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A Look at Market Pricing on Fed Rate Path after Powell’s U-Turn

Fed Chair Jerome Powell’s speech last week was sort of a turning point. Stocks staged a strong rally and helped lifted Kiwi and Aussie as the strongest ones. Nevertheless, despite being sold off steeply, Dollar has indeed reversed much the the losses and ended as the third strongest one. Sterling ended as the weakest one as traders turned defensive ahead of the Brexit vote in the parliament on December 11. Yen was the second weakest for the week, followed by Canadian Dollar, which decline together with oil prices.

The immediate near term outlook of the markets will depend on the result of the Trump-Xi summit in Argentina. The two presidents are scheduled to have a dinner on Saturday night, as sideline of the G20 summit in Argentina. Ahead of that, there were a lot of rumors, comments and news floating around. For example, Trump indicated it’s “highly unlikely” for him to hold off raising tariffs on USD 200B in Chinese goods on January 1. He also tried to sound hardline, repeating that China wanted to make a deal, but he’s happy with the current one right now. There were also reports that both countries are exploring a trade pact.

It’s hard to determine whether the US-China news were real or just diplomatic smokescreens. So we’d refrain from making any prediction on the outcome. Nonetheless, we’re just hours away from know the results. So better just be patient.

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Powell’s awkward U-turn and fed fund futures pricing

Powell’s awkward change in his description of interest rate was a big mover in the markets last week. In short, he described interest rate as being “just below” neutral. For what ever reasons, that’s a sharp u-turn from being “a long way from neutral” as he said on October 3. Dollar dived sharply while stocks were shot up. But then there was no follow through selling in the greenback, even though stocks did edge a little bit higher after close.

So, how did investors expectation on Fed’s rate path changed after Powell’s turn. Let’s have a look at fed fund futures pricing. As of now, fed funds futures are pricing in 82.7% chance of a December hike to 2.25-2.50%. It was 75.8% a week ago and 74.5% a month ago.

For another hike to 2.50-2.75% in March, fed funds futures are pricing in 41.8%. It was 37.5% a week ago and 53.2% a month ago.

For yet one more hike to 2.75% to 3.00% in June, fed funds futures are pricing in just 14.4%. It was 15.8% a week ago and 31.3% a month ago.

So, after Powell’s words, investors have actually firmed up their expectation of December and March hikes. That is, federal funds rates will enter into the long run range of 2.50-3.50% as in September projections, but stop there. It could be kept below the central tendency of 2.8% to 3.0%, and well below the median long run range of 3.0%.

But of course such expectations could easily change with incoming data, Fed rhetorics and most importantly, December’s new economic projections. We’ll see.

Stocks staged decisive rebound, medium term range set for now

US stocks staged a decisive rebound last week, no matter what. The medium term range for DOW should have been set between 24122.23 and 26951.81. For now, we’re not expecting long term up trend through 26951.81 record high soon. DOW should start to feel rather heavy above 26000. There is still prospect of extending the correction from 26951.81 to 38.2% retracement of 15450.56 92016 low) to 26951.81 at 22558.33. But that’s not something to happen in near term.

10 year yield extended pull back, but downside should be limited

10 year yield extended the pull back from 3.248 last week hitting as long as 3.008. While the pull back is deep, we’re not seeing a trend reversal yet. Hence, we’d expect downside to be contained by 61.8% retracement of 2.808 to 3.248 at 2.976 to bring rebound. Firm break of 55 day EMA (now at 3.086) would bring retest of 3.248 high. However, sustained break of 2.976 will be the first serious warning of medium term bearish reversal and would turn focus to 2.808 structure support.

Dollar index rally still index, no reversal yet

Dollar index had a rather volatile week last week. But after all, it stayed inside near term rising channel and above 55 day EMA. Thus, there is no indication of near term bearish reversal yet. Outlook remains mixed as it’s also limited by 61.8% retracement of 103.82 to 88.25 at 97.87. And, upside momentum is diminishing as seen in daily MACD.

On the upside, decisive break of 97.87 fibonacci level is needed to confirm upside momentum and up trend resumption. Meanwhile, rejection by 97.87, followed by break of 95.67 support will be a strong side of reversal. In this case, deeper fall should be seen back to 93.81 support.

Position trading

We tried to sell EUR/JPY on break of 127.49 last week but the order was not filled. Simply speak, EUR/JPY was not ready to resume recent decline yet. Nevertheless the corrective structure of the price actions form 127.49 to 129.29 so far affirmed our bearish view. So, we’ll maintain the strategy but raise the entry. That is, we’ll sell on break of 127.80, slightly below 127.83 support. Stop will be raised to 129.30, slightly above 129.29. We’d expect the fall from 133.12 to resume eventually for a test on 124.61/89 support zone. But we’d actually expecting the fall from 137.49 to resume and extend to 61.8% retracement of 109.03 to 137.49 at 119.90

So in short, we’ll sell EUR/JPY on break of 127.80, with stop at 129.30. We’ll put 120.00 as target first. But we’d be cautious on the reaction fro 124.08 key support and might exit earlier. Meanwhile, we’ll hold our hands off first before seeing other reactions on the Trump-Xi meeting.

EUR/USD Weekly Outlook

EUR/USD rebounded after hitting 1.1267 but lost momentum well ahead of 1.1472 resistance. Initial bias stays neutral this week first. As long as 1.1472 resistance holds, deeper decline is expected in the pair. On the downside, break of 1.1267 will target 1.1215 low first. Firm break there will resume larger down trend from 1.2555 for 1.1186 fibonacci level next. However, considering bullish convergence condition in daily MACD, firm break of 1.1472 will be suggest medium term bottoming and turn outlook bullish for 1.1814 resistance instead.

In the bigger picture, as long as 1.1814 resistance holds, down trend down trend from 1.2555 medium term top is still in progress and should target 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. However, break of 1.1814 will confirm completion of such down trend and turn medium term outlook bullish.

In the long term picture, the rejection from 38.2% retracement of 1.6039 to 1.0339 at 1.2516 argues that long term down trend from 1.6039 (2008 high) might not be over yet. EUR/USD is also held below decade long trend line resistance. Firm break of 61.8% retracement of 1.0339 to 1.2555 at 1.1186 should at least bring a retest on 1.0339 low. This will remain the favored case as long as 1.1814 resistance holds.

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