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USD Eyes FOMC Meeting amid Perceived Policy Divergence

Talking Points:

- GBPUSD on better footing than EURUSD before FOMC.

- Expect NZDUSD to be particularly volatile with RBNZ today too.

- See the DailyFX Economic Calendar for Wednesday, January 28, 2015.

With the US Dollar sitting near 11-year highs versus the Euro, it would be logical to arrive at the conclusion that market participants are expecting a hawkish Fed to rule to the central bank roost in 2015.

After all, the Fed’s most recent dot plot projections point to a 0.75% main rate by the end of 2015 – equivalent to two rate hikes. Yet market participants don’t agree.

The Fed funds rate as well as the overnight index swaps are pointing to a late-Q4’15 rate liftoff, which would only bring the Fed’s main rate to 0.50% by year-end. This discrepancy between the Fed’s guidance and what’s been priced into the market is worth monitoring.

Will the Fed take notice of recent market forces (falling inflation expectations, low sovereign yields, and plummeting energy costs) and embrace a more dovish outlook that the market is expecting? – or, perhaps worse yet, will the Fed maintain its policy trajectory, forcing traders to reprice their expectations altogether? Either way, one party is wrong here.

Today’s FOMC statement, given the apparent misunderstanding between markets and the Fed, could be particularly caustic as reality comes crashing back to earth – either for the US Dollar (the Fed pushes back its own rate hike expectations) or for equity markets (the pricing in of sooner than expected rate hikes).

See the above video from technical considerations in EURUSD, GBPUSD, AUDUSD, and NZDUSD.

Read more: Contagion Contained as Euro Rebounds Post-Greek Elections

— Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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US Dollar May Fall as FOMC Fails to Fuel Interest Rate Hike Bets

Talking Points:

  • US Dollar May Fall as Status-Quo FOMC Fails to Fuel Rate Hike Outlook
  • Aussie Dollar Gains as CPI Data Undermines RBA Interest Rate Cut Bets
  • See Economic Releases Directly on Your Charts with the DailyFX News App

A quiet economic calendar in European trading hours is likely to see traders looking ahead to the US session for direction cues, with the spotlight pointing firmly to the outcome of the FOMC monetary policy meeting. Janet Yellen and company introduced a much-discussed change to the language of the policy statement at December’s sit-down, swapping out a pledge to hold rates low for a “considerable time” after the end of QE3 and replacing it with another promising to be “patient” before tightening. It seems unlikely that the cautiously slow-moving US central bank will opt to tinker with policy again so soon after making an adjustment, meaning today’s announcement will probably stick closely to the status quo.

The substance of the FOMC outcome and its interpretation by the financial markets need not align however. The markets seem primed for a hawkish result, if only because the US Dollar is hovering near six-year highs while speculative net-long positioning in the benchmark unit is at the highest since at least 1993. An outcome that sees the Fed in wait-and-see mode and fails to meaningfully advance the case for tightening may have a hard time sustaining such levels. In fact, it may serve to remind investors that the central bank has signaled no rate hikes will occur through April. That may open the door for a period of near-term profit-taking, sending the greenback downward. Technical positioning seems to agree, with prices seemingly hinting at a brewing reversal.

The Australian Dollar outperformed in overnight trade despite a seemingly soft set of fourth-quarter CPI figures. The report showed the headline year-on-year inflation rate fell to 1.7 percent, undershooting economists’ bets on a print at 1.8 percent. The slump was predictably chalked up to falling crude oil prices however and core inflation readings broadly topped expectations (albeit narrowly so). That appeared to undermine the probability that the RBA will move to cut interest rates at next week’s policy meeting, with traders likely expecting the monetary authority to treat the effects of sinking energy costs as a transitory factor (similarly to the Fed and the Bank of England). The Euro proved weakest on the session in a move that appeared to be corrective after the single currency outshined all of its major counterparts in the prior session.

New to FX? START HERE!

Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Dollar Suffers First Two-Day Drop In 7 Weeks Before Fed

Talking Points:

  • Dollar Suffers First Two-Day Drop In 7 Weeks Before Fed
  • Euro Traders Should Be Cautious as Currency Extends Rebound After Greek Election
  • British Pound Climbs after UK GDP Posts Strongest Growth Pace Since 2007

Dollar Suffers First Two-Day Drop In 7 Weeks Before Fed

The Dow Jones FXCM Dollar Index (ticker = USDollar) notched its first two-day decline in seven weeks with Tuesday’s close. However, that shouldn’t be taken as a particularly ominous sign. The fact that the benchmark currency has managed to charge such a persistent advance over such an extended period is impressive. Furthermore, a modest pullback is more than reasonable given the position of the currency and the event risk that lies ahead. For the Greenback, we are only a few days away from closing out a seventh consecutive monthly advance – that would be the first in the USDollar’s and ICE Dollar Index’s histories. Given that singular drive, a modest breather is warranted heading into a critical Federal Open Market Committee (FOMC) meeting.

As far as central bank policy decisions go, the Fed’s first gathering of 2015 isn’t inherently crucial. This isn’t one of the quarterly events where we are issued updated forecasts (inflation, employment, interest rates) and Chairwoman Janet Yellen holds a press conference. Nor is it likely to be a definitive turning point in policy like the end of QE3 last year or the announcement of the first rate hike. Instead, this event is made extraordinary by the context of the broader market. These past few weeks, we have seen the ECB introduce a massive QE program, the BoJ downgrade its inflation outlook (which could lead to another stimulus upgrade), the BoC surprise with a rate cut and other central banks either make clear dovish shifts or come under pressure from unfavorable data. That puts the onus on the US central bank. Does the world’s largest player support its global counterparts – and indirectly support investor sentiment – by offering up rhetoric to push out the timing of the first tightening effort? Or, will the Fed keep its rate bearing on a divergent course to the G10 and potentially undermine ‘moral hazard’?

Euro Traders Should Be Cautious as Currency Extends Rebound After Greek Election

The Euro has rallied hard over the opening two trading days of this week. In fact, EURUSD has posted its biggest two-day with Tuesday’s close since September 18, 2013. Having dropped nearly 20 percent over the past nine months, that may seem overdue; but the catalyst for the correct is remarkable. Over the weekend, Greece put anti-austerity party Syriza in charge of the government. And, though the situation didn’t immediately deteriorate into a Eurozone crisis like that of 2010; the country and Eurozone are clearly on a collision course over the Greece’s onerous debt load. Syriza leader Alexis Tsipras ran on a campaign of pushing back against the harsh rescue requirements the Troika attached to its bailouts over the past five years – and he has not backed down from that drive after winning the office. So far, he has appointed an anti-austerity leaning board and halted the privatization of the Greece’s largest port (Pareaus port). Meanwhile, other Eurozone leaders have made it clear that no haircuts or debt forgiveness are on the agenda. The ECB’s QE program may offer some reprieve for the region, but a revived sovereign crisis is not something it can ‘solve’. Euro investors should remain on their guard.

British Pound Climbs after UK GDP Posts Strongest Growth Pace Since 2007

Top event risk this past session amongst the majors was the United Kingdom’s 4Q GDP release. Through the final three-month period, the pace of growth cooled with a 0.5 percent expansion; but this doesn’t look like a full stall of the country’s economic boom over the past few years. We can see the momentum is still robust when we refer to the annual pace of 2.7 percent –the most vigorous since 2007. For the Sterling, the news supports expectations of a BoE hike sometime this year which helps offset the dovish tone in the minutes from last week. The currency did gain traction against most counterparts this past session, but neither swaps more Short Sterling futures have turned a corner on rate forecasts.

New Zealand Dollar More Potential from RBNZ than Dollar to Fed?

There is little doubt that the Fed rate decision will be an important event risk for the US Dollar whether the event tips dovish or hawkish. That said, the RBNZ’s own policy meeting is likely to exact a heavier toll on the New Zealand Dollar. At the last policy decision, Governor Wheeler tacitly approved of the market’s policy expectations at that time – a hike sometime in the first half of 2015.Since then, however, market-based rate forecasts have plunged and were exacerbated by last week’s weak 4Q CPI. There is far more chance of a dramatic NZ policy surprise.

Australian Dollar Rallies…as Inflation Cools?

The 4Q Australian CPI data weakened from the previous quarter this morning…and the Aussie dollar rallied. There was a slightly better-than-expected outcome for the core-equivalent reading, but it was still on a slowing trajectory. Yet, with this data, there is a tangible, data-derived reason why the RBA may not need to cut rates. Before this data, swaps were pricing in a 44 percent chance of a cut next week. After, it’s 17.

Emerging Markets Slide as PBoC Injects Liquidity, Singapore Loosens Policy

The MSCI EM ETF was modestly lower this past session, but the rally that peaked last week seems to have confirmed its lost momentum. Whether or not that retreat accelerates or not will rely heavily on the Fed’s outlook. Meanwhile, this past session, the Chinese Yuan gained ground after the PBoC used reverse repos to pump liquidity into the market and the Singapore Dollar dropped after the MAS eased policy.

Gold Bugs Ask ‘Where Does the Fed Stand in the Great Currency War’

We have seen an almost universal, dovish shift from central banks these past week. And through that transition, gold has gained on its anti-currency war appeal. Yet, despite Eurozone QE and other efforts directed at cheapening fiat currencies, the precious metal has struggled to overtake $1,300. A critical fuel additive is needed to extend this drive – a Fed that kills any hope/risk of higher yields that will weigh gold.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

— Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

http://bit.ly/DFXNewsAppJohn

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Scalping the AUDCAD Reversal- Shorts Favored Below 9928

Talking Points

  • AUDCAD reversal off key resistance in focus
  • Possible head & shoulders formation underway
  • Event Risk on Tap

AUD/CAD Daily

Scalping the AUDCAD Reversal- Shorts Favored Below 9928

Chart Created Using FXCM Marketscope 2.0

Technical Outlook

  • AUDCAD reversal off key resistance / RSI trigger break shifts scalp bias lower
  • Resistance at 9912/28- bearish invalidation- Breach targets 9985 & 2013 TL resistance
  • Interim support 9739, 9684 & 9658
  • Look for daily RSI break sub-50 to validate our bias- bearish
  • Event Risk Ahead: Consumer Price Index (CPI) tonight, Canada GDP on Friday & RBA Interest Rate Decision next week

AUD/CAD Hourly

Scalping the AUDCAD Reversal- Shorts Favored Below 9928

Notes:We’ve been tracking the AUDCAD lower since last week’s reversal off the 2013 trendline resistance with the rally overnight offering short entries back at the 9913/28 resistance level. We will continue to reserve this region as our near-term bearish in validation level with shorts-scalps favored below this zone. A quarter of the daily average true range yields profit targets of 25-28 pips per scalp.

Bottom line: we’ll favor selling rallies / short triggers with a break below the weekly opening range low at 9765 putting targets in view at 9733/39, 9684 & 9658. Note that a possible head & shoulders formation may be underway here and as such a measured move puts in to target the 100% extension of the decline at 9612. Caution is warranted heading into tonight’s Australia data with the release of the 4Q inflation numbers likely to fuel added volatility in the Aussie crosses.

* It’s extremely important to give added consideration regarding the timing of intra-day scalps with the opening ranges on a session & hourly basis offering further clarity on intra-day biases.

Relevant Data Releases

Scalping the AUDCAD Reversal- Shorts Favored Below 9928

Other Setups in Play:

—Written by Michael Boutros, Currency Strategist with DailyFX

For updates on this scalp and more setups follow him on Twitter @MBForex

To contact Michael email mboutros@dailyfx.com or Click Here to be added to his email distribution list

Join Michael for Live Scalping Webinars on Mondays on DailyFXat 13:30 GMT (8:30ET)

Interested in learning about Fibonacci? Watch this Video

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Pound May Rise as 4Q UK GDP Data Boosts BOE Rate Hike Bets

Talking Points:

  • British Pound May Rise as Firm 4Q GDP Figures Boost BOE Rate Hike Bets
  • Australian Dollar Edges Higher on Swelling Risk Appetite in Overnight Trade
  • See Economic Releases Directly on Your Charts with the DailyFX News App

The preliminary set of fourth-quarter UK GDP figures headlines the economic calendar in European trading hours. The year-on-year economic growth rate is expected to rise to 2.8 percent, the highest since 2007. The quarter-on-quarter increase is seen registering at 0.6 percent, a print squarely in line with the near-term trend average.

UK economic news-flow has increasingly outperformed relative to consensus forecasts over recent months, suggesting analysts are underestimating the economy’s vigor and opening the door for an upside surprise. Such an outcome may fuel speculation that a Bank of England interest rate hike may come sooner than currently priced in, boosting the British Pound.

The Australian Dollar outperformed in overnight trade, rising as much as 0.2 percent on average against its leading counterparts. The advance tracked a move higher in Australia’s benchmark S&P/ASX 200 stock index, pointing to swelling risk appetite as the catalyst behind upside momentum.

New to FX? START HERE!

Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To receive Ilya’s analysis directly via email, please SIGN UP HERE

Contact and follow Ilya on Twitter: @IlyaSpivak

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Another Big Week Points to Major Currency Moves – How Might we Trade?

- US Dollar at elevated risk of volatility ahead of critical US Federal Reserve decision

- Forex volatility prices continue to trade near multi-year highs amid central bank activity

- We continue to favor high-volatility strategies, but important to limit leverage used

A surge in forex volatility prices suggests big moves are likely in the days ahead. What are the risks and how might we trade?

Currencies have seen sharp price moves in recent weeks, and the coming week may prove no different as markets look to the highly-anticipated US Federal Open Market Committee (FOMC) policy decision. Indeed our DailyFX Volatility indices, which measure prices paid/received on FX options across major pairs, point to sharp moves across the board.

Forex Volatility Prices Remain Near Multi-Year Peaks Ahead of Critical Week

Another Big Week Points to Major Currency Moves - How Might we Trade?

Data source: Bloomberg, DailyFX Calculations

Elevated Euro/US Dollar volatility prices are of particular interest as the pair trades near major decade-plus lows. Current 1-week EURUSD volatility data implies that the currency pair is likely to move in as much as a +/- 250 point range in the coming seven days. Given heavily stretched price momentum and trader positioning, risks of an important reversal seem particularly high.

Past performance is NOT indicative of future results, but our Breakout2 trading system has done fairly well across US Dollar, Euro, and Japanese Yen pairs through recent price action. There is reason to believe that this system may continue to do well, but it is critical to note that volatility can also make for outsized losses.

It will be critical to keep trading leverage low in what promises to be a big week for FX markets ahead.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Another Big Week Points to Major Currency Moves - How Might we Trade?

Another Big Week Points to Major Currency Moves - How Might we Trade?

Automate our SSI-based trading strategies via Mirror Trader free of charge

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via Twitter at http://www.twitter.com/DRodriguezFX

Definitions

Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.

Range High – 90-day closing high.

Range Low – 90-day closing low.

Last – Current market price.

Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.

OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.