The market has been anticipating this meeting by the Federal Reserve for a few days, with the uncertainty driving a consolidation. Traders were right to be cautious as the volatility on financial markets in the hours following the Fed’s announcement has been enormous. A dovish outlook from the Fed has driven huge swings in financial markets with the dollar sharply sold off, along with Treasuries and equities being bought. In the event, the FOMC did remove the word “patient” but then remained rather cautious with cuts to its inflation and growth forecasts, whilst the “dot plots” showed a significant reduction on interest rate expectations by FOMC members. The Fed’s policy will now be data dependent but Yellen noted the sluggish growth in earnings. All in all the market has taken it that the expectations of a June rate hike have been significantly reduced and the more likely time is in Q4 this year now.
The impact across equities has been significant, with Wall Street showing strong gains, the S&P 500 was 1.2% higher. The Asian markets also cheered the move by the Fed with broad gains, with the exception of the Japanese Nikkei which is 0.4% lower as it is negatively correlated to the strength of the yen. European markets are fairly mixed again, with the FTSE 100 looking to hold on to gains from yesterday, whilst the DAX continues its curious near term underperformance.
In forex markets the volatility is still significant, with the dollar looking to claw back some of the move against many of the major currencies seen yesterday. The euro is over 150 pips lower, with sterling down by around 120pips. Until the markets settle it will be very difficult to assess the true impact of the FOMC meeting. It looks like the market has unwound some of the overdone dollar strength which may have gone a bit ahead of itself, but ultimately a strong dollar trend is still likely to prevail. Interestingly, although the same argument sits with the precious metals, the gold price has held on to its gains early today.
Traders will be looking out for monetary policy from the Swiss National Bank today, in addition to the announcement of the take up of the latest targeted LTRO from the ECB (around €40bn expected). US Weekly Jobless Claims are out at 1230GMT with 295,000 expected which would be slightly higher than the 289,000 last week.
All dollar related plays have seen a huge swing in the outlook since the Fed meeting and the Kiwi is no different.. The question is though whether the move will mark a crucial beginning of a recovery against the dollar which has been so strong for months. It is difficult to say on the Kiwi chart as there is a bullish outside day but the move has come within a slight ranging phase. The focus should be more on the old resistance levels that have turned into new support. The Break above the old pivot level at 0.7440 is a key development but this level is now being tested today as the move unwinds slightly. Daily momentum indicators show little real improvement in the outlook. Until the RSI moves above 60 and the MACD lines move above neutral there is no real suggestion that this is anything more than a bear rally. The key overhead resistance remains intact at 0.7615 and until this is breached the outlook will remain bearish with rallies seen as a chance to sell.
There has been some incredible volatility in the wake of the FOMC monetary policy decision. The euro rallied almost 350 pips in just under 3 hours after the Fed announcement and the rate is now in the process of unwinding some of that move. The impact on the daily chart has been significant, but interestingly the overall move does not actually change a great deal for the dollar bull run. EUR/USD has merely unwound back to the resistance once more of the falling 21 day moving average (currently $1.0976) which gives you an idea of how stretched the dollar strength had become. I still have a sense that this will be used as another chance to sell the pair, it just depends upon how much volatility it goes through before settling once more into a consistent selling phase again. Momentum indicators have been thrown into a bit of a spin by the move, with Stochastics showing a marked improvement but the RSI is stalling already in a rebound just above 40.
There is a massive bullish key one day reversal on Cable after the FOMC decision. The big question is whether we can trust that this is significant turning point in the run and whether we can back the bulls once more. My hunch is that this will be near term volatility that could peter out fairly quickly. The second day following a move such as that becomes important as a confirmation and already there is cause for concern with the pair lower by over 80 pips. The near term resistance at $1.4950 was breached by a daily range of over 500 pips yesterday so we must wait for the pair to settle down before we can gauge the true impact of this move. Ultimately though Cable continues to trade below all moving averages and whilst there has been a slight improvement in momentum, the move is still considered to be a rebound within the bear trend, and still more than likely to be another chance to sell. I would be looking towards the old resistance band $1.4850/$1.4900 to be supportive and if this fails it would be suggesting that the bulls have been quickly rebuffed.
Will this significant volatility provide another chance to buy Dollar/Yen. Despite the sharp decline on the FOMC the medium/longer term outlook remains bullish and this is likely to prove a good entry point. The confluence of supports can be important on charts and despite the huge volatility yesterday, we had an old strong support come in to prop up the correction yesterday. At 119.40 there was an old pivot level and also the support of a 2 month uptrend. There are mixed signals on momentum, with the RSI having unwound back to 50, but the more sensitive Stochastics showing a more corrective signal. However, the pair continues to trade above the moving averages and this looks to be a correction within the bull market. Already there has been a sharp intraday rally to suggest an appetite for the dollar still. A failure of the support at 119.40 would now be the key breakdown.
There has been a huge rally on gold as the dollar has weakened and precious metals prices have pulled higher. However, for now this is little more than just a rebound within the big downtrend channel that has been in place over the past 2 months. The top of the trend channel comes in around $1187 today, whilst the falling 21 day moving average which capped the late February rally is around $1183. Daily momentum indicators are yet to respond too significantly, with the RSI around 40 and only marginal pick-ups in the MACD and Stochastics. The intraday hourly chart shows all the old resistance of the lower highs which will now be seen as a near term gauge of sentiment. If these levels begin to fail as supports then the near term outlook will quickly turn negative again. Watch for support at $1170.60 and $1166.30 being tested.
An impressive turnaround was been seen on WTI yesterday. The driver has certainly been a key fundamental event (the dollar taking a dive after a dovish steer from the Federal Reserve) but there has been a large bullish key one day reversal on the oil price. This comes after what could now be a key low has been posted at $42.03. Daily momentum indicators have begun to improve with the move, with a bullish crossover from the Stochastics and the RSI picking up. The big question is how sustainable this move is. On the intraday chart a couple of near term resistances were breached with a push above $44.20 and $44.78, but already these levels have failed as supports which is a concern for the bulls. The hourly momentum indicators have improved but if the bulls cannot regain the ascendency again today this will seem like a lost opportunity and the bounce could quickly fizzle out. Resistance now becomes yesterday’s peak at $45.34.