The consensus is that the Federal Open Market Committee will keep interest rates unchanged at 5.25%, and we expect Richmond Fed Chief Jeffrey Lacker once again to be the sole dissenter, a development that would surprise hawkish expectations and reverse some of the dollar optimism of the past week. We see the FOMC making minor changes to the policy statement acknowledging further signs of slowdown (payrolls, retail sales, ISM, existing home sales, industrial production and Philly Fed survey). Similar to the September statement, the Committee will likely maintain the slightly downgraded inflation directive of “reduced impetus from energy prices.” The statement would confirm that the Fed is beginning to factor falling energy prices into its inflation forecast, while preventing any over-optimism in fixed income markets.
Euro revived by strong IFOA better than expected IFO German business confidence is giving the euro its second daily gain, pushing EUR/USD towards the1.2590 mark. The survey rose unexpectedly in October, showing the first increase in four-months as executives were encouraged by falling oil prices, overcoming worries of VAT hike and higher interest rates. The IFO climate index rose to 105.3 from September’s 104.9, while the situation indeed advanced to 111.8 from 111.3. The expectations index rose to 99.2 from 98.9.
Euro optimism from a dovish interpretation of the FOMC statement is likely to test the 1.26 trend line resistance standing since Sept. 22, a clean breach of which requires overcoming the 38% retracement at 1.2615. The worse case and realistic scenario for the euro is to see more than one FOMC member voting for a rate hike, at which case we could see the pair falling off the 1.2520 support and onto the key 1.2480 foundation.
Aussie at fresh highs as CPI assures November rate hike The Aussie hit a six-week high against the greenback and new highs for the year against the yen after Australia’s third quarter consumer inflation rose more than expected, despite showing a slowdown from the prior readings. The figures seal the deal for a 25-basis point rate hike by the Reserve Bank of Australia in November. Third quarter CPI rose 0.9% quarter on quarter compared with the previous quarter of 1.6%, and up 3.9% year on year from 4.0%, while third quarter Core CPI rose 0.8% q/q from 0.6%, while rising 2.6 % y/y from 2.4%. The central bank’s weighted median measure of core CPI increased 3.2% year-on-year from 3.0% in the second quarter, surpassing the high end of the bank’s inflation target range.
The CPI figures are the latest round of evidence signaling rising inflation following this week’s strong PPI figures and the September employment figures released two weeks ago, showing an increase of 31,400. Making a November rate hike inevitable, markets are now debating whether the RBA will raise rates in December, or wait to assess the need for a February rate hike.
Hovering just below USD 0.76, AUD/USD looks for a more decisive break of the 61.8% retracement of the 77.17-74.15 move at 76.01. Cautiousness ahead of the FOMC decision is likely to maintain the pair below 76.20 and only a bearish USD interpretation of the statement should carry the potential of triggering 77.45-50. A hawkish FOMC statement is likely to test preliminary support at 75.60, followed by 75.35-40.
Yen gains amid speculation of coordinated concernSpeculation of behind the scenes talks between Tokyo and Washington checking yen weakness against the dollar and market talk of Bank of Japan intervention in capping EUR/JPY has managed in dragging USD/JPY and EUR/JPY. This comes one day after remarks from Japanese vice Finance Minister of International Affairs saying he has no reason to expect further yen weakness, but added that Japan’s deflation was unlikely to end before next March. Markets will turn to Friday’s latest inflation figures and next week’s release of the BoJ’s semi annual outlook, which could affect chances of a January rate hike.
USD/JPY remains weighed by increased toppishness off the EUR/JPY figure. Support is underpinned at the 38% retracement of 119.00, a breach of which is seen limited at 118.80 prior to the FOMC announcement. A relatively dovish statement is seen accelerating the pair’s momentum to 118.55-60, with support likely building up at 118.40. A hawkish statement from the Fed should revisit the key 119.60 resistance, which could give way to 119.85-90 in the event of absence of remarks from Japan regarding yen weakness.
Ashraf LaidiChief FX AnalystCMC Markets US140 Broadway, 30th FloorNew York, NY 10005(212) 644.4220(416) 644.4222 faxa.laidi@cmcmarkets.com
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