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Article / 28 July 2015 at 8:02 GMT

FX Update: Are currencies ready for a more hawkish FOMC?

Head of FX Strategy / Saxo Bank
  • Commodity dollar weakness appears to be evaporating 
  • Market is pricing in a September move for US rate hike
  • Higher rates should be supportive of USDJPY

By John J Hardy

The US dollar staged a minor comeback in places overnight as risk appetite recovered into the New York close. Chinese equities also managed to survive (so far) another test of the 200-day moving average and bounced slightly overnight. 

The momentum in commodity dollar weakness appears to be evaporating at the moment and the spring back higher in USDJPY and rally in EURCHF seem to point to a more risk-on tone.  

Looking forward to tomorrow’s Federal Open Market Committee meeting and with the US dollar on the defensive, the surprise side looks very much to the upside for the greenback, i.e. a hawkish read on the new monetary policy statement. 

Yellen and company will want to make it sufficiently clear that a September rate hike is a possibility if incoming economic data cooperates (though sufficiently vague that this won’t be seen as a “tip-off” meeting for a September move in case incoming data weakens suddenly.) 

The market is pricing very low odds for a September move and high odds for a December move. The big question here is the nature of the market’s reaction if we do see a more hawkish Fed – will risk appetite weaken again – and if so, how will yield curves react? 

It’s hard to believe that risk off from a more hawkish Fed will result in a further euro squeeze, even if the euro has been negatively correlated with risk recently, and higher rates should be supportive of USDJPY.


USDJPY pushed on the Ichimoku Cloud support yesterday and survived the test as risk appetite stabilised late yesterday and in Asia overnight. The chart needs to pivot soon after a long period of inaction, and the signals from the FOMC will be the most critical factor determining the near term direction. A more hawkish Fed than expected could see us quickly testing 125.00 again.

FOMC could end USDJPY inaction
 Source: Saxo Bank

The G-10 rundown:

USD: Bouncing back as risk sentiment picked up again around key levels in many of the major indices (200-day moving average in S&P500 looks important), but may be more about whether FOMC triggers any shift forward in Fed hike expectations.

EUR: EURUSD is the barometer for the status of this latest squeeze, which is mostly driven by developments in risk appetite – so we need to work back below, and close below, 1.1000 to see the bearish case re-emerge.

JPY: An interesting one to watch as we tested an important support (Ichimoku Cloud in the low 123.00s) yesterday and could be reactive to FOMC if the latter proves hawkish.

GBP: Recovering strongly with risk sentiment – GDP in focus today and whether a strong reading can push EURGBP back lower. GBPUSD in limbo.

CHF: A big move in EURCHF that has received little fanfare – will USDCHF take over on a more hawkish FOMC? USDCHF looks quite well supported above the 200-day moving average after yesterday’s action.

AUD: Weakness easing a bit here – especially in EURAUD after huge spike in three previous session. Still, AUDNZD looks excessively beat down soon. And in AUDUSD, we can only call a reversal if we trade/close back above 0.7330/50 and what’s to prefer on a hawkish FOMC – short AUDUSD or short EURUSD…

CAD: USDCAD remains above 1.3000 on weak oil prices, but we’ve lost a bit of momentum here as we await the FOMC tomorrow.

NZD: Has rallied strongly versus the AUD and trying to look higher versus the USD as well, though let’s see how NZDUSD behaves around FOMC. It’s status over last quarter or so as weakest of the G10 may now be over with, though it may not rally much further versus AUD. Watch out for Wheeler out speaking later today.

SEK: Recent weakness clearly related to risk off – if risk continues to recover, EURSEK may ease all the way back down into the range.

NOK: Oil prices remain very weak despite risk-off tone. Lower range in EURNOK is 8.85-9.10 and may stay within as long as we don’t see risk meltdown.

Upcoming economic calendar highlights (all times GMT):

  • Sweden Jun. Retail Sales (0730)
  • UK Q2 GDP (0830)
  • US S&P/CaseShiller Home Price Index (1300)
  • US Jul. Preliminary Markit Services PMI (1345)
  • US Jul. Consumer Confidence Index (1400)
  • UK BoE’s Cunliffe to Speak (1800)
  • New Zealand RBNZ’s Wheeler to Speak (2100)
  • Japan Jun. Retail Trade (2350)
  • Japan Jul. Small Business Confidence (0500)

– Edited by Oliver Morrison

John J Hardy is head of FX strategy at Saxo Bank


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