HomeContributorsFundamental AnalysisCurrencies: Will Fed Help To Put A Floor Under The Dollar?

Currencies: Will Fed Help To Put A Floor Under The Dollar?


Sunrise Market Commentary

  • Rates: Flattening US yield curve on Fed verdict?
    We expect the FOMC to announce the start of its BS run-off, hang on the 2017/2018 rate projections (1-3) and potentially lower its neutral rate forecast. That would cause a flattening of the US yield curve. The front end of the US yield curve will in this scenario rise further as the market implied probability of a 2017 rate hike currently stands at 53%.
  • Currencies: Will Fed help to put a floor under the dollar?
    Today’s Fed policy assessment might be key for the dollar. The start of reducing the BS will probably give the dollar only limited additional interest rate support short-term. The new Fed dots will signal substantial additional rate rises to come. In theory this should be USD positive, but will the FX market believe the Fed more than it did until now?

The Sunrise Headlines

  • US stock markets eked out small gains yesterday (+0.1%) in an uneventful session. Overnight, Asian risk sentiment is mixed but changes remain small.
  • Trump warned that America would “totally destroy” North Korea if forced to defend itself or its allies, as the US president used his debut address to the UN general assembly to issue stark threats to a “wicked few” oppressive regimes.
  • Theresa May will offer a €20B Brexit payment to the EU when she lays out her divorce strategy Friday, according to the FT. She hopes it will break a threemonth deadlock over negotiations and allow talks to include a future trade deal.
  • Shipments of cars and electronics in August drove up Japan’s exports at the fastest pace in nearly 4 years (18.1% Y/Y), evidence that overseas demand is strong enough to support healthy economic growth. Imports rose 15.2% Y/Y.
  • Iraq’s oil minister said OPEC and other crude producers were considering extending or even deepening a supply cut to curb a global glut, while a report showed a smaller-than-expected increase in U.S. inventories.
  • Two key US senators said they had reached a pact on the parameters of a critical budget resolution, removing an obstacle on the complex path towards Republican-led tax cuts.
  • Today’s calendar contains UK retail sales, US existing home sales and a German 30-yr Bund auction. However, these will all be overshadowed by tonight’s FOMC meeting and press conference by chair Yellen

Currencies: Will Fed Help To Put A Floor Under The Dollar?

Will Fed put a floor under the dollar?

USD trading remained technical in nature yesterday as investors counted down to tomorrow’s FOMC decision. Data were second tier and had little impact on trading. USD/JPY set a new ST top, but reversed gains later. EUR/USD traded close to mostly slightly below 1.20.

Overnight, Asian equities are narrowly mixed after WS closing at again new record levels. Japan August trade data were stronger-than-expected, but doesn’t change to broader picture going into tomorrow’s BOJ policy announcement. The BOJ is largely expected to keep course, lagging the normalisation process in other major economies. This prospect weighs on the yen, especially if rates in the US or Europe would rise further. The overall picture for the dollar stays unchanged. USD/JPY holds in the mid 111 area, within reach of the ST correction top. The dollar continues to trade weak against the euro. EUR/USD tries to regain the 1.20 barrier. EUR/JPY trades near the highest levels since December 2015.

Today, the eco data (German PPI, US existing home sales) will be largely ignored as investors will forward to the Fed policy decision. For an in depth preview of the Fed decision, see the fixed income part of this report. The start of the reduction of the balance sheet is a symbolic step in the normalisation process. The move was extensively pre-announced and the initial impact on market liquidity is limited. In this context, the new Fed rate dots might be more important for the dollar. We don’t see changes in the median dot for 2017 (one additional hike) and for 2018 (3 extra hikes), but chances of a downward revision of the 2019 median dot (2.5 extra rate hikes) and the long run (3%) are high. The Fed’s ongoing intention to normalize policy should be USD supportive given that hardly any further tightening is discounted. However, are there reasons for the market to believe the Fed more after today’s meeting than it did till now? For that to happen, the Fed dots probably need ‘confirmation’ from good eco data and higher inflation. We won’t get that today. In this context, the defuse/fragile picture for the dollar might persist for some time. We assume more USD consolidation near the recent lows, maybe with room for some modest USD gains, but we dare not anticipate on it.

From a technical point of view EUR/USD hovers in a ST consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that last week’s correction didn’t reach the range bottom. More confirmation is needed that the recent bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (against the euro).

The day-to-day momentum in USD/JPY is more constructive. The yen trades weak across the board. USD/JPY regained the 110.67/95 previous resistance. This a short-term positive. EUR/JPY shows a similar positive picture. So, the yen might stay under pressure at least until the next event risk pops up.

EUR/USD: nearing correction top ahead of the FOMC decision

UK retail sales in focus

Sterling traded with a slightly negative intraday yesterday following a sharp rally last week, when the BoE warned that it was likely to raise its policy rate in the coming months. BoE governor Carney confirmed that view on Monday, but sterling started to lose ground. The political bickering between UK PM May and UK Foreign Secretary Johnson was also a slight sterling negative. EUR/GBP closed the session at 0.8881 (from 0.885). Cable hovered around the 1.35 pivot.

Today, the UK August retail sales take centre stage. A very modest rise of 0.2% M/M and 1.2% is expected A soft figure questions the viability of the recent hawkish BoE speak. However, the BoE is temporary giving more weight on prices than on activity data. Even so, the sterling rally might lose further momentum in case of a poor report. Markets will also look forward to PM’s Brexit speech. A more conciliatory PM May would be a ST sterling positive. The recent GBP rebound is losing momentum. Even so, we look out whether sterling can return to the recent correction top (EUR/GBP low). If that move fails, the easiest part of the sterling rebound might be behind us.

EUR/GBP made an impressive uptrend since April and set a new MT top at 0.9307 late August on the back of euro strength. Simultaneously, UK price data were soft enough to keep the BoE side-lined. Recent price data amended this story and the ST-trend reversal of sterling was reinforced by recent BoE hawkish comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look out how far the current correction has to go. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We start looking to buy EUR/GBP on dips

EUR/GBP: GBP-rebound rebound slows

Download entire Sunrise Market Commentary

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Featured Analysis

Learn Forex Trading