Currencies: Will Fed Convince USD Bulls?

• Rates: Will the Fed’s 2021 dot signal the end of the cycle?
  The German 10-yr yield cleared the 0.5% mark. A sustained break in the weekly close opens a new trading band (0.5%-0.8%). US yields remain at/near cycle highs ahead of tonight’s FOMC meeting. A rate hike and confirmation of 2018-2020 dots are discounted, but what about the forecast for 2021? We don’t expect the Fed to signal the end of the eco/tightening cycle.
• Currencies: will Fed convince USD bulls?
  Today, USD traders will also keep a close eye at the Fed dots/communication. Of late, the performance of the dollar was not really convincing. If the Fed doesn’t signal an end to the tightening cycle yet, this should at least provide a solid floor for the US currency.

The Sunrise Headlines

• All US equity markets closed yesterday’s trading session with losses but NASDAQ (+0.18%). Most Asian exchanges opened with gains. China is outperforming (CSI 300 +1.58%) and Japan is having a small setback.
• US President Trump addressed the UN yesterday, attacking Iran’s ‘corrupt dictatorship’. He vowed to take more actions. Trump added that OPEC is ‘ripping off’ the world in its unwillingness to compensate for Iran’s oil exports.
• Iranian president Rouhani criticized the US for its hostile policy towards Teheran, but praised the EU, China and Russia for backing a plan to sidestep American sanctions and allowing international trade to continue with Iran.
• Volker Kauder, Merkel’s right hand for over a decade, lost elections for head of the bloc’s parliamentary group to Ralph Brinkhaus, a deputy leader of the conservatives. The defeat reflects rising discontent with Merkel’s leadership.
• UK PM May has signalled that she would prefer a ‘no-deal’ Brexit over the offer currently put forward by the EU. French FM, Bruno Le Maire, countered by saying it would be ‘suicidal’ for the EU to accept May’s Chequers proposal.
• Italy’s Five Star Movement leader Di Maio warned his fellow ministers that if the 2019 budget doesn’t keep his key demands in mind, including a minimum income, the budget would not enjoy the support of his group in Parliament.
• Today’s focus turns to central bank meetings in the US, Czech Republic and New Zealand. The former two are expected to hike rates further. Fed Powell’s press conference and the new dot plot will draw a lot of attention.

Currencies: Will Fed Convince USD Bulls?

Will Fed convince USD bulls?

Yesterday, there was little high profile news to guide USD trading. Investors were counting down to today’s FOMC decision. ECB’s Praet downplayed Monday’s hawkish inflation comments from Draghi. EUR/USD traded off Monday’s ST correction top, but the pair remained well supported. After a soft start, EUR/USD mostly hovered in the upper half of the 1.17 figure. The 1.1815/1.1850 resistance stayed within reach. US consumer confidence was very strong but provided only limited support to the dollar. EUR/USD closed at 1.1767. USD/JPY continued its gradual uptrend to close the session at 112.97. Overnight, Asian equities are trading mixed to slightly stronger with China outperforming. The (trade weighted) dollar is still struggling to avoid further losses even as the Fed is expected to raise rates. EUR/USD is trading in the 1.1765 area. USD/JPY is testing the 113 level, nearing the highest level in 2 months. Today, eco data are second tier and will probably be ignored as markets will look forward to this evening’s Fed policy decision. A 25 bp rate hike is largely discounted. The market focus will be on the Fed guidance as mirrored in the dots. We expect the Fed to confirm the scenario of a protracted US eco cycle and maintaining the June rate path for 2018/2020. We also assume the 2021 median forecast to remain unchanged from 2020. This scenario of the Fed not yet signalling a material roll-over/setback in the US economy should in theory support a further rise in US yields and in the USD. Admittedly, interest rate markets and, even more, the dollar were reluctant to embrace this scenario of late. Even so, if our expectations for the Fed dots materialize, it should at least be enough to prevent a sustained break of EUR/USD beyond the 1.1851 range top. USD/JPY might extend its uptrend. On the other hand, if the Fed signals a substantial slowdown in the US economy toward the end of the policy horizon, the dollar will probably suffer. This is not our preferred scenario. Yesterday, sterling extended Monday’s rebound, reversing part of the losses suffered after last week’s EU summit. There were no eco data and we didn’t see any real Brexit progress. Today, the CBI retail data will be published. However, Brexit and technical considerations will probably remain the drivers for sterling trading. For now, the UK currency looks quite resilient to the Brexit turmoil. That said, we expect any sterling rebound to be limited as long as visibility on Brexit remains blurred.

EUR/USD holding within reach of 1.1850 range to ahead of the Fed meeting