Dollar could rally sharply on hawkish FOMC
Fawad Razaqzada September 20, 2017 2:10 PM
The Federal Reserve’s latest policy decision this evening is the main macro event for today and quite possibly for the week, unless the Bank of Japan comes up with something better tomorrow (unlikely). We, like most other analysts, expect interest rates to be held unchanged, but the focus will be on two other key issues. First, how the FOMC will present the outlook for interest rate changes going forward, as will be indicated on the so called dot plots. Second, their plan, if any, on normalising the Fed’s enormous balance sheet.
In making their decisions, policymakers at the Fed are likely to take into account last month’s sharper-than-expected rise in CPI inflation, and weigh this against somewhat softer macro pointers elsewhere in the economy. But with employment remaining healthy and inflation being so close to its target, the Fed may get the market ready for another rate rise in December and also provide a plan for balance sheet normalisation. In other words, the Fed may be more hawkish than dovish at this meeting.
If so, we would expect the dollar to rip, especially against currencies where the central bank is still very dovish – for example, the Japanese yen and the Swiss franc. This outcome may also be modestly negative for the US stock markets. If the dollar rises and stocks fall, then gold’s response may be relatively muted, although as a dollar-denominated commodity it too should fall. Obviously if the Fed comes across as more dovish than hawkish then one would expect the opposite reaction in these markets.
USD/CHF one to watch
But my base case is that the dollar may rally as a result of a more hawkish Fed than expected. With the Swiss franc softening across the board in recent times, the USD/CHF could be in for a sizeable move higher in this potential scenario. The Swissy has already shown signs that it doesn’t want to fall further lower, as indicated for example by the sellers’ unsuccessful attempts to push it below the 2016 low of 0.4445 throughout the summer. They have had three futile attempts in as many months to crack this level. This clearly suggests that the buyers (or the SNB) are probably coming back in. I say “probably” because so far we haven’t seen a sharp enough rally to suggest the sellers are done. But that could change as early as today with a hawkish FOMC statement. Any move north of 0.9650 resistance would be bullish in the short-term, with the next potential objectives being at 0.9705, 0.9770 and 0.9850/65 – the latter marking the convergence of the 200-day moving average with a prior broken support level that hasn’t yet been retested.
Meanwhile the key short-term support levels to watch include 0.9590, 0.9505 and then that 0.9445 level. A decisive break below 0.9445 would completely invalidate the bullish scenario outlined above.
Source: eSignal and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.