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News

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FOMC to Echo 2015 Rate Path; USD to Take Cues from Fresh Projections

- Federal Open Market Committee (FOMC) Widely Anticipated to Preserve Current Policy.

- Will Fed Officials Curb Their Growth, Inflation and Interest-Rate Forecasts?

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Trading the News: Federal Open Market Committee Interest Rate Decision

Even though the Federal Open Market Committee (FOMC) is expected to remain on the sidelines in September, the fresh batch of central bank rhetoric may foster a near-term sell-off in EUR/USD should the central bank prepare U.S. household and businesses for a late-2016 rate-hike.

What’s Expected:

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Why Is This Event Important:With Fed Funds Futures highlighting a 60% probability for a December rate-hike, the policy statement may boost the appeal of the greenback and reveal a growing dissent within the committee as the central bank appears to be following a similar course to 2015. However, a downward revision in the updated projections (growth, inflation as well as the interest rate dot-plot) is likely to produce headwinds for the greenback as Chair Janet Yellen continues to endorse a ‘gradual’ path in normalizing monetary policy.

Expectations: Bullish Argument/Scenario

Signs of sticky price growth accompanied by the ongoing expansion in the housing market may push the FOMC to endorse a December rate-hike, and the central bank may largely retain its projections for higher borrowing-costs in 2017 especially as the economy approaches ‘full-employment.’

Risk: Bearish Argument/Scenario

Nevertheless, subdued wage growth paired with waning household confidence may push Chair Yellen to further delay the normalization cycle, and the dollar stands at risk of facing a bearish market reaction should central bank officials curb their projections for growth, inflation and interest rates.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Promotes December-Hike, Warns of Higher Rates in 2017

  • Need red, five-minute candle following the fresh updates to consider a short EUR/USD position.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from cost; at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is met, set reasonable limit.

Bearish USD Trade: Fed Officials Lower Economic Forecasts

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same strategy as the bullish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • The near-term wedge/triangle in EUR/USD may give way as price approaches the apex, with the broader outlook still constructive as the Relative Strength Index (RSI) preserves the bullish formation carried over from the end of last year. Need a break of near-term support around 1.1110 (50% retracement) to favor a bearish outlook for EUR/USD, with the next downside region of interest coming in around 1.0960 (23.6% retracement) to 1.0970 (38.2% retracement).
  • Key Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Key Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Check out the short-term technical levels that matter for USD/JPY heading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the Traits of Successful Traders series.

Impact the FOMC interest rate decision has had on EUR/USD during the last meeting

July 2016 Federal Open Market Committee (FOMC) Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The Federal Open Market Committee (FOMC) voted 9 to 1 to preserve the current policy in July, with Kansas City Fed President Esther George pushing for 25bp rate-hike as ‘the Committee risked eroding the credibility of its policy communications.’ The recent comments suggest the Fed remains in no rush to implement higher borrowing-costs as ‘the risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged lower,’ and Chair Janet Yellen may continue to endorse a wait-and-see approach at the next quarterly meeting in September as ‘most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.’ Despite the limited initial response, the greenback struggled to hold its ground following more of the same from the FOMC, with EUR/USD climbing above the 1.1000 handle to end the day at 1.1056.

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Read More:

S&P 500 Tech Update: Looking to Short-term Chart for Direction

Silver Prices: Triangle Morphs into Larger Version of Itself, Wait for the Break

Few US Data Pre-FOMC Keeps Markets on Edge

Weekly Trading Forecast: Fed and BoJ Rate Decisions, Brexit Fears Carry More than Currency Risks

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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USD/JPY Dives Post-BOJ; Preview for September FOMC Meeting

Talking Points:

- BOJ refrains from major easing, only small technical adjustments.

- USD/JPY reverses quickly ahead of FOMC later today.

- FX volatility set to remain high with FOMC and Brexit vote next two weeks – it’s the right time to review risk management principles to protect your capital.

Here we go again: What once was a much heralded and anticipated rate decision, the September FOMC meeting seems all but wrapped up at this point. The Federal Reserve will keep its main rate on hold at 0.25-0.50%, citing near-term, weak economic developments, yet insisting that enough progress has been made to warrant a rate hike at one of the upcoming meetings (hint: December, when the next SEPs are released). The key for the US Dollar today, however, is to what degree of confidence the FOMC has in the US economy, or simply, ‘how quickly does the Fed think it will be able to raise rates next?’

Certainly, market participants are looking around and don’t see much to be excited about. As a gauge of long-term growth and inflation expectations, the US Treasury yield curve has flattened significantly over the past year. The evolution of US economic data over the past several months has, in investors’ minds, reduced the potential for substantially higher interest rates in the long-run. If the US economy is close to moving to a recession, look for the yield curve to invert (2s10s spread) – an inversion preceded each of the last seven US recessions (every recession in the post-war era).

In December 2015, we pointed out the US yield curve was already starting to flatten out, which was the bond market’s way of saying that long-term growth expectations weren’t looking so hot. In turn, as this flattening has continued, market participants have reduced expectations for the Fed to tighten policy further (an expanded interpretation is that the Fed’s insistence on raising rates despite the obvious shortcomings in the economy may significantly reduce the economy’s long-run growth potential).

After the past few weeks of US economic data (US Citi Economic Surprise Index down from +43.1 on July 26 to +3 through yesterday), markets are only pricing in a 20% chance of a hike today, and a 55% chance of a hike by December. Over the past 20 years, the Fed has never raised rates unless the market has been pricing in the chance of a hike in excess of 60%, so in actuality, rate expectations are completely muted for today and are sitting on the fence for 2016.

This is the main source of risk for markets today. Should the FOMC choose to be headstrong and tear down conventional wisdom – a small possibility with two prime dealers coming out and calling for a rate hike – global markets will be shocked. But assuming the Fed plays it safe as it usually does, a lack of a rate hike may not hurt the US Dollar significantly. By suggesting that a rate hike is still “on the table” in the near-term, and by laying out an interest rate glide path for next year calling for multiple rate hikes, then the Fed could help insulate the US Dollar, plain and simple. It’s starting to feel like a September-December 2015 redux.

See the video (above) for technical considerations in EUR/USD, GBP/USD, USD/JPY, AUD/USD, and the USDOLLAR Index.

Read more: US Dollar Off Day Before FOMC as Atlanta Fed GDPNow Forecast Falls

— Written by Christopher Vecchio, Currency Strategist

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

Follow him on Twitter at @CVecchioFX

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Crude Oil Price Recovery May Fizzle on Hawkish FOMC

Talking Points:

  • Crude oil prices bounce from chart support on API inventories data
  • Gold prices mark time as all eyes turn to Fed policy announcement
  • Hawkish FOMC may send US Dollar higher, weigh on commodities

Crude oil prices rose after a weekly inventory estimate from API showed a drawdown of 7.5 million barrels. This stands in stark contrast with expectations for build of 3.4 million barrels to be reported in the upcoming release of official EIA inventories data. Gold prices continued to mark time as traders waited for the FOMC monetary policy announcement to cross the wires before showing directional commitment.

An outright rate hike is unlikely but the US central bank may ramp up rhetoric setting the stage for tightening in December. The US Dollar is likely to rise alongside front-end bond yields in this scenario, sapping demand for anti-fiat assets and pushing gold prices downward. Crude oil may likewise weaken as the greenback’s gains echo into the USD-denominated WTI benchmark, though EIA flows data could complicate price action.

What do gold and crude oil trading patterns hint about on-coming trends? Find out here!

GOLD TECHNICAL ANALYSISGold prices continue to cling to support in the 1303.62-08.00 area (May 2 high, 38.2% Fibonacci retracement). A daily close below this threshold exposes the 50% level at 1287.29. Alternatively, a move above the 23.6% Fib at 1333.62 targets trend line resistance at 1347.26.

Crude Oil Price Recovery May Fizzle on Hawkish FOMC

CRUDE OIL TECHNICAL ANALYSISCrude oil prices turned higher after testing support at 43.02, the September 1 low. From here, a daily close above the 23.6% Fibonacci expansion at 45.03 targets the 38.2% level at 46.46. Alternatively, a reversal back below the 14.6% Fib at 44.15 opens the door for another test of the $43/barrel figure.

Crude Oil Price Recovery May Fizzle on Hawkish FOMC

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

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Yen Falls as BOJ Updates Policy, Fed Rate Decision Now in Focus

Talking Points:

  • Yen gains, then falls as BOJ adjusts parameters for stimulus delivery
  • Fed monetary policy announcement to keep volatility elevated ahead
  • US Dollar may rise as FOMC sets the stage for December rate hike

The Japanese Yen fell as the Bank of Japan introduced an updated QQE stimulus effort with new parameters aimed at controlling the yield curve. The currency briefly rose on news that the central bank opted to keep the target interest rate as well as the pace of asset purchases unchanged but the move was swiftly overturned as details on the new regime crossed the wires.

Policymakers pledged to grow the monetary base until inflation is stable above 2 percent, scrapping the maturity target for JGB holdings and promising to keep 10-year rates around current levels. They added that additional stimulus including a possible further cut of the short-term policy rate and/or the long-term target will be considered as needed.

BOJ members voted 7-2 on the updated guidelines for asset purchases and 8-1 on the commitment to overshoot the inflation target. Commenting on economic conditions, officials said deflation has ended but the influence of oil prices, the sales tax and overseas factors will keep price growth subdued for the time being.

All eyes are on the FOMC policy announcement from here. Financial markets price in the probability of a rate hike at 22 percent, suggesting that relatively few investors will be surprised if Federal Reserve officials opt for the status quo this time around. This will shift the spotlight toan updated set of economic and rate-path forecasts as well as a press conference with Fed Chair Janet Yellen.

Comments from most US central bank officials including Yellen and Vice Chair Fischer have struck an increasingly hawkish tone over the past month, telegraphing an intention to resume stimulus withdrawal. At the same time, policymakers have clearly shied away from tightening either against a backdrop of risk aversion or in an environment where their actions may significantly sour sentiment.

This means the Fed’s tone is likely to be cautiously but unmistakably hawkish, pushing markets toward firmer bets on a December hike. This will be meant to reduce surprise risk, smoothing volatility when the increase occurs. Coupling this with a downgrade of the projected rate hike path may help limit fallout this time around and maintain flexibility to adjust perceptions at the November meeting.

The US Dollar is likely to trade broadly higher against its counterparts in this scenario. The yield-sensitive Australian Dollar may suffer outsized losses relative to other major currencies. The New Zealand Dollar might be more reserved however as markets wait for the RBNZ rate decision before taking bets in earnest.

Are retail traders buying or selling the US Dollar before the FOMC rate decision? Find out here!

Asia Session

European Session

Critical Levels

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

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China’s Market News: Chinese Premier Li Addresses on Yuan Stability

This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in China’s foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.

- The borrowing cost of offshore Yuan dropped on Tuesday but remained at relative high levels.

- China’s Premier Li Keqiang reiterated that there is no basis for sustained devaluation in the Yuan.

- Regulators approved the first debt-to-equity swap deal for state-owned enterprises.

To receive reports from this analyst,sign up for Renee Mu’ distribution list.

Yuan Rates

- The overnight borrowing cost of the offshore Yuan dropped on Tuesday after the rate hit the second-highest level on record a day ago. The HIBOR O/N fell 11.5477% to 12.1353% on the day. Despite the drop, the key measure of Yuan’s borrowing cost in the offshore market remains beyond an average level: The average HIBOR O/N in August was 1.41% and the average over the past 12 months was 2.56%.This indicates that the tightened liquidity in the offshore Yuan has not fully eased and the funding cost for shorting the currency remains relatively high.

China's Market News: Chinese Premier Li Addresses on Yuan Stability

Data downloaded from Bloomberg; chart prepared by Renee Mu.

On Tuesday, the PBOC guided the Yuan by +191 pips or +0.29% higher against the U.S. Dollar to 6.6595. Following the release of the reference rate, a Doji candle was formed, indicating indecision from traders. Similar moves were seen on September 12th and 13th after the PBOC released the Yuan fix. This indicates that the PBOC’s impact to the offshore Yuan rate through the reference rate was diminished over the past few days.

USD/CNH 1-Hour

China's Market News: Chinese Premier Li Addresses on Yuan Stability

Prepared by Renee Mu.

From September 14th to 19th, the offshore Yuan (USD/CNH) traded below the onshore Yuan (USD/CNY) and the daily fix, which was uncommon. This was most likely driven by the tightened Yuan liquidity in the offshore market. On September 20, the USD/CNH rose above USD/CNY and the daily fix. Yet, with relatively high funding cost of the offshore Yuan, the USD/CNH pair may retrace around its current levels rather than spike higher. Next major driver for the Dollar/Yuan is the Fed rate decision to be released on Wednesday, which could lead to major breakouts of the pair.

China's Market News: Chinese Premier Li Addresses on Yuan Stability

Data downloaded from Bloomberg; chart prepared by Renee Mu.

Market News

Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- China’s Premier Li Keqiang said that there is no basis for sustained devaluation in the Yuan. Yuan exchange rates will remain stable within a reasonable range. In terms of the Chinese economy, he told that a steady upward trend has been seen. Premier Li made these comments at the meeting with U.S. President Obama on September 19th during his trip to the UN summit.

Caixin New: Chinese leading online media of financial news.

- A debt-to-equity swap deal for Sinosteel Corporation was approved by regulators. This is the first approved deal of such kind for a state-owned enterprise (SOE). It is expected that the SOE will swap approximately half of its 60-billion-Yuan debt into equities. Chinese policymakers introduced the swap program early this year as a major solution to managing companies’ rising debt load; however, some investors raised concerns over potential risks of the program. Sinosteel’s deal could set an example for the program and more deals for SOEs may be seen over the following periods.

-To receive reports from this analyst,sign up for Renee Mu’ distribution list.

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Beware the BoJ as the Fed Looks to Avoid a September Repeat

Talking Points:

- This is one of those Central Bank weeks, and Wednesday is going to be loaded: On Wednesday morning we hear from the Bank of Japan. Later in the day we hear from the Fed, and just after that we hear from the RBNZ. Each of these meetings can bring new information to markets that can drive risk trends for weeks or perhaps even months after.

- While the Fed is largely expected to pose a hawkish-hold scenario similar to what was seen last September, expectations are significantly more opaque around the Bank of Japan. While the BoJ is stretching the limits of current QE-policies, the bank has said that they’re going to release a ‘comprehensive review’ of their monetary policies, and this could stoke future expectations around even more easing in new and inventive ways.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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For weeks global markets have been looking ahead to the upcoming Central Bank meetings out of Japan and the United States, both lining up for Wednesday of this week. And while hopes are running high for more loosening out of Japan, markets are on edge around the fear of a faster-than-expected interest rate hike out of the Federal Reserve. To be sure, few are actually expecting a hike out of the Fed on Wednesday; but, the timing of when they’re planning to pose that next move could be critical for risk trends in the weeks and months ahead. And not to be forgotten, the Reserve Bank of New Zealand has an interest rate decision later on that same day, and markets are looking for another cut out of the RBNZ in the next couple of months. We previewed that meeting in the weekly trading forecast, and if you’d like to read more, please click here.

So we’re likely looking at heavy volatility towards the middle of the week as markets incorporate all of this new information. Below, we look at two of the more widely-followed markets that are primed to move around these upcoming announcements.

USD/JPY

This is an obvious candidate for volatility given that both represented Central Banks are speaking to markets, and this is really an extension of similar themes seen in the pair over the past four years. It was about four years ago that Abenomics took Japan (and the economic world) by storm, and this led to considerable Yen weakness in the three years following. For currency traders this was a beautiful thing, as a clean and consistent trend developed in Yen-pairs that made trading the move fairly simple; wait for the Yen to strengthen and then sell some more; the BoJ was behind the trade and it seemed like the rest of the world was going along with it.

But it was about a year ago that this theme came to an abrupt end: We had called the Yen the ‘safe haven vehicle of choice’ as volatility from China began to emanate around-the-globe, and since then the currency has strengthened by more than 18% against the US Dollar, erasing pretty much the entire move of the year prior. This has produced a fairly clean trend-channel in USD/JPY, and expectations for even more stimulus out of Japan have raged as the Yen has spent the past three months attempting to develop long-term support around the ¥100.00-handle.

At issue is whether the BoJ is running out of ammunition. The bank already owns over 38% of their own government bond market, and many are of the mind that they’re running out of tools to employ in the effort of stoking inflation. This hasn’t been helped by the fact that for the past few meetings, markets have went into BoJ meetings expecting something only to be disappointed. So that hope appears to be waning. Just two months ago expectations were ramped-up for an announcement around the highly-theoretical ‘helicopter money.’ As we said at the time, any announcements of BoJ stimulus would likely come later in the year, as Prime Minster Shinzo Abe had previously said that a ‘comprehensive, bold economic package’ was coming this fall. Thickening the drama is the fact that the Bank of Japan has announced that they will issue a ‘comprehensive review’ of current policies at their September meeting. We’ve even heard from direct sources saying that ‘investors won’t be disappointed’ by the September review. So, even if the Bank of Japan doesn’t pose any changes, the results of this review could be a significant driver if the BoJ merely says that they have more ammunition that they’re willing to deploy in the coming months.

As we near this upcoming BoJ meeting, USD/JPY is getting primed to move, digging deeper into a shorter-term symmetrical wedge pattern, near the resistance portion of a year-long trend-channel. For traders looking to try to anticipate more monetary action out of the Bank of Japan, the longer-term support build around the ¥100.00-level could be extremely enticing.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

S&P 500 (SPX500)

The median expectation for the upcoming Federal Reserve announcement appears to be for a ‘hawkish hold’ type-of-scenario. Numerous Fed officials have warned of impending rate hikes in the past few weeks, but economic data remains rather non-convincing and other Fed members are continuing to take on a dovish tilt towards future policy moves. This would be very similar to last September’s Fed meeting, in which the bank had talked up the prospect of rate hikes for months only to capitulate as Chinese risk began to seep through global markets.

It was the reaction around that event that should be most noteworthy to traders, as this meeting produced a brutal reversal in the risk trade: With excitement of no rate hike first driving prices lower, only for selling to take over shortly thereafter as it becomes obvious that the Fed is looking to hike very soon. On the chart below, we go over the context around last September’s hawkish-hold from the Federal Reserve, as shown in the S&P 500.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

Right now we have a similar situation developing in the S&P 500 as we sit just two short days away from that next FOMC announcement. The July FOMC meeting saw the Federal Reserve make a slightly hawkish tweak to their statement; and in the following month we heard quite a bit more hawkish Fed commentary at the Jackson Hole Economic Symposium, and this brought additional strength into the US Dollar while risk assets like stocks faced weakness.

On the chart below, we’re looking at the hourly setup in the S&P 500, which looks very similar, albeit abridged compared to what we saw last year.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

— Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX