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Article / 12 October 2017 at 8:13 GMT

FX Update: USD slipping after FOMC minutes

Head of FX Strategy / Saxo Bank
  • Nothing indicates that the Fed won’t hike in December
  • Dollar index now back below the 21-day moving average
  • Catalonia challenge likely to be resolved pretty soon
 Some FOMC pessimists have hobbled the dollar. Photo: Shutterstock

By John J Hardy

The Federal Open Market Committee minutes overnight provided no surprises to the expected path of Fed rate hikes, with much of the attention on the debate over whether low inflation expectations are a concern for the longer-term risks of disinflation or whether keeping the rates as low as they are risks the Fed finding itself behind the curve if wage pressures pick up due to the tightening labor market. 

On balance, nothing indicates that the Fed won’t hike in December, but if inflation data remains weak, it appears the Chicago Fed’s Evans might join Kashkari in dissenting at the December FOMC decision, if it is for a hike. Traders apparently decided that the lack of any hawkish angle was sufficient reason to sell the greenback, and the dollar index now finds itself back below the 21-day moving average, one of our favourite medium-term trend indicators. Again, however, the tactical moves are tough to trust until we have the name of Trump’s Fed chair nominee. 

I wonder if the Fed has had a look over at Poland and its economy for any ideas on what might drive inflation. The Polish government claims it has increased social spending some 400% from the prior government’s levels, while lowering the retirement age and also raising tax revenue to sharply to reduce the budget. Wage inflation has jumped above 6% from prior levels of 3-4% and inflation has jumped from -1% to over 2%. There is probably no single answer here, but I would suspect the root of inflation in Poland traces mostly back to fiscal stimulus – as does the recent revival of the Canadian economy. The problem with most of the Fed policy makers and the mentality of many policymakers in Washington is their focus on supply-side reform of tax cuts and deregulation. If you want an economy to grow here and now, the quickest rout is via stimulating the demand side.

Elsewhere, Spain’s president Rajoy has given the separatist Catalonian leader Puigdemont five days to indicate whether he did or did not declare independence (Monday morning deadline), with the implication that the Catalan government will be unwound if independence is declared. From every perspective, it appears the separatists lack leverage and this issue will be resolved one way or another soon, unlikely to rear its head again any time soon.

EURUSD finds itself back above the 21-day moving average, as well as the recent 1.1835 pivot area, suggesting the range back to the 1.2000+ highs may be open. Bulls are unsure of the solidity of the move, however, as a Fed nominee announcement over the next couple of weeks could blast the pair either way on a kneejerk reaction.
 Source: Saxo Bank

The G-10 rundown

USD – weak reaction to the FOMC minutes and on the defensive until proven otherwise. More notable US data tomorrow with Sept. CPI and retail sales. A bevy of Fed speakers out later today at an international conference in Washington.

EUR – EURUSD back above the tactical 1.1835 area, but we probably need to get onto bigger event risks, like Fed chair nominee announcements and the October 26 ECB meeting to stretch the action beyond 1.20 or a similar distance back to the downside.

JPY – weaker against everything yesterday, but clawing back a bit overnight. The zone from 111.85 to 111.00 in USDJPY an important one, and the pair could prove the most reactive to US data tomorrow.

GBP – Brexit negotiations entirely stalled in the latest round, though this headline didn’t drive further sterling weakness. GBPUSD has worked all the way back to the key 1.3250 pivot zone on the way up and down recently. Next weekend’s EU summit could provide the next spark on the Brexit issue.

CHF – EURCHF getting interesting if it can sustain above 1.1500 for a fresh high for the cycle.

AUD – the Aussie bounce back showing some force today and a solid close above 0.7850 begins to suggest that the pair will survive the challenge of the 0.7800-0.7750 pivot zone, keeping the focus to the upside. Key for the longer term will be the longer term perspective on commodities after China’s 19th party congress next week.

CAD – CAD slipping back higher against the greenback, mostly on the latter’s weakness. 1.2250 is first area of note lower if the 1.2500 continues to cap the action.

NZD – waiting for that New Zealand First decision on which side of the aisle to support, a decision which has been apparently drawn out further into the weekend at the earliest. Key for AUDNZD at the 1.1000.

SEK – Swedish Sep. CPI lower than expected and sees fresh EURSEK squeeze - gets dicey for the bars if we sustaning above 9.60

NOK – traders finding better things to do with their time than trading NOK. Focus is lower for EURNOK as long as capped by 9.40-42.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0900 – Eurozone Aug. Industrial Production 
  • 1230 – Canada Aug. New Housing Price 
  • 1230 – Canada Sep. Home Price Index 
  • 1230 – US Sep. PPI 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1430 – US Fed’s Powell to Speak on EM 
  • 1430 – US Fed’s Brainard so Speak 
  • 1430 – ECB’s Draghi to Speak 
  • 1430 – ECB's Praet to Speak
  • 1915 – Bank of Canada’s Wilkins to Speak 
  • 1930 – Sweden Riksbank Governor Ingves to Speak
  • 1945 – UK Bank of England's Haldane to Speak
  • 2000 – ECB's Coeure to Speak
  • 2010 – ECB's Lautenschlaeger to Speak

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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