Fed leans dovish. ECB stands pat. UK election result looms.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is hanging on to the bottom end of its post payrolls (1.3160-1.3260) range in the wake of yesterday’s dovish FOMC meeting.  While the Fed kept interest rates on hold as expected, chairman Jerome Powell gave the market another dose of dovish commentary when talking about inflation, the interest rate outlook, and the 2020 dot plots.  The broader USD started to dip when Powell muddled his way through a reporter’s question about repo and this week’s report from the Bank of International Settlements.  We think the market found these two headlines rather disheartening: 

I DIDN'T SEE THE CHALLENGES WE FACED THIS YEAR COMING

THERE HAVE BEEN PAYMENTS, SUPERVISORY AND REGULATORY ISSUES RAISED WITH REGARD TO REPO MARKET STRESSES

A discussion about interest rates then ensued, where Powell reiterated: IN ORDER FOR FED TO MOVE RATES UP, WOULD HAVE TO SEE SIGNIFICANT, PERSISTENT MOVE UP IN INFLATION.  The market really latched on this headline in our opinion, as it essentially cemented the idea that rates will either stay here or go lower (but certainly not higher).  When you combine this commentary with other soundbites about the Fed’s “readiness to act” (willingness to buy short-term securities other the T-bills if appropriate…ie. QE4), you really have to ask yourself if the Fed is now trying to steal a page out of Mario Draghi’s playbook of “we’ll do whatever it takes”.  This is dovish stuff in our opinion, and reminds us of the Japan-style rabbit hole of monetary policy failure that the European Central Bank now finds itself trapped in.  The US 10yr yield fell swiftly back below the 1.80% level on this headline and USDCAD broke below chart support in the 1.3180s.

We’re seeing a mild bounce in USDCAD here as NY trade gets underway today, and we think the near term focus for traders will be whether or not the market can regain the 1.3180s.  Success in this regard should invite more buyers in and reiterate the 1.3160-1.3260 post-payrolls range we talked about late last Friday.  Failure, on the other hand, will set trader sights on breaking the market below the 1.3150-60s, which would create another bearish technical development that could see the market slip much lower.  The Bank of Canada’s Stephen Poloz will be giving a speech today at the Empire Club in Toronto.  The speech is expected to commence between 12:45-12:55pm, with the Governor’s text being released on the BOC’s website at 12:40pmET.

USDCAD DAILY

USDCAD HOURLY

JAN CRUDE OIL DAILY

EURUSD

The European Central Bank kept all monetary policy measures in place as expected this morning.  Full press release here from the ECB.  The EURUSD market barely moved, as one might expect, but it’s now starting to gyrate as ECB President Christine Lagarde commences her first press conference.  Stay tuned to @EBCTradeDesk on Twitter for more.  The bulls have very much taken back control of EURUSD with yesterday’s clean upside breakout above the 1.1100 level after the dovish Fed meeting.  The next resistance level comes in at the 1.1160s.

EURUSD DAILY

EURUSD HOURLY

FEB GOLD DAILY

GBPUSD

Sterling traders sure look nervous this morning as the Brits head to the polls for today’s general election.  Overnight option volatility has shot up to 45%, which is the highest since the June 2016 Brexit referendum vote.  The premium for GBPUSD puts over calls for the 1-week tenor (risk reversal) has surged to over 6%, as traders rush to pay more for downside insurance.  Spot GBPUSD prices, in turn, have reversed sharply back below the 1.3200 handle…and this comes after yesterday’s post-Fed, upside breakout.  This is not a great technical development for the market in our opinion and could portend a disappointing result for the Tory party later today.  Over 1.1blnGBP in options expire at the 1.3200 strike this morning.  The polls close at 5pmET in the UK, after which exit polls will emerge with predictions as to the winner.  See here for some more election day coverage from the BBC.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar extended its gains yesterday following the Fed’s dovish press conference, and this upside move was helped immensely in our opinion by the market’s early-NY session break back above the 0.6840 level.  The post-Fed move then dented chart resistance at the 0.6870-80s, which has given dip buyers confidence in the overnight session.  Chart resistance in the 0.6890s now looms ahead of a high-stakes White House meeting today to debate planned Dec 15 China tariffs.  More here from the CNBC.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

The dollar/yen fund longs got dealt another blow yesterday following the FOMC meeting, but they’ve managed to hang on to 108.50 chart support during the overnight session despite some UK-election related “risk-off” flows.  The US 10yr yield has just reversed back above the 1.80% as German bund yields spike 3bp higher.  This is likely ECB-press conference driven as Christine Lagarde continues to speak.  We continue to believe the funds (who have been buying USDJPY for weeks) are not well positioned here for “risk-off” headlines heading into week’s end.  We have the UK election results coming up during the Asia session tonight, and then of course the looming Dec 15th tariff deadline.

USDJPY DAILY

USDJPY HOURLY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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