US yields and the dollar are still reacting to a blowout average hourly earnings print from Washington Friday, while SEK is in focus as the Sunday election showed less of a political rebellion afoot than many had forecasted.
Article / 29 October 2014 at 7:49 GMT

FX Update: Will FOMC comply with market's dovish expectations?

Head of FX Strategy / Saxo Bank
  • USD on defensive as dovish FOMC expected
  • EURUSD could head towards 1.300 depending on Fed stance
  • EURSEK rises to to 3-year high after Riksbank 0.0% move on rates

By John J Hardy

The USD remains largely on the defensive as the market anticipates a more dovish Federal Open Market Committee which it will likely get, though the question is the degree to which dovishness is already priced in, 

I suspect the Fed will do little to discourage the market’s current dovish read on its stance, but the burning question is the degree to which this is already priced into the relatively weak USD of late. 

GBP suffered a bit of weakness yesterday after the Bank of England deputy governor Andrew Bailey saidt low and slowing inflation and a less rosy outlook for the economy mean that the BoE can maintain its current policy for longer than previously anticipated. 

“The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought.”

SEK was pounded for significant losses after the Riksbank cut 25 bps, and therefore all the way to 0.00%. The guidance was quite dovish on the policy rate front, as the first imagined rate hike was pushed all the way out into 2016 and the inflation forecasts for 2015 were radically lowered.

Yesterday’s close in EURSEK was the highest daily close in over three years, as the 9.35/9.40 zone has been an important one stretching back to 2010. 

It’s tough to see what prevents a test above that resistance from here, unless we see a few strong Swedish numbers to stem the bleeding. 

Also, Riksbank governor Ingves ruled out unconventional measures for now yesterday, suggesting that the zero-rates would be enough to do the trick, though he did leave himself with an unconventional option, saying “But if the world turns out completely differently, then we have the tool box to do other things.) . 

I expect that option is exercised at some point next year.

 Stockholm commuters no doubt have much to ponder after
the Riksbank's move to zero interest rates. Photo: Thinkstock

FOMC to avoid saying much?

All eyes on the FOMC this evening (note again that US has not yet set the clock back, so for those of us in Europe and elsewhere that have adjusted clocks for winter time, the monetary policy statement release will come out an hour before normal). 

There may be some doubt at the margin on whether the Fed unwinds the remaining 15 billion/month of purchases, so in the very unlikely event that the Fed hesitates and reduces by 5 or 10 or not at all, expect an enormous USD sell-off.

Otherwise, it is about how the Fed chooses to tinker with the language describing the economy, and particularly any policy implications if the inflation rate continues to trend lower. The dovish bar is rather high at this point, given that the market has already pushed the anticipated first rate hike well into the second half of next year after long predicting that it would take place in the June time frame. 

My general suspicion is that the Fed tries at all costs to avoid sending much of a signal at all (relative to where the market is currently pricing the situation) with its monetary policy statement today after the zany dump-and-recovery routine in asset markets over the last few weeks. 

The situation might have been different were equities at the recent lows rather than back near the highs – but as we trade within a couple of percent of the all-time highs, the Fed won’t want to encourage excess froth to the upside, either. 

Let’s see if they succeed either way, as it is increasingly a dodgy proposition for the Fed to steer around generating market volatility now that we have reached the inflection point of ending QE. 

As for market reaction, my default view is that we may get a post meeting USD sell-off of a relatively modest degree if the Fed confirms the market’s anticipation that it has shifted to a more cautious and dovish stance, but that this selling will quickly peter out, possibly ahead of the weekend. 

If we get a distinctly dovish development in either a failure to entirely taper QE3 to zero or more significant alteration of the policy guidance in the statement (more likely achieved through ratcheting up the worry on inflation, as it has already triple-underlined that the trajectory from here will be highly dependent on incoming data), then another USD sell-off leg could prove more durable – possibly seeing a test of 1.3000 in EURUSD and 0.9000 or higher in AUDUSD.


The EURUSD is precisely mid-range heading into today’s FOMC meeting and will have to pivot one way or the other today – note the key range between 1.2605 and 1.2850. Interesting to note that the 100% extension of the recent rally from the 1.2615 low comes in right at 1.3000, if the market sees the FOMC as particularly dovish today.

 Source: Saxo Bank

A very passive Fed that does very little to alter the statement, and therefore hawkish relative to the market’s dovish expectations, would most likely be felt in the USD rallying sharply in USD/JPY, USD/EM and USD/commodity currencies.

Kiwi traders, don’t forget that we have an Reserve Bank of New Zealand meeting up shortly after the FOMC meeting this evening. The bank has taken a rather loud stance on the kiwi exchange rate and the market could be very reactive to its words tonight. 

I’m focused on the upside in AUDNZD and to the downside in NZDUSD, though the latter could face a significant delay if the Fed is particularly dovish today. The market may react to the 0200 GMT release of the RBNZ’s possible currency intervention levels.
Economic data highlights

  • Japan Sep. Preliminary Industrial Production rose +2.7% MoM and +0.6% YoY vs. +2.2%/-0.1% expected, respectively and vs. -3.3% YoY in Aug. 
  • New Zealand Oct. ANZ Activity Outlook/Business Confidence out at 37.8/26.5 vs. 37.0/13.4 in Sep., respectively 
  • China Oct. Westpac-Min Consumer Sentiment dropped to 110.9 vs. 113.2 in Sep. 

Upcoming economic calendar highlights (all times GMT)

  • Norway Sep. Retail Sales (0900) 
  • UK Sep. Mortgage Approvals (0930) 
  • Norway Norges Bank Nicolaisen to Speak (1100) 
  • US FOMC monetary policy statement release (1800) 
  • New Zealand RBNZ Official Cash Rate (2000) 
  • Canada Bank of Canada’s Poloz speaking (2015) 
  • Australia Sep. HIA New Home Sales (0000) 
  • New Zealand RBNZ to report net currency sales (0200) 
-- Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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