What Happened Yesterday
The USD Index fell on Wednesday, touching its lowest level in more than a year after the release of the Federal Reserve’s policy statement following its July meeting. The devil is in the detail and never is this more true than the Central Bank Monetary Policy Statements.
The Federal Open Market Committee announced no changes to monetary policy, as expected. Policymakers said, however, that the U.S. central bank would begin implementing balance sheet normalization “relatively soon.” That marked a change from the committee’s previous statement that it would begin to reduce its $4.5 trillion bond holdings “this year.” Read the whole FED Statement here.
The words ‘relatively soon’ is of course open to interpretation. It appears the market was hoping for specific details and maybe the mention of September as the starting point. They have interpretted ‘relatively soon’ as some time down the track with no specific date.
Well they let the FED know how they feel about it as they bashed the USD aggresively. The dollar index fell to 93.37, its lowest since June 23, 2016. The dollar index has fallen about 4 percent over the last month and more than 8.5 percent this year.
While the Statement did seemingly set the Fed up to begin paring its balance sheet as soon as its next meeting in September, the lack of surprise allowed the market to revert to the trend of dollar weakness seen before the statement’s release.
In my opinion, the market has overrreacted and I think this initial move will be turned around very swiftly. All it will take is one comment from a FED official to ‘clear up’ the interpretation and the USD will reverse these moves. We see it all the time that the market gets it wrong and the FED calmly corrects it a few days later. So watch out for any FED officials speaking in the next few days or week, especially because they haven’t been scheduled at this point. so if they do it’s for a purpose!
Note also the FED did state “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” This is the forward guidance the market needs and it makes all the upcoming major US releases very important for future rate moves and also for the unwinding of their bond portfolio…. “The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated”
The large moves I think are also an exaggeration due to a few factors. USD weakness was already in the market with US political turmoil (good one Donald), the market had factored in a more agressive schedule by the FED so that had to be unwound, and the fact that most of the majors broke key long term technical levels on the topside, triggering large stop loss runs. So it was a massive cleanout of sorts and with no support levels on the USD it slid lower with little resistance.
The key sign for me is the fact that the EUR only managed to touch 1.1747. The major level on EURUSD was 1.1710 so to me this is just a stop loss run and we’ll see the USD reverse shortly!
Today’s Fundamental Drivers
The market will have plenty of time to simmer after the FOMC announcement as there isn’t any major economic releases until the North American session.
Technical Set Up – What’s Happening with the Majors
We’ve had some major levels broken after the FOMC so you may need to spend some time updating your charts today.
The Euro, which had been bumping up against a 23-month high at 1.1710 for most of the week, pushed through that mark to touch $1.1747, its highest since Jan. 15, 2015. This to me looks more like a stop loss run then a genuine up move.
Stop loss orders triggered above 1.3070 taking it to a high of 1.3126 which is 1 pip above the high on July 18.
Gave up earlier gains on the back of geopolitical rubbish revolving around US sanctions against Russia and slid straight back into it’s recent ranges. But once again it hasn’t gone that far!
The dollar dropped 0.6% to 111.21 yen, reversing early gains but didn’t really break any major levels.
Stop loss orders triggered above 0.7964 and above the high on the 20th July at 0.7990 and above 0.8000 psychological resistance.
Stop loss orders triggered above 0.7460 the previous high last week and above 0.7500 psychological resistance.
With no major trendlines around it was an easy slide lower for USDCAD. The dollar fell to a more than 2-year low against its Canadian counterpart, dropping to $1.2411, its lowest since June 30, 2015.
Today’s Focus – Major Currencies in Play
You need to follow the economic data releases & best technical set ups to work out where the majority of action and interest will be.
It’s back to the US for the next move which pretty much brings all the majors back into play!
If we get strong US data then watch out we could get big reversals of yesterday’s moves.
Technical Set Up: 1.1711 is now a key pivot level
Fundamental Driver: German Gfk Consumer confidence & US Jobless claims + Durable goods
Potential Strategy: You could trade the US data like a ‘break trade’ either side of the market. But I think the best trade is selling EURUSD back through 1.1710 on strong US data.
Weak US data confirms the FED delay whilst strong data would reverse yesterday’s move.
Next Best Trade Update
Now the FED is out of the way it’s opened the market right up. We should have some really good trading opportunities over the next few days and on the back of all major US data releases.
Elite members stay tuned for further updates!
There is always a little confusion when the major moves are on the back of ‘Statements’ or ‘Press conferences’. Often the initial move (interpretation) is wrong and the market reverses these moves over the coming days. I believe yesterday’s moves are exactly that…wrong!
We’re lucky today that we have the key US Durable goods data shceduled. This could provide a great trade either side of the market so make sure you tune in for it!