It’s just over a week before the big decision, will the FOMC hike the Federal Funds rate? At this stage, it’s hard to imagine them not doing so. It’s been well flagged, the data proximal to the decision has not disappointed, and call me a cynic, but the ECB’s Draghi not going as far as he had hinted he might, may just have been another clue. What I mean is this, we all know that once you’re at the zero bound further attempts to ease monetary conditions are largely an exercise in weakening your exchange rate. On that basis, Draghi’s signalling that there would be an expansion in the Eurozone’s quantitative easing programme before Thursday’s announcement led to a lot of disappointment and mangled the year to date profit and loss for traders around the globe. Why would he do this? After all the net result has been a stronger exchange rate than before the ECB meeting, and European equities have been crushed. I suspect that knowing that the Federal Reserve is definitely going to hike, he decided at the last moment to appease the Northern Europeans on the council. After all EUR/USD he would assume will drop again following a Federal Reserve hike. This is all just my speculation, and I could be completely wrong. But one thing is for sure, the extent of long dollar positioning following the ECB’s meeting is a magnitude less than before. Couple that with the closeness of the Christmas holidays, and you start to imagine that there’ll be fewer people trading come next week. It is entirely possible that EUR/USD will now react much more negatively than it would have to a Federal Reserve hike. There might be genius in the strategy, but then again, this is just me speculating, we will find out one way or the other next Wednesday evening.
I’ve had another look at the chart for EUR/USD following the meeting last Thursday. One thing which has become evident, is that the currency pair bounced off a support zone, and then subsequently failed to breach a former trend-line support which has now become a resistance area. To my mind, the possibility still exists, and indeed it is still my preferred outcome, for EUR/USD to re-test the year to date lows in the not too distant future. This view will be fatally damaged if we make a new post ECB meeting high.
Big news overnight, it turns out the Japanese economy did not in fact dip back into recession in Q3 after all! The data has been revised up to +1% growth year on year for Q3, a quite stunning turnaround, particularly when you consider what large numbers in terms of GDP the error represents.
In a short time, we’ll get industrial production numbers in the UK, and provisional Q3 GDP growth data for the Eurozone as a whole. These are all significant data points, but the truth is that everything now pales into near irrelevance in comparison to the FOMC next week. The dollar has been slowly regaining strength, as commodities retreat. It is no surprise that we therefore maintain our bias for continuing dollar strength.
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