Dollar ended the week as the second weakest major currencies as markets are preparing for the highly anticipated FOMC meeting this week. After all the talks and speculations, it's still a close call on whether Fed would lift interest rate from the current near zero level at this particular meeting. The uncertainty on the impact of recent turmoil in the financial markets is seen as the main reason to delay Fed's first hike to start ending the ultra easing era since 2008 global financial crisis.
According to CME group FedWatch data released on Thursday, futures are pricing in 23% chance of rate hike in September. That compared to 45% chance a month ago. For October hike, futures are pricing in 39% chance. For December hike, it's also priced in just 58% chance. On the other hand, according to a Wall Street Journal survey, 46% of economists surveyed said there will be a hike in September, 9.5% predicted October hike while 35% predicted December hike.
The dollar index faced strong resistance from 55 days EMA and dipped towards the end of the week as traders are simply unconvinced of a hike this week. In fact, the breach of 95.19 minor support argues that the index is starting another leg of downward momentum. And deeper selloff could indeed back to back towards 92.62 support in near term. On the other hand, a Fed hike could reverse the course and send the index through 96.61 to 98.33/100.39 resistance zone.
Stocks were volatile but directionless last week. And the "relative stability" send yen lower. DJIA engaged in side trading in recent range between 16000/16600. The structure of the pattern from 15370.33 low is getting more clearly as corrective. For the near term, further recovery might be seen. But in that case, strong resistance should be seen between 50% and 61.8% retracement of 18351 to 15370, that is, between 16860 and 17212, to limit upside. For medium term, a downside breakout is expected in at a later stage.
In addition to FOMC meeting there are a few other central bank activities to watch. That include RBA minutes and BoJ policy decision on Tuesday. Also, SNB will meet on Thursday. We're not expecting much news from these events nonetheless. Some volatility could indeed be seen from economic data releases, including China industrial production on Sunday; UK CPI, German ZEW, US retail sales on Tuesday; UK job data, US CPI on Wednesday; and, Canada CPI on Friday.
Regarding trading strategy, out GBP/JPY short was wrong and stopped out as the anticipated selloff didn't occur in spite of weak production data from UK. Instead, Sterling was supported as BoE sounded calm over recent market turmoils, more in BOE Left Bank Rate Unchanged, Believed Recent Turmoil Won't Affect Growth Prospect. At this point, we're not convinced on Sterling's strength yet as GBP/JPY lagged behind EUR/JPY. Meanwhile, EUR/GBP stays bullish. Commodity currencies were firm last week but remain vulnerable to another selloff, in particular in reaction to China data. Yen could also be volatile as risk sentiments flip. We'll prefer to hold our hands on new position as we wait for FOMC rate decision this week.