Article / 18 August 2016 at 7:49 GMT

FX Update: USD fizzles after FOMC minutes

Head of FX Strategy / Saxo Bank
  • FOMC minutes shows Fed still divided on when next rate hike should be
  • EURUSD pushes above 1.13 with 1.14 in view as post-Brexit stasis breaks
  • Janet Yellen's Jackson Hole speech on August 26 looking key


Will Janet Yellen change course when she delivers a keynote speech
on August 26 at the Jackson Hole jamboree in Wyoming? Photo: iStock

By John J Hardy

The Federal Open Market Committee minutes reflect the wide range of developments from the Fed over the last week (William’s dovishness and Dudley’s hawkishness) as the debate is clearly divided among Fed members on when the next rate hike is advisable.

The debate on the state of the economy made for painfully boring reading and blogger Mike Shedlock counted 17 references to “uncertainty” in the minutes. One paragraph in the economic outlook section was mostly pessimistic, save for the outlook for employment:  

"The staff viewed the uncertainty around its July projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones. In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. 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. "

This is not the kind of rhetoric that points to an itchy trigger finger for hiking rates – cue Janet Yellen's speech August 26 at the Fed’s Jackson Hole Symposium. Hopefully, that speech will contain comments on how the Fed views the next policy steps from here (pointing a finger at the government and need for fiscal tools/debt relief and obliquely indicating that the Fed doesn’t have the right tools to move the economy forward.)

My suspicion is that the Fed is tiring of its role and simply “wants out” rather than to continue to sponsor an ever deeper spiral into ever lower rates and new QE to bail out financial markets. Is this a misread?. Certainly, a speech like this could serve as a shock to markets, and Yellen has so far entirely failed to appear visionary, but this offers a chance to do the right thing.

Elsewhere, an adviser to Shinzo Abe was out overnight claiming that the Bank of Japan would move boldly at the September meeting and railed against the idea that the central bank has reached the end of its policy rope. The next big level for USDJPY if the local lows give way is perhaps the 61.8% retracement of the entire 2012-15 rally sequence around 94.65.

EURUSD eyes 1.14

EURUSD this week cleared the local 1.1200/50 resistance area and thus traded to new post-Brexit highs and is now staring down the critical 1.1400+ resistance that held the pair back before the Brexit vote.

If Janet Yellen doesn’t ride to the greenback’s rescue at next Friday’s speech, the focus switches to the European Central Bank meeting on September 8. The EURUSD chart has been a trail of tears for trend/momentum traders, so it's hard to get worked up about the latest breakout.

Is EURUSD on its way to 1.14?
 Source: SaxoTraderGO

The G-10 rundown

USD – weak as the market questions whether the Fed is at all relevant for now, given the tepid language. Ironically, both the San Francisco Fed’s Williams and New York Fed’s Dudley are speaking today. The currency will turn back stronger only when the risk appetite/yield-reaching theme turns, and especially if (unlikely) Yellen indicates that the Fed is waving the white flag at Jackson Hole.

EUR – EURUSD is charging hard toward the next resistance in the 1.1400/25 area – then it’s all about 1.1500 and the marginal highs above. The September 8 ECB meeting is the next key event risk for euro, unless today’s ECB minutes point to something.

JPY – looks like the market is willing to challenge the BoJ with this USD weakening move – as indicated above, the next structural level is toward 94.65 in USDJPY.

GBP – perhaps ripe for a squeeze higher today – particularly in GBPUSD, if the UK retail sales is exceptionally strong – would suggest confidence remains relatively high after the Brexit vote.

CHF – nothing to report – EURCHF 1.08-1.0950 is the trigger for having a view.

AUD – jobs data overnight given a positive spin, though the full time losses are more worrisome than the part-time jobs gains are positive. Still, this market doesn’t care and the snapback in risk appetite/reach for yield theme saw AUD back higher. Hard to see the local highs in AUDUSD holding here.

CAD – USDCAD continues to grind lower and we saw some positive US inventory data for oil prices – watching the 1.2650 and then 1.2500 areas next in that pair.

NZD – 0.7300 area in NZDUSD is once again in play and we’re likely to see new marginal highs at minimum, though still prefer NZD to weaken versus the AUD.

SEK – SEK appears to have a low beta to other smaller currencies bouncing back as risk appetite did likewise yesterday. 9.50+ in EURSEK is the local resistance.

NOK – Bears have a hook to get involved again in shorting EURNOK after the pair found hard resistance yesterday just ahead of 9.30. Next key is the 9.15 area to the downside for whether we can open up the path to 9.00.

Upcoming economic calendar highlights (all times GMT)

  • 0830 – UK Jul. Retail Sales  
  • 0900 – Eurozone Jul. CPI / CPI Core 
  • 1130 – Eurozone ECB Meeting Minutes 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1230 – US Aug. Philadelphia Fed Survey 
  • 1400 – US Fed’s Dudley at Press Briefing 
  • 2000 – US Fed’s Williams (FOMC non-voter) to Speak 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank

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