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Euro Bid Up Ahead of Fed But Not Likely to Extend Much Further
Written by article default Tuesday, 21 September 2010 18:23
Morning SlicesFUNDYS
Markets appear content on deferring to some more consolidation ahead of the US open with the key event risk not coming until the North American afternoon when the FOMC releases its latest rate decision and accompanying central bank statement. So far, it is the Euro, Swissie and Yen that are the gainers against the buck on the day, while Kiwi, Cad, Sterling and Aussie all lag behind. The Euro is the standout gainer on the day thus far, with most of the demand attributed to a well received Greek bond auction.
Relative Performance Versus USD Tuesday (As of 11:20GMT)
1. EURO+0.57%
2. YEN+0.29%
3. SWISSIE+0.19%
4. AUSSIE-0.01%
5. STERLING-0.14%
6. KIWI-0.16%
7. CAD-0.23%
Elsewhere, the RBA Minutes have been released and although the underlying tone is quite upbeat, the Australian Dollar has traded lower after the Minutes were pretty much priced in following RBA Steven’s hawkish remarks on Monday. We have since seen a marginal round of profit taking in the antipodean. Elsewhere, President Obama has ramped up the pressure on China foreign exchange reform, with the market reacting as the Yuan fixed at record highs against the buck. On the data front, Swiss trade prints failed to influence price action, while UK public finances and public sector net borrowing results encouraged the Treasury to move ahead with steps to implement massive austerity measures. Finally Canada inflation data was out in early North American trade and came in on the whole softer than expected, to slightly weigh on the Loonie.
As we inch closer towards the Fed decision it is important to attempt to anticipate just how the markets will react to what the Fed says. There are three clear outcomes that will all inspire 3 very different reactions. Should the Fed signal that it is finally ready to implement another round of accommodation quickly and with a good deal of size without looking at further data, then we expect to see a very favorable market reaction with investors finding comfort in the central bank decision to provide more cushion throughout the recovery. This would translate into a lower USD against most of the major currencies, while only potentially gaining against the Yen. This scenario however does not seem as likely. Should the Fed leave language pretty much unchanged, then we can expect to see the opposite reaction with market participants seen liquidating higher risk positions in favor of safe haven assets. Finally, should the Fed present a balanced statement, which would suggest that the Fed is not ready to move but would be willing to do so if data remained weak, then we would expect to see a moderately risk positive market reaction in which the USD remains under pressure.
Looking ahead, US building permits (560k expected) and housing starts (0.7% expected) are due at 12:30GMT, followed by the highly anticipated FOMC rate decision later in the day at 18:15GMT. The Fed is widely expected to leave rates on hold at 0.25% and all of the attention will be on the accompanying monetary policy statement. For now, US equity futures and gold prices consolidate (gold just under record highs) and trade relatively flat, while oil is tracking lower.
TECHS
EUR/USD:The daily close above the 61.8% fib retracement off of the major move from August has seriously dampened bearish prospects, with the market racing above 1.3100 thus far. Next key resistance comes in by 1.3170 which represents the 78.6% fib retracement off of the August move, and the final line of defense for USD bulls before a full retracement to 1.3335. A close above 1.3170 will open a direct retest of the critical 1.3335 highs , while a close below will still keep alive the potential for a bearish resumption. For now, 1.3020 is the key short-term level to watch below, with the break to officially relieve topside pressures.
USD/JPY:The major downtrend could finally be at risk of expiring following the latest surge back above the 20-day SMA. Last Wednesday’s close above the 20-Day SMA was indeed the first obstacle that needed to be overcome to potentially force a shift in the structure, while the next test will be the Ichimoku cloud bottom that comes in around 86.20. Daily studies certainly show plenty of room for additional upside, so we would look for a break into the cloud (currently defined roughly between 86.20-88.50) before considering any possibility of a bearish resumption.
GBP/USD:The latest break back above 1.5700 threatens the integrity of the downtrend and potentially exposes a move back towards 1.6000 over the coming sessions. It is however worth noting that the 61.8% fib retracement off of the 1.6000-1.5295 move, comes in by 1.5730, and should we manage to hold below this level, the bearish structure will remain intact.
USD/CHF:Finally showing some serious signs of a material base, with the market very well supported on dips below par. Medium-term and longer-term technical studies certainly confirm the possibility of some major upside ahead, but for now, we will need to see a break back above next key topside barriers by 1.0280 to reaffirm recovery prospects.
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