Fundamental Update ?? Dec 14 – Dec 15 2017

December 14, 2017

5 min read

Dear Traders,

the FOMC meeting is behind us and caused quite a stir in the FX market. Next comes the ECB and BoE rate decisions.

This article provides an update on the fundamental outlook for the rest of the trading week.

USD: On the back foot…

The FOMC meeting caused a significant dollar sell-off. Although this was anticipated, it was no doubt surprising that the greenback sold off so hard in spite of positively revised GDP and employment forecasts, as well as pretty much confirmation of further rate hikes. The only fundamental reasons that could be attributed to the sell-off were 2 members voting against a rate hike (even though they won’t be voting members anymore next year) and Yellen’s concerns over low inflation. In my opinion it could be that technical factors contributed more to the sell-off than the news itself because the market positioned itself bearishly already prior to the event. Investors appear to expect more of the USD than of any other currency, and thus, it is perhaps more prone to disappoint at the moment. Either way, it is now difficult to gauge how much follow-through the USD sell-off is going to have because the greenback is standing on fairly solid ground in terms of economic data. So I will be cautious about long-lasting follow-through; maybe still for the rest of this week, but I will be even more cautious at the start of next week.

EUR: Looks Like Come Back is Happening…

Looks like one of the strongest winners this week (only topped by the AUD and NZD). Today’s ECB meeting could easily give more fuel for a EUR-rally because, unlike the Fed, the ECB has already freed itself from any market expectations of quick rate hikes or QE reductions. The ECB meeting has therefore much more potential to surprise the market positively with optimistic comments from Draghi about the economic recovery. EUR is one of the currencies that I think could comfortably withstand a potential USD rebound.

GBP: Veiled in mystery…

With all attention focused on the Fed, the market appeared to forget about the negative news headlines of Theresa May’s setback regarding her ability to have a free hand in negotiating a Brexit deal. This could start to impact the currency today however. Although UK economic data has been strong, including upwards-revised inflation numbers, there is no change in monetary policy expected in today’s BoE rate decision. It is difficult to predict the GBP’s direction currently, both from a technical and fundamental point of view. So my bias is towards avoiding the GBP a little longer.

AUD & NZD: Exagerated Moves?

The AUD and NZD had the biggest rallies of all currencies against the USD yesterday. This was further fueled by very strong job data from Australia earlier today. Although I expected the bullish moves, the intensity is somewhat surprising. In my opinion the rallies in AUD and NZD are over-exaggerated relative to the fundamental outlook of these two currencies, and should still be seen as part of a larger correction, not a trend change. The AUD has more reason to rally than the NZD, but both are now approaching strong resistance levels, and it would not surprise me to see a fairly strong bearish move soon, although this may not happen until next week or toward the end of Friday.

CAD: Going Nowhere Fast

With not much data releases for the rest of the week, the CAD should take its cues from the USD and oil prices. USD/CAD is still stuck in a range which could continue because there is also not much reason for a CAD rally either.

JPY: Benefits from Weak USD

The JPY is perhaps the prime measure for USD strength or weakness. Consequently we also saw a strong decline in USD/JPY yesterday. Price is now back in the middle of its range. There is room for a further decline during the rest of the week but there is significant support between 112 and 111.50. JPY also finds itself in a range against the EUR and GBP, so the outlook remains unclear.