The USD, as measured by the USD Index, reached an 18-month high of 97.60 on Friday as safe-haven flows dominated trade into the weekend.
Even though the USD/JPY lost ground on the day, the EUR/USD and GBP/USD (which together have a 70% Index weighting) dropped enough to lift the USD Index to it’s best level since May of 2017.
Steep losses on Wall Street combined with weaker Chinese data, expanding “yellow vest” riots in Europe and continued Brexit chaos kept the USD well bid across all the major crosses except the JPY.
Against this backdrop of both financial and political uncertainty, Forex traders will focus on Thursday as the US Federal Reserve (FED) will hold its last meeting of the year.
Despite the ongoing weakness in global equity markets, a somewhat synchronised slowdown in G-7 GDP growth rates and thinly veiled comments of disapproval from the White House, the FED is widely expected to raise the Fed Funds target from 2.25% to 2.50%.
With the market already pricing-in a 25 basis point increase, we expect the main driver of currency rates on the day will be the comments from FED Chief Jerome Powell, as well as the FED’s Summary of Economic Projections; also known as the ” The Dot Plots”.
The FED meets eight times a year but the Economic Projections are only updated four times a year. These projections are simply the opinions (guesses) of all the FED governors including the non-voting members. The Dot Plots reflect the views of where the FED Funds rate could be over the next two years.
To put this in a currency perspective, the FED left rates unchanged after their meeting on January 25th of this year and the USD index traded down to 88.25. However, the Dot Plots from that meeting showed that the majority of voting members expected four rate hikes over the course of 2018.
And as the FED has kept raising the Fed funds target along the trajectory of the January Dot Plots, the USD has continued to rally throughout 2018.
The risk to the USD rally now stems from recent comments from FED officials regarding how high the Fed Funds need to rise to reach the “neutral bound” and how that will be illustrated in Thursday’s Dot Plots.
It’s our base case that with US unemployment at 40-year lows and the current Fed Funds rate barely above the core inflation rate, the FED will maintain its tightening-bias and the Dot plots will show at least 2 rate hikes in 2019.
As such, we expect the broad USD rally will have periodic corrections but still trade higher throughout 2019.
From a daily chart perspective, the Aussie dollar has the weakest technical structure. The AUD/USD fell .5% last week and posted its lowest weekly close since October 30th. We see initial support in the .7120 area and a more critical chart point near .7070.
We are currently short from .7310 and suggest looking to add to short positions at .7230 with an initial target of .6970 and .7345 stop.
In keeping with its general form, the EUR/USD traded lower after last week’s ECB meeting. Weaker EU PMI data pushed the pair down to 1.1275 before the recovering into the NY close. Now we see resistance in the 1.1350 area and key support down at 1.1180.
We are currently short from 1.1560. Our suggestion to add to short positions at 1.1390 was not filled on Friday. We suggest lowering that offer to 1.1355 with an initial target of 1.1210 and a 1.1415 stop.
The lack of material progress in the Brexit negotiations pushed the GBP/USD down to 20-month low near 1.2470 last week. The Bank of England also meets this week, but they aren’t expected to make any policy adjustments. We are currently flat the GBP/USD and suggest short-term traders look to sell at 1.2680 with an initial target of 1.2410 and a 1.2770 stop.
The USD/JPY continues to trade in a broad 112.00 to 114.00 range as both technical and fundamental forces lack the momentum to extend in either direction. We still prefer the short side of the pair on a break of the 112.00 level.
We are short from 113.25 and suggest adding to short positions at 113.80 with an initial target of 110.70 and a 114.65 stop.
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