The US policy makers are undergoing their two-day meeting, and will unveil their decision this Wednesday, largely expected to finally fulfill the promise of lifting rates for the first time in almost a decade. There have been many twists and turns over this decision all through this 2015, with a rate hike initially expected for April, and then delayed for September, when policy makers disappointed markets by maintaining the status quo.
_20151027141420.jpg "fed")
The fact is that, despite the US economy has made significant progress on the employment front, inflation is still a rock in FED's shoe. Inflation, in all of its forms, remains subdued, closer to deflationary levels than to the 2.0% ideal. Anyway, Ms. Yellen is confident that it would return to normal levels, as in its latest congressional hearing she remarked that data fits criteria for increasing rates.
A non-spoken reason on why the Central Bank waited so much was fears of a panic-selling turn-around in stocks, but at this point, a lift-off has been largely priced in. The most likely scenario is a 25bp rate hike, to a range of 0.25% to 0.50%, pretty much what the market is expecting. What may determinate the dollar's tone following the move can be a revision of the inflation and growth outlooks, yet with the winter holidays around the corner, and the year-end seems hard to determinate how the market will react.
Anyway, a rate hike alongside with a hawkish stance should lead to some steady dollar gains into the weekend. Yellen should also offer a discrete outlook of the upcoming pace of rate hikes.
In the unlikely case of an on-hold stance, the Federal Reserve risks more than just a weaker dollar. They risk losing their credibility, which will be much more harmful for the US than a rate hike.
The EUR/USD pair has been clearly bullish ever since the month started, following the ECB's soft announcement on QE, well below markets expectations. The advance was quite convenient ahead of a US rate hike, as the dollar is around 500 pips away from its year high against the common currency, and therefore the risk of an excessive strength has been diminished. Anyway, a 0.25% rate hike won't be surprise enough to send the greenback soaring, but indeed should be supportive of the American currency.
Technically speaking, the pair has failed to sustain gains beyond the critical 1.1000 figure after recovering from the monthly low at 1.0505, having met selling interest around its 100 DMA. Also this latest recovery represents an upward corrective movement of the 50% of the October high/December low decline, and if the price is unable to recoup the 1.1000 level, and extend beyond it, the risk is towards a new bearish trend in the mid-term.
The initial bearish target, in the case of dollar's demand comes at 1.0880, the 38.2% retracement of the same decline, whilst additional slides can extend down to 1.0795, December 12th daily low. Towards the upside on the other hand, the level to watch is 1.1045, as a steady advance beyond it should lead to a continued advance up to 1.1120, while further gains above it will only confirm a bullish continuation into 2016.
The USD/JPY has entered in bearish mode last week, after breaking below the 122.20 level, the base of the previous two-month range. The pair will be among the most interesting this Wednesday, as its usually extremely sensitive to first line US data, which means it could react sharply, even despite if the FED fails to surprise. The pair seems to be recovering some ground, advancing above its 100 DMA for the first time in three days, but still around 100 pips below the mentioned breakout point.
Daily basis, the technical picture is still favoring the downside, as the technical indicators have barely corrected extreme oversold readings, and remain well below their midlines. For this Wednesday, an advance beyond 121.60 should lead to an advance up to 122.20, while a stronger recovery above this last, exposes the 123.00 level. Below 121.00 on the other hand, and with a dovish tone from the US Federal reserve, the pair can slide down to 119.80, with a weekly close below this level opening doors for another 100 pips decline.
The fact is that, despite the US economy has made significant progress on the employment front, inflation is still a rock in FED's shoe. Inflation, in all of its forms, remains subdued, closer to deflationary levels than to the 2.0% ideal. Anyway, Ms. Yellen is confident that it would return to normal levels, as in its latest congressional hearing she remarked that data fits criteria for increasing rates.
A non-spoken reason on why the Central Bank waited so much was fears of a panic-selling turn-around in stocks, but at this point, a lift-off has been largely priced in. The most likely scenario is a 25bp rate hike, to a range of 0.25% to 0.50%, pretty much what the market is expecting. What may determinate the dollar's tone following the move can be a revision of the inflation and growth outlooks, yet with the winter holidays around the corner, and the year-end seems hard to determinate how the market will react.
Anyway, a rate hike alongside with a hawkish stance should lead to some steady dollar gains into the weekend. Yellen should also offer a discrete outlook of the upcoming pace of rate hikes.
In the unlikely case of an on-hold stance, the Federal Reserve risks more than just a weaker dollar. They risk losing their credibility, which will be much more harmful for the US than a rate hike.
EUR/USD technical outlook
The EUR/USD pair has been clearly bullish ever since the month started, following the ECB's soft announcement on QE, well below markets expectations. The advance was quite convenient ahead of a US rate hike, as the dollar is around 500 pips away from its year high against the common currency, and therefore the risk of an excessive strength has been diminished. Anyway, a 0.25% rate hike won't be surprise enough to send the greenback soaring, but indeed should be supportive of the American currency.
Technically speaking, the pair has failed to sustain gains beyond the critical 1.1000 figure after recovering from the monthly low at 1.0505, having met selling interest around its 100 DMA. Also this latest recovery represents an upward corrective movement of the 50% of the October high/December low decline, and if the price is unable to recoup the 1.1000 level, and extend beyond it, the risk is towards a new bearish trend in the mid-term.
The initial bearish target, in the case of dollar's demand comes at 1.0880, the 38.2% retracement of the same decline, whilst additional slides can extend down to 1.0795, December 12th daily low. Towards the upside on the other hand, the level to watch is 1.1045, as a steady advance beyond it should lead to a continued advance up to 1.1120, while further gains above it will only confirm a bullish continuation into 2016.
USD/JPY technical outlook
The USD/JPY has entered in bearish mode last week, after breaking below the 122.20 level, the base of the previous two-month range. The pair will be among the most interesting this Wednesday, as its usually extremely sensitive to first line US data, which means it could react sharply, even despite if the FED fails to surprise. The pair seems to be recovering some ground, advancing above its 100 DMA for the first time in three days, but still around 100 pips below the mentioned breakout point.
Daily basis, the technical picture is still favoring the downside, as the technical indicators have barely corrected extreme oversold readings, and remain well below their midlines. For this Wednesday, an advance beyond 121.60 should lead to an advance up to 122.20, while a stronger recovery above this last, exposes the 123.00 level. Below 121.00 on the other hand, and with a dovish tone from the US Federal reserve, the pair can slide down to 119.80, with a weekly close below this level opening doors for another 100 pips decline.
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