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US dollar gets psychological support from the Fed

On Wednesday evening, on the 20th of September, we saw some significant intraday movements on the currency market. In the first half of the day, the US dollar index (DXY) dropped to 91.33 levels. Then, after the conclusion to the Fed’s two-day meeting on monetary policy was published, it reversed and surged to 92.49. The main reason for this was the softening of the Fed’s rhetoric on monetary policy.

The US regulator downgraded its forecast for its long term neutral rate from 3.0% to 2.8%. During the subsequent press conference, Janet Yellen, the chair of the Federal Reserve, stressed that the Fed was ready to intervene if the economic situation worsens by halting rate hikes, or even reducing the key rate to as far as 0.25%. These words gave peace of mind to market participants, who will now be more confident that the US economy can once again show some stable growth. US 10Y bond yields jumped from 2.21% to 2.30%, which has given the dollar a boost.

In my opinion, the softening of rhetoric on monetary policy is a good sign for the US economy and the dollar can now start gradually recovering its lost ground against the euro, pound, franc, yen, and gold. It’s important to note that the dollar received a psychological boost from the Fed, but for the dollar to actually grow, it needs stable economic growth. As such, the US dollar is going to be very sensitive to macro-data.

Today, the Bank of Japan, taking its cue from the Fed, also softened its stance on monetary policy. The Japanese regulator left its key rate unchanged at -0.10% and maintained their program of Japanese government security purchases at its current level of around 80 trillion JPY a month. This time, however, 8 members voted in favour of ultra-loose monetary policy and one against, while the previous vote came out at 7 against 2.

According to the economic forecasts from SECO, the Swiss economy will grow by 0.9% in real terms in 2017, which is much lower than their previous forecast of 1.4%. The main reason for the revision is lower consumer and government spending, as well as a rise in imports.

Day’s news (GMT 3):

  • 11:00 Eurozone: ECB economic bulletin.
  • 15:30 Canada: wholesale sales (Jul).
  • 16:30 Eurozone: ECB President Mario Draghi’s speech.
  • 17:00 Eurozone: consumer confidence (Sep).

There aren’t any important economic statistics to be published during the US session. Once again, I’d like to note that I doubt the US dollar is going to start showing stable growth in the immediate aftermath of the Fed meeting. We’ll most likely see a stronger dollar around October/November if the pace of economic growth in the US recovers such that GDP growth is on course to hit its 2017 target of 2.0%.

For now, I’m going to trade the US dollar against safe haven assets.

EUR/USD

On the 4-hour timeframe, the EURUSD pair is still in an upwards trend, although the price is testing the trend line:

So, on H4, the upwards trend is still intact, so I won’t be trading against it just yet. There are currently no buy signals.

On the hourly timeframe of the EURUSD pair, the price is currently in the lower half of its potential range:

This tells us that growth has halted on this pair, bringing into doubt whether the upwards trend will continue on H4. Nevertheless, I’d like to stress that yesterday; the US dollar at least got a psychological boost from the Fed, although the economic fundamentals for the dollar aren’t stable. Therefore, I’m not expecting a collapse on the EURUSD pair and will probably refrain from trading on it.

At the time of writing, the EURUSD is trading at 1.1911.

GBP/USD

On the 4-hour timeframe of the GBPUSD pair, growth continues to stop around the resistance line of the upwards trend:

From my point of view, although the GBPUSD pair could, sooner or later, return to the line of the upwards trend, just like with the EURUSD; I’m going to refrain from trading against the trend. This is because the UK’s economic fundamentals have improved in recent weeks, which is good for the pound, and the US dollar at least has some psychological support.

At the time of writing, GBPUSD is trading at 1.3504.

Commodity currencies (AUD, CAD, NZD, RUB)

I’m not planning on buying the US dollar against any of these currencies in the near future. First of all, the economy is improving in all of these countries. Secondly, a looser monetary policy from the Fed could have a positive influence on economic growth in the US, which in turn would bring about faster growth in the global economy. This would increase demand for commodities, which will cause the prices of oil and metals and so on to stabilise, which in turn will provide support to commodity currencies.

In the near future, barring any force majeure circumstances, I’ll be looking to trade on USDJPY, USDCHF, and gold. That is to say, I’ll be betting on the Eurozone’s economy to continue growing and for the US economy to start recovering, which could limit demand for the safe havens; namely the Swiss franc, Japanese yen, and gold.



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