- Packed week with four central bank meetings
- FOMC expectations running low
- Greece remains an open wound
No great expectations for the Fed on Wednesday. Photo: iStock
By John J Hardy
The US dollar closed last week on a weak note, not even able to rally against a euro that showed signs of struggling after the headlines emerging from the Eurogroup meeting in Riga showing that negotiations between Greece and its creditors are not going well. That issue looks to remain an open wound for some time for the euro.
This week will, of course, be all about the US Federal Open Market Committee meeting and whether the Fed will fulfill the market’s dovish expectations for this meeting as we are going into it with future rate hike expectations near their lowest for the cycle at approximately 0.50% of hikes expected over the next 12 months. This means, of course, that it would be extremely easy for the Fed to surprise the market with hawkishness, which in this case, would be “lack of dovishness”. The other big focus this week will be on the preliminary US Q1 GDP report on Wednesday, as this is expected to be an extremely weak report showing annualised growth on the order of 1.0%.
One particular wildcard this week will be USDJPY which is trading uncomfortably close to range support as Japan PM Abe is touring the US this week (he will address the US Congress on Wednesday). Don’t look for the Bank of Japan to say anything interesting at its Thursday meeting. You might possibly look for Abe to try to reassure everyone that a weaker JPY is not official government policy (althoughin the longer run, this is of course just like the US recycling the meaningless “strong USD policy” during 2009-2011.)
GBPUSD could have a pivotal week this week with UK GDP reported tomorrow and the FOMC meeting on Wednesday. The pair reached a key technical milestone at the 61.8% Fibonacci retracement of the sell-off from the February highs to the April lows, which also coincided with the 100-day moving average. If the pair doesn’t turn here, we risk a full test toward those 1.5500+ highs, while a pivot back lower on the other side of the FOMC meeting might take some time to get bearish confirmation, as we have rallied very sharply off the April lows.
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The G-10 rundown
USD: It’s all about the FOMC meeting and whether they deliver the expected notes of caution on the recovery that are needed to justify these levels in the USD (and even slightly lower) or whether the Fed would like to keep its options open in case the data comes roaring back over the next couple of data cycles. I lean to the side of the Fed keeping its options open, especially now that the USD rally has come off the boil since the last meeting.
EUR: Managing to maintain an even keel despite the noise on the Greek negotiations, which have also failed to further aggravate either Greek yields or peripheral spreads since last week’s highs. 1.1000 resistance in EURUSD may be the focus running up to and after the FOMC meeting on Wednesday, but I'm very sceptical on the potential for euro upside in general.
JPY: An interesting week for the JPY with a Bank of Japan meeting and Abe’s visit to the US. Still wondering if the JPY will do anything besides trading like a low-beta US dollar.
GBP: Most definitely over-achieving, considering the looming uncertainty of the UK election on May 7. Watching tomorrow’s UK Q1 GDP report for whether we have seen the peak for the cycle in GBPUSD for now.
CHF: EURCHF doing quite well despite the noise and USDCHF critical support is not much lower near 0.9500. Liking the USDCHF long side if FOMC is supportive and we are back above 0.9650/0.9700 on the other side of the meeting.
AUD: Local 0.7850 area high so far holding in AUDUSD, but we need a USD rally to suggest the local highs are in, with a more bearish outlook needing to see a move back down through last week’s 0.7683 low.
CAD: Wondering at the potential for further downside in USDCAD here and looking for ways to express a medium-term upside view in case the FOMC sees the USD pivot back to strength this week.
NZD: Trying to regain ground on the AUD after last week’s big sell-off. NZDUSD is perhaps the lone USD pair that continues to have a bearish structure as long as we continue to trade below approx. 0.7650, with better confirmation on broader USD strength and a move below 0.7540.
SEK: All about the Riksbank meeting up on Thursday, after the bank waxed very dovish at the March meeting – probably in response to the SEK’s sudden strengthening at the time against the euro. That has yielded to rangebound activity, but the Riksbank will be careful about sending too dovish a message.
NOK: Oil prices have been supportive of recent NOK rally, but most of the krone’s upside potential may have been realised. Watching 8.50/55 zone in EURNOK as pivot area for a possible fresh bout of weakness.
Upcoming Economic Calendar Highlight (all times GMT)
- UK Apr. CBI Trends – Total Orders and Selling Prices (1000)
- Euro Zone ECB’s Constancio to Speak (1200)
- US Apr. Preliminary Markit Services PMI (1345)
- Euro Zone ECB announces asset purchase (1345)
- Australia RBA’s Stevens to Speak (2240)
- Japan Mar. Retail Trade (2350)
– Edited by Clare MacCarthy