FX Update: EURUSD pivotal after FOMC minutes pushed on a string
Summary: The headlines touted a dovish set of FOMC minutes, further reducing the recent spike in expectations for Fed rate hikes and supporting US treasuries, but the US dollar was not particularly reactive. EURUSD has risen to a critical tactical level that must hold if the USD bulls are to maintain a key pillar of support. Meanwhile, low volatility suggests a market that is lacking inspiration here, in search of a catalyst.
FX Trading focus: EURUSD (and USDJPY) inflection points front and center
US STIR futures and treasuries rallied again yesterday and are trading near the top of the recent consolidation after providing the bulk of the energy for recent moves among currencies, particularly the lowest yielders, as noted in yesterday’s FX Update. It is doubtful that the market can milk much more out of the nominally dovish FOMC minutes released late yesterday. Yes, it is rather novel to see the tone of “unanimity” in waiting for inflationary and labor market outcomes to be realized before even wanting to discuss an eventual tapering or other unwinding of policy accommodation, but this was.
The more interesting question is perhaps whether the market is buying into the story that inflation and growth will prove as transitory as the Fed says – a narrative that would support recent developments in the treasury market, if not equity markets (save for the “relief” provided by falling yields.) Supporting that notion is the razor thin majority the Democrats enjoy in the Senate, which could make further rounds of stimulus tough unless the economy and sentiment are clearly tanking again, and the fact that the touted infrastructure bill (quite modest in terms of yearly outlays despite the $2 trillion touted) may be offset with tax increases.
So tactically speaking the most urgent question is whether the US dollar is setting up for a trend reversal here, with the EURUSD Exhibit A on that account after its rise to the key levels as noted in the chart discussion below. Elsewhere, the USD situation is not as immediately pivotal – for example in USDJPY, which can afford a deeper consolidation lower without reversing the trend (for example, 107.75-108.00 as a possible next step area for consolidation). And in general, implied volatilities in options point to little drama. Across markets, many may want to sit on their hands to see how the macro environment pans out and how the economy behaves as covid restrictions are lifted in rolling fashion and after this last round of stimulus fades, for example whether pent-up savings remain pent up.
AUD traders, beware the RBA Financial Review up tonight in Asian hours - the currency looks eerily quiet and the RBA rather escalated the housing issue in the most recent policy statement - could be some follow up on that front if there is a strong indication suggesting something "macroprudential" is in the works (leaning AUD negative if the central bank raises a bigger fuss).
Chart: EURUSD
EURUSD is trading up against key levels here, the first of which was the 61.8% retracement of the recent sell-off wave, coming in around 1.1880 and tested and broken briefly yesterday (with the price action above 1.1900 smacking a bit of stop-loss driven flows ahead of the release of the FOMC minutes.) Slightly higher is the 200-day moving average, all leading to the impression that this 1.1900 area is important resistance as a move significantly above that level would begin to more fully neutralize the latest sell-off wave. A deeper consolidation in US treasuries (rally sending yields lower) with accompanying extension of recent strong risk sentiment are the biggest risks for the bears here – watching this level carefully. Meanwhile, the scale of the rally has helped take considerable momentum out of the medium-term falling trend, strengthening the support of the 1.1704 low – and in general we see the 1.1500-1.1600 as a significant longer term value zone unless some new exogenous shock roils markets.
John Hardy
Head of FX Strategy
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FX Trading focus: EURUSD (and USDJPY) inflection points front and center
US STIR futures and treasuries rallied again yesterday and are trading near the top of the recent consolidation after providing the bulk of the energy for recent moves among currencies, particularly the lowest yielders, as noted in yesterday’s FX Update. It is doubtful that the market can milk much more out of the nominally dovish FOMC minutes released late yesterday. Yes, it is rather novel to see the tone of “unanimity” in waiting for inflationary and labor market outcomes to be realized before even wanting to discuss an eventual tapering or other unwinding of policy accommodation, but this was.
The more interesting question is perhaps whether the market is buying into the story that inflation and growth will prove as transitory as the Fed says – a narrative that would support recent developments in the treasury market, if not equity markets (save for the “relief” provided by falling yields.) Supporting that notion is the razor thin majority the Democrats enjoy in the Senate, which could make further rounds of stimulus tough unless the economy and sentiment are clearly tanking again, and the fact that the touted infrastructure bill (quite modest in terms of yearly outlays despite the $2 trillion touted) may be offset with tax increases.
So tactically speaking the most urgent question is whether the US dollar is setting up for a trend reversal here, with the EURUSD Exhibit A on that account after its rise to the key levels as noted in the chart discussion below. Elsewhere, the USD situation is not as immediately pivotal – for example in USDJPY, which can afford a deeper consolidation lower without reversing the trend (for example, 107.75-108.00 as a possible next step area for consolidation). And in general, implied volatilities in options point to little drama. Across markets, many may want to sit on their hands to see how the macro environment pans out and how the economy behaves as covid restrictions are lifted in rolling fashion and after this last round of stimulus fades, for example whether pent-up savings remain pent up.
AUD traders, beware the RBA Financial Review up tonight in Asian hours - the currency looks eerily quiet and the RBA rather escalated the housing issue in the most recent policy statement - could be some follow up on that front if there is a strong indication suggesting something "macroprudential" is in the works (leaning AUD negative if the central bank raises a bigger fuss).
Chart: EURUSD
EURUSD is trading up against key levels here, the first of which was the 61.8% retracement of the recent sell-off wave, coming in around 1.1880 and tested and broken briefly yesterday (with the price action above 1.1900 smacking a bit of stop-loss driven flows ahead of the release of the FOMC minutes.) Slightly higher is the 200-day moving average, all leading to the impression that this 1.1900 area is important resistance as a move significantly above that level would begin to more fully neutralize the latest sell-off wave. A deeper consolidation in US treasuries (rally sending yields lower) with accompanying extension of recent strong risk sentiment are the biggest risks for the bears here – watching this level carefully. Meanwhile, the scale of the rally has helped take considerable momentum out of the medium-term falling trend, strengthening the support of the 1.1704 low – and in general we see the 1.1500-1.1600 as a significant longer term value zone unless some new exogenous shock roils markets.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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