The dollar is weaker across the board while bond yields are higher after the FOMC announcement to keep rates unchanged for the third-consecutive time at 5.25%.
The reasons for the dollar weakness are:
Contrary to many market observers, Richmond Fed’s Jeffrey Lacker was the sole dissenting member demanding a rate hike, suggesting that FOMC hawkishness is not sufficient to affect the views of the Committee.
The statement omitted energy and commodity prices as a potential to inflation pressures, but keeping “high level of resource utilization” as the only cause to have “the potential to sustain inflation pressures.” In the Sept. 20 statement, the Fed said: “… the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.” Today, the Fed said: “the high level of resource utilization has the potential to sustain inflation pressures.”
Dollar bulls have something to hope for as the FOMC reminded markets that the economy continues to expand by noting: “Going forward, the economy seems likely to expand at a moderate pace.”
Looking ahead, we see the Fed conducting a policy of staying on hold in December (no meeting in November) but more importantly, carefully managing markets’ expectations with the aim of preventing bond market complacency from pricing a looming rate cut and simultaneously sounding off excessively hawkish to destabilize capital markets during a period of an economic slowdown.
The Australian dollar and Canadian dollar remain the currencies with greatest potential to gain versus the U.S. dollar, due to expectations of at least one more rate hike in Australia and our forecasts for stability in oil prices. Although the Bank of Canada has signaled the end of its tightening cycle, steady growth and a likely modest bounce in oil prices should help support the loonie.
Facing the risk of declining new home sales, which are due tomorrow, and a sub-2.0% growth in third quarter Gross Domestic Product, the U.S. dollar will lack necessary dynamics to sustain the gains of the past seven days.
We see EUR/USD breaching interim resistance (38% retracement) at 1.2615 and onto 1.2650 as the key target for the week. Support is seen creeping up to 1.2670
USD/JPY seen underpinned at 118.55-60, with the focus shifting to Friday’s CPI from Japan. Target for the week stands at 117.90, with resistance downshifting at 119.30.
Ashraf LaidiChief FX AnalystCMC Markets US140 Broadway, 30th FloorNew York, NY 10005(212) 644-4220(416) 644.4222 faxa.laidi@cmcmarkets.com
