US stocks hit record highs on the back of improved earnings, which pushed the VIX down to a fresh record low yields higher upon improved risk sentiment.
The expectations of a dovish meeting also played a part as it is deemed good for stocks and bonds, sending yields higher in the process.
After extending its 13-month decline, the US Dollar Index stabilized and recouped all of Monday’s losses ahead of tonight’s Fed meeting. The single bullish outside day looks a little lonely right now, but perhaps if the Fed aren’t as dovish as feared there is potential for a bounce. Yet even under this scenario a move higher is more likely to be down to profit taking or technical traders betting the downside is temporarily over-extended. If the Republicans pull of the seemingly impossible with health-care we can revisit the upside potential, as this paves the way for other inflationary policies. Until then, the trend points lower.
Yesterday closed with a bullish pinbar and now trades above the monthly S2, making 93.64-93.92 a viable support zone. As the monthly S1 is at 94.78 and coincides with the 10-day MA, this is the lower bound of a resistance zone which takes us the 95.16 high. As sentiment and trend point lower, we suspect any rally up towards this zone may be tempting for bears to fade into for a run down to 93. As momentum from the monthly pivot has been increasingly bearish we expect a shallow pullback from here, unless the Fed manage to surprise markets (unlikely) or Whitehouse tremors subside.
December remains the most probable window for the next hike, according to CME’s FedWatch tool. Yet at a 49.1% probability, traders remain unconvinced of this likelihood, and even then they’re spreading their bets by pricing in a 47.9% to 49.1%. from the December through to the May 2018 meeting. Between now and November, traders see rates on hold as being a 89.8% probability which is as good as saying no chance at all until December.
Traders are keeping a keen eye on Australia’s inflation data and speech by the RBA governor later today. Given that inflation is showing signs of picking up and AUD is moving higher against RBA’s wishes, we could see another verbal intervention by Philip Lowe. Currently in a holding pattern below 80c, the weaker USD is propping AUD up despite Debelle’s best efforts to lower the currency on Friday. Although in all the time the US Dollar Index points lower and AU economic data outperforms the US, verbal interventions may have limited impact and a break above 80c is imminent.
