FOMC surprise weakens the dollar to test key levels

Last night’s announcement of the meeting of the Federal Open Market Committee (FOMC) took markets by surprise. The dovish tilt from the Fed has resulted in the US dollar coming under significant pressure. The US yield curve has bull falttened, there has been a strong run on key forex pairs and the gold price rebounding too. It has been a meeting that has had a real impact on the outlook across the markets. The fallout from the surprise of the FOMC meeting means that several key technical levels are either under threat or have already been broken.

doveIt was an FOMC meeting that was filled with caution. Perhaps this should be little surprise with Janet Yellen as the Fed chair, a committee member who has long stood on the dovish side of the argument. In her press conference, Yellen all but confirmed that there wold be a rate hike by December, if not earlier in September (the Fed will look ipon the need to make such as important first step as it make a renewed set of forecasts and also has a press conference scheduled in order to fully explain the decision).

However Yellen also noted that further improvements needed to be seen in the labor market and when the committee was reasonably confident that inflation was on the path towards 2%. More needed to be done. This cautious stance was exaccebated by a cut to the GDP projection for 2015 and a dovish slide in the dot plots for 2016 and 2017 (which would have been the cause behind the flattening of the US Treasury yield curve). For me this is the major take away from the FOMC meeting. Yellen was emphasising that focus should be on the speed of rate hikes rather than the timing of the first move. The dot plots suggested that the Fed is in intent on not hiking rates too quickly in its path back towards normalisation. Furthermore, the fact that the number of committee members who are expecting 2 rate hikes in 2015 has dropped from 14 to 10, whilst there are still 2 members who think there will be no rate hikes in 2015. This leads me to expect that there will be just the one rate hike in 2015, with December the base case and September still a possibility.

There has been a significant impact on the US dollar in response to this surprisingly dovish outlook for the path of rate hikes for the Fed. With the dollar bulls under pressure this has meant that across the forex major pairs there are some significant levels either being breached or ready to be tested.

The pairs that are already in the process of breaching key levels:

  • AUD/USD has rallied today through the key near term resistance band $0.7800/$0.7820. A closing breakout would be a completed base pattern (confirmed on momenutm indicators and imply further recovery at least back towards the next upside pivot level at $0.7930.
  • GBP/USD has been the massive outperformer agains the dollar in recent weeks, now having added over 700 pips in less than 2 weeks. The breakout above $1.5814 has already been completed yesterday and a two day closing is a significant confirmation of a shift to a far more positive outlook for sterling.
  • USD/CAD has this morning broken below the key near term support at 1.2200 which would be confirmed by a closing breakdown. The move implies an initial 150 basis points lower, but with momentum increasingly conffigured for furher weakness there is little major support until the key May low at 1.1916.

Other pairs are ready for a test of key levels:

  • EUR/USD has made a near term break above the consolidation resistance around $1.1380 and this is the final hurdle that has been preventing the euro from pushing a test of the resistance at $1.1465. A close above $1.1380 tonight could be the bullish signal that traders need for the test. It is currently touch and go.
  • USD/CHF broke below the near term support at 0.9226 but has been in decline for the past 3 weeks now and is well on the way towards a test of the key May low at 0.9065. The stance of the SNB saing that the Swissy is “significantly overvalued” has done little to support the pair as the dollar has been the main focus today.
  • USD/JPY has fallen sharply and is very close to testing the key near term support at 122.43, whilst also the old breakout support around 122.00 is possible.

(N.B. The only major that the dollar is not getting panned by is the Kiwi, which has been under pressure from a dovish outlook from its own central bank, but also by last night’s GDP disappointment too.)

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