Amid thinly traded volumes, the expected consolidation took a turn yesterday and with risk back into the trading sentiment it would appear that markets may be positioning for a FOMC decision that does not hike rates. There have been a range of mixed signals in recent days, not least of all with the jump in US Treasury yields (which on the 2 year yield is a hawkish sign). However, commodity prices shot higher yesterday, with oil prices over 5% higher and also gold taking a significant turn higher after recent weakness. Also we have equity markets which continue to move higher and some are either threatening to break out of near term consolidation patterns (i.e. FTSE 100) or are actually doing so (i.e. S&P 500). This positive market sentiment as we move towards the FOMC announcement suggests that the market does not believe a rate hike will be seen and is incredible coming ahead of such a huge risk event which is still very much in the balance.
Fed funds futures are pricing in around a 30% chance of a rate hike at 1900BST tonight but with Wall Street around 0.9% higher, Asian markets all higher and European indices also starting the day with mild gains, you would be forgiven for thinking the chances were a lot less. However, not only will markets be looking for the hike, but also for the FOMC’s dot plots of the speed of future hikes, which could temper volatility a touch if the path of the rate rises were shallower.
Forex markets are a touch more settled today, but there were decent gains for the Aussie and the euro yesterday which reflect confidence in the Fed not to move rates, whilst the huge move higher on Sterling (on the back of continued improvement in wages) would also suggest a confidence that the interest rate differentials will not be shifting on tonight’s announcement.
Just parking the Fed for now though and there are still several economic announcements through today. The SNB announces monetary policy at 0830BST with no change expected, before the UK retail sales are announced at 0930BST with +0.2% month on month expected to maintain a decent performance from the UK consumer. At 1330BST for the US there will be weekly jobless claims which are expected to once more remain fairly steady at 276,000 whilst building permits are expected to increase slightly to 1.15m (from 1.13m) and housing starts are forecast to be 1.16m (1.21m last). The Philly Fed manufacturing index at 1500BST is expected to dip slightly to 6.1 from 8.3. But then all eyes will be firmly on the Fed.
Chart of the Day – AUD/USD
Talking about a dollar forex major pair on a day that the Fed could hike rates may be considered on the foolhardy side, but the move on the Aussie in the past few days has been remarkable. The rebound following the small intraday base pattern has already achieved its $0.7150 implied target and has kept going. That move has now moved to breach the downtrend that has been in place since the May high. Interestingly, the move has brought the Aussie to a key crossroads for the medium term outlook. The downtrend may have been breached, but the key overhead resistance now comes in a 60 pip band of resistance $0.7200/$0.7260. Not only that the daily RSI is once again at a level at which the rallies have consistently fallen over throughout the sell-off since May. A closing price above $0.7260 would also take the RSI to a 4 month high and really suggest a turnaround in sentiment. This is a pivotal time for the Aussie/Dollar pair, not least of all with the Fed due to announce tonight.
The uncertainty of the Fed meeting is being reflected in a series of fairly messy, indeterminate candles in the past few days. Just yesterday alone, the initial selling pressure has seen a low being posted around the $1.1215 support before a 100 pip intraday turnaround which has left what was looking like a near term corrective outlook, flipped around again. The truth is that the pair remains thinly traded and this is what can happen when there is such uncertainty surrounding a hugely important economic announcement. Daily momentum indicators are still no real guide as the RSI and MACD lines remain flat, although the Stochastics do continue to rise. The hourly chart shows yesterday’s rally failing just under the resistance at $1.1330 and is now settling again. It is unlikely that there will be too much movement today in front of the Fed at 1900BST, but if there is (and traders decide to take a view) it would be wise to make it intraday as at 1900BST there is likely to be enormous volatility. The key levels to watch will be the $1.1050/$1.1100 pivot level should the Fed hike, and the $1.1465 resistance on standing pat. Once the dust settles we can assess the situation.
Another big rally on Cable has seen the pair break to a three week high and put the bulls seemingly in control. However positive the technicals may seem, they will be low down on the list of determinant factors today, with the FOMC decision looming large. Due to yesterday’s rally above the resistance at $1.5475 the outlook is pretty positive near term moving into the announcement, with a consolidation still likely in the coming hours. The old resistance at $1.5450/$1.5475 becomes supportive today, but after 1900BST tonight technical levels will not matter. The major supports if the Fed hikes come in at $1.5330 initially and then at $1.5170. For the resistance 1.5690 is an old barrier before $1.5820.
Once more, just as it seemed as though there was something of a trend emerging, the indecisive market that is Dollar/Yen changes the outlook again. Looking at the recent candlesticks on the daily chart it is easy to see why. Lots of long shadows and small bodies suggests continued uncertainty in the past week or so. Momentum indicators are very much neutral and although there has been a slight drift higher in the past two sessions there is no real direction moving into the Fed. Taking a step back the market remains rangebound between 118.20/121.70 and it will be interesting to see if once the dust settles whether we will get some direction. The near term support of 119.40 is likely to be tested if the Fed fails to raise interest rates today, whilst a hike will see 121.30 and probably 121.70 tested on the upside.
I am surprised that gold broke out yesterday and it is almost as though the market has already taken the view and is adamant that the Fed is not going to raise interest rates. After over three weeks of consistent decline with lower highs and lower lows, the breakout has changed the near term complexion of the chart. I was expecting that this move (albeit maybe not as significant) may have happened tonight or even tomorrow, so if the Fed hikes rates there could be even more upside of a recovery. The resistance level around $1117 was quickly breached, but it is interesting that the old resistance band around $1125 so far remains intact. I remain bearish medium/longer term and there is not a lot that has been achieved by this rally (yet) which has only really broken the 3 week downtrend. There is further resistance at $1131.85 from the old critical long term floor, but the main resistance comes in at $1147. There could be some consolidation today in front of the Fed decision at 1900BST. A Fed rate hike is likely to see the gold price dive and may even test $1080.
An incredible turnaround has been seen in the last 36 hours, with a sharp rebound on WTI. Having looked ready to put pressure on the support at $43.20 the oil price has staged a remarkable rally and destroyed a rather consistent looking downtrend that had formed over the past 2 weeks. This move comes on fairly low volume (perhaps not surprising given how close the FOMC meeting is), whilst momentum indicators on the daily chart are rather neutral now. The initial key reaction high around $46.00 in addition to $46.40, both of which will now be seen as a basis of support for any retracement/correction of the move today perhaps a reaction to near term stretched momentum. The intraday hourly chart shows the next key resistance to be tested is at $48.40. With such huge volatility amidst low volume trading, this makes the immediate term very difficult to call and with the FOMC announcement today, the side-lines seem to be a very safe and comfortable place for now.