There are always two sides to a story in forex. However, despite some significant uncertainty surrounding the euro (Greece and is protracted negotiations with the Eurogroup) and sterling (the prospect of a hung parliament after the UK General Election), both these currencies have been rising against the dollar in the last couple of weeks. This comes as we approach the next announcement of the monetary policy from the Federal Reserve. Expectation is that the Fed will hold steady and not change the FOMC statement to any substantial degree. But the market has clearly taken a view against the US dollar in the past couple of weeks. As the forex majors have rallied, could it be a case of “Buy on rumour, sell on fact”?
In the last two weeks, since posting a low of $1.0519 on EUR/USD the rate has rallied by almost 500 pips to around $1.1000, whilst the rally on sterling has been even more pronounced with over 800 pips of upside form $1.4563 to $1.5380. We have also seen significant rebounds on the commodity currencies such as the Canadian, Australian and Kiwi dollars. This has all resulted in a breakdown in the Dollar Index which yesterday fell below its key March low of 96.17 to fall to an 8 week low.
However, the chart of the Dollar Index still suggests that the move is counter to the 9 month uptrend that the dollar has been in since July last year. I have been saying for a while that I see the rallies on these forex pairs would be opportunities to sell. Perhaps the near term rallies have gone further than I had anticipated, but I still see the longer term trend for dollar strength as being sound.
Today’s FOMC meeting is likely to ultimately be a bit of a non-event. The economic data in the US has been coming off the top in recent weeks. Yesterday’s Consumer Confidence was a case in point, falling to a 4 month low and coming in lower than expectations. The fact that US GDP is forecast for an annualized 1.0% growth in Q1 today will just add to the reasons why the Fed is going to struggle to make any hawkish lean in the statement today. Also, with no projections or press conference this month there is unlikely to be too much in the statement that will cause too much of a stir. The FOMC decision as to when it will tighten monetary policy will remain data dependent.
However the market has been steadily scaling back on expectations of a rate hike in the past few weeks. The CME Group FedWatch data suggests that the Fed Funds futures are cutting the odds of a September rate hike. Today the probablility of a September rate hike is around 26% versus where is was at 36% just one month ago. Also the chances of an October rate hike have fallen from 54% (i.e. odds on) to just 43% now (ie. less than likely).
Also, if CNBC’s Fed survey this month is anything to go by then perhaps the market is being a touch too dovish. The path of expectation fr tightening is far easier by the consensus compared to the FOMC itself. The survey of 38 respondents suggested the Fed Funds rate would be 0.54% at the end of 2015 (versus 0.71% for the latest FOMC projections in March). The survey suggested that consensus expects the Fed Funds rate to then rise to 1.46% by the end of 2016 (versus the FOMC expectation of 1.86%) and then 2.85% in 2017 (3.75% expected by the FOMC). This suggests that the market is now far more dovish than the FOMC.
However the way that forex markets have moved in the past two weeks would suggest that this is all now priced in. This could leave us open for a potential hawkish surprise today. There are some key resistances overhead:
It could easily be that these resistance levels all give traders an excuse to lock in some of the profits over the past two weeks. The reaction to the Fed tonight could be fairly volatile, but I would still be looking for sell signals as ultimately I feel that the dollar strength will prevail.