The long awaited FOMC meeting produced mixed results as the Fed lifted the Fed Funds target for the fourth time this year to 2.50%.
The lowering of the trajectory from 3 rate hikes to 2 in 2019 sparked a selloff in the USD and a rally in US equities during the 30 minutes between the rate announcement and FED chief Jerome Powell’s press conference.
During the press conference, Mr Powell confirmed that the FED’s balance sheet unwind of $50 billion per month was on “automatic pilot”, would continue throughout 2019 and would not be considered as a tool for monetary policy.
For perspective, the FED’s balance sheet ballooned from $1.75 trillion to $4.45 trillion during the five years of Quantitative easing (QE).
Since March of this year, just over $400 billion has been rolled off the FED’s balance sheet; this has been referred to as Quantitative Tightening (QT). At a rate of $50 billion per month, the QT operation will reduce the FED’s free reserves by over $1 trillion, (or 22%) by December of 2019.
By many monetary measures, removing over a trillion USD from the global financial system pencils out to further tightening, which is why global equity markets have been sold off sharply over the last 24 hours on a “risk off” type of pattern.
As we have discussed in previous FX UPDATES, Forex traders will usually respond to risk off conditions by going long the USD versus all the major crosses except the JPY.
And while the USD has been mixed post-FOMC, the JPY has clearly strengthen.
The USD/JPY has dropped over 2.5% this week and posted a 3-month low of 110.80 in NY trade overnight. As the USD/JPY trades lower, the JPY is getting stronger as it takes fewer JPY to equal 1 USD.
The technical picture in the USD/JPY is looking stretched even as the major stock indexes continue to experience long liquidation. We entered the week short USD/JPY from 113.25 with an initial target of 110.70. Considering our target was just missed by 10 points last night, we suggest closing out this trade at 111.25, or better, taking a nice profit and going flat into the weekend.
The commodity currencies, including the Aussie dollar, were sold off hard after yesterday’s FOMC press conference. The AUD/USD had been consolidating between .7150 and .7200 over the last three sessions before spiking down to .7080 in early Asian trade.
The internal momentum indicators are becoming increasingly negative as the pair has traded below the 30-day moving average for the last 12 sessions and the daily RSI is at 38.00 and pointing lower. Our suggestion to add to short positions at .7230 was not filled.
We are currently short from .7310 and suggest adding to short positions at .7180 with an initial target of .6980 and a .7270 stop.
The EUR/USD traded down to 1.1360 after Mr Powell’s press conference but spent most of the European session steadily climbing higher.
The pair reached 1.1485 in early NY trade, which sets up a potential “double top” pattern dating back to November 7th. With EU data flow continuing to miss to the downside, we consider the recent rise transitive and corrective in nature.
With the US FED Funds at 2.5% and the ECB benchmark rate at -40 basis points, the carry spread favours the USD by 290 basis points; we see this spread widening throughout 2019 and pressuring the single currency lower.
We came into the week short from 1.1560. Our stop at 1.1415 was hit for a nice profit. We suggest selling EUR/USD at 1.1450, or better, with an initial target of 1.1210 and a 1.1585 stop.
Despite an acute lack of any progress in Brexit negotiations, the GBP/USD has had a brisk recovery from last week’s low of 1.2470. If nothing else, the ongoing drama will keep the BoE on the sidelines well into 2019. As such, we see the pair trading lower as the current overnight yield spread of 175 basis points continues to widen.
Our trade suggestion to sell GBP/USD at 1.2680 was filled and is a few points onside. We suggest holding short from 1.2680, or better, with an initial target of 1.2410 and a 1.2775 stop.
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