Market News & Insights
29 October 2014

Dollar Poised for Reaction

EUR/USD 1.2731
GBP/USD 1.6135
GBP/EUR 1.2669 (0.7893)
EUR/CHF 1.2059
GBP/CHF 1.5277
GBP/AUD 1.8175

The most consistent theme of the week thus far has been that of a weaker USD. The USD has declined for three straight days thus far as data suggests the US economic recovery remains uneven, with markets now looking to this evenings FOMC meeting for direction on USD. Markets have been gearing up for a dovish Fed this evening and USD positioning would confirm this, the prospect of lower rates for longer however has supported equity markets, which closed in positive territory yesterday. European markets snapped a two day decline after several earning releases supported a pick up in risk. In the US the prospect of lower rates helped support risk appetite which was also bolstered by stronger than expected consumer confidence data, the S&P rallied to within 1.5% of recent record highs. The positive equity market theme carried into the overnight session, in a global environment of ultra-low interest rates, investors will continue to look for increased yields and equity markets have been a favourite choice. Major currency crosses remain very much in consolidation through yesterday’s session with recent ranges remaining intact in EURGBP, EURUSD and GBPUSD but the USD has been under pressure, particularly against higher yielding currencies.

Weaker than expected Durable Goods Orders started a rout in USD as we entered the US session yesterday, the dollar has been facing selling pressure this week as markets position themselves ahead of the FOMC, but yesterday confirmation that durable goods orders declined 1.3% through September, following a 18.3% decline in August. We have been keen to point out that US data has been mixed and the USD rally has certainly halted for now, all eyes will be on tonight’s FOMC release for confirmation of the USD move. Markets are expecting the Fed to announce the end of QE with their final $15bln taper, finally ending their purchases of Treasuries and MBS. There is a very slim chance the Fed opt to maintain a small amount of purchases but most weakness has stemmed from a shift in interest rate expectations, Fed future rates are now suggesting a rate hike is not priced in until December 2015, pushed back from mid 2015 less than a month ago. The expectations are the Fed will be cautious on recovery and should we see any change in the Fed statement reflecting this renewed concern about persistently low inflation in recent USD weakness will be warranted and will likely persist into the end of the week.

The data calendar remains light though much of today and currency markets are likely to reflect the lack of major data ahead of the major event risk this evening and as such recent ranges are expected to remain in play. GBPSD tested towards last week’s highs around 1.6185 yesterday following the weaker durable goods order print but quickly fell back in line following the better than expected consumer confidence print. Support to the downside in GBPUSD comes in at 1.6090, with firmer support below at 1.6000. EURGBP has been capped on moves higher by .7900 with support lower at .7875 and .7861 below, would expect this range to remain in play through much of today. EURUSD continues to be held by the larger downtrend since the beginning of September with moves higher likely to be held around 1.2800, with 1.2885 and 1.3000 strong EURUSD sell levels.