Market News & Insights
22 September 2016

Are Central Banks Only Thing Holding Markets Up?

Yesterday was very much a waiting game ahead of the Fed but the relaxing of easing conditions from the BOJ, broadening some of their scope, and a promise to ease further if required was enough to spur some early risk appetite as European stocks traded to a one week high, taking their lead from the stronger overnight session. The JPY which had weakened over 1% following the BOJ announcement, quickly clawed back its lost ground and even before the FOMC announcement last night the yen had rallied over 2% against the USD from its lows. I spoke yesterday about market being drip fed, where bad economic news and outlook proves to be positive for equity markets and drives currency direction. This is the environment we find ourselves in, the BOJ have to continue to act as their economy struggles for meaningful growth and against a permanently low inflation environment, in the US the Fed held off on raising rates, as expected, but the market reaction to the Feds view the economy is not firmly positioned to absorb a paltry 25bps rate hike is to surge higher. We saw this as US stocks closed up almost 1% while the USD declined across the board. Overnight,  the RBNZ signaled their appetite to ease further whilst keeping rates on hold. This is the same story across many of the major central banks and is not painting a convincing picture of the global recovery, and yet this morning we find ourselves looking at green across the board as risk appetite soars.

The Fed did not surprise markets with their lack of action, and they were relatively hawkish in their views that December would be an appropriate time to raise rates, while also repeating the old lower for longer mantra. We have been guiding December for rate hikes since before Summer, as data from the US remains mixed, and now we face the final run in for the US election campaign. We cannot highlight enough, that the Fed will need to form a united front in their support for raising rates, similar to last year, if market are going to believe them. And the data will also have to support this. The last thing the Fed wants to do is to rock already fragile markets, so we need to see markets pricing in the hikes if they are to come to fruition. It is a long run into the December meeting and all data and Fed rhetoric will be key in convincing markets. The USD index has dropped some 1.2% from yesterday’s highs as dollar selling took over, even pre FOMC,  GBPUSD rallied back above 1.3000, while EURUSD is back above 1.1200. USDJPY has dropped back as low as 100.09, although still holding firmly below 101.00. Jobless claims and home sales data headlines today’s economic calendar but for now the USD remains under pressure.

EURUSD runs into firm support sub 1.1140 but we are already well above that level now, intraday support around 1.1190 is key for upside momentum but for now we are heading towards 1.1270/80 area. Where we run into plenty of sellers right up to 1.1330.

GBPUSD also now supported at Mondays lows, around 1.2950, currently on an upward trajectory we are likely to run into first resistance around 1.3091. A break above here will open up addition upside potential for GBPUSD.

EURGBP remains within a 1 week range between .8560 and .8630, with intraday resistance around .8600. a break above should see a quick test back towards recent highs just over .8630.