ECB and FOMC moving opposite, together 15Dec15


ECB and FOMC moving opposite, together

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US CPI as expected – no reaction in FX
  • EURUSD defying gravity
  • USDX bearish but holding support

This is not the FOMC. But the Fed Force is awakening too. Photo: StarWars.com

By Michael O’Neill

This morning’s US data did nothing to derail the US interest rate hike debate. EURUSD traders may be reconsidering their desire to buy euros with the failure to extend gains above 1.1100 and the risk of a steeper slide on a close below 1.0940.

The FOMC force has awakened, too.

The most highly anticipated movie of 2015, “Star Wars – The Force Awakens” premiered in Los Angeles yesterday to great fanfare, hoopla and adults wearing costumes. Tomorrow’s Federal Open Market Committee has all the anticipation of the movie. It just lacks the hoopla and costumes.

But why the anticipation? Janet Yellen, chair of the Federal Reserve, has pretty much pre-announced a rate hike so a 0.25 basis points increase shouldn’t surprise anyone. The Federal Open Market Committee has taken a number of hits to its credibility this year due to its penchant for flip-flopping on guidance and members delivering contradictory statements. Announcing a rate hike, which Yellen has strongly hinted at, would be a redemption of sorts and allow the FOMC to wrap up 2015 with a tidy little bow.

2016 will begin just like 2015 with traders wondering “when will the FOMC hike rates”. And that debate will begin Wednesday afternoon with the release of the Economic Projections and new “dot-plot”.

EURUSD down, up and now…..?

It appears that European Central Bank president Mario Draghi’s grand plan for a new “whatever-it-takes” stimulus package was sharply curtailed by other powerful interests, particularly the German Bundesbank. The result was that traders expecting large and instant profits from short EURUSD positions had to scramble to protect rapidly shrinking gains and even booked losses when EURUSD soared in a massive short squeeze.

The FX market was disappointed because the ECB only cut rates by 10 bps and didn’t increase the amount of bond purchases. Big deal. That move didn’t signal the end to the ECB’s stimulus plans, it actually opened the door wide for additional action in the months to come. Mario Draghi said the same thing in a speech in Bologna on Monday. According to the Financial Times, Draghi remains very concerned that headline inflation remains well below the ECB’s target and he insists that additional monetary stimulus is still on the table.

Meanwhile, the Federal Reserve is about to raise interest rates in a bid to “normalise” monetary policy. Policy normalisation implies that more than one increase is in store in 2016. CNBC reports that over 70% of CNBC Global CFO Council members expect at least 2 rate hikes.

Surprisingly, EURUSD has rallied despite the fact that ECB rates are going lower for longer while US rates are heading higher which is counter-intuitive and in my mind, the current levels are unsustainable.

The sharp gains, post ECB meeting are understandable. The FX market was extremely short EURUSD and didn’t get what it wanted. Those positions were squared up either to take profits or limit losses.

But that was then, this is now. The prospect of additional ECB stimulus and a couple of Federal Reserve rate hikes in 2016 should put the EURUSD focus back on parity. EURUSD and USDX technicals support that view.

EURUSD technical outlook

The short-term EURUSD technicals are bearish while trading below 1.1340 a level guarded by resistance in the 1.1100-10 area. The intraday downtrend is intact below 1.1130. A break of minor support in the 1.0920 area should lead to a re-test of the 1.0485-1.05 area which if broken points to parity.

Chart: EURUSD daily with downtrend

Source: Saxo Bank

US dollar index finds support

The intraday USDX technicals are bearish while trading below 98.05 but have been unable to break support at 98.05. The bounce from support is approaching the downtrend line, that if broken should extend gains 98.80. Above 98.80 targets the 2015 high. A break of support at 98.05 suggests further losses to 96.50

Chart: USDX daily with downtrend and support

Source: Saxo Bank

– Edited by Clare MacCarthy

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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