Market News & Insights
20 September 2016

Fed Need to Convince Markets Before Hike

European stocks edged higher through much of Monday, following almost two straight weeks of declines. They took their lead from a positive open to the Asian session as markets await major central bank decisions from the BOJ and Fed, amongst others. Data was relatively light to start the week and broader based risk appetite and central bank expectations were the primary driver of currencies. The USD was weaker on the day as markets expect the Fed to remain on hold, losing ground against a dominant Euro, while the JPY also struggled despite expectations the BoJ meeting will fail to weaken the yen any further. GBP was an under performer, having started the morning slightly firmer the pound gave back gains against the USD, while EURGBP also rallied higher, the pair pressing fresh four week highs this morning after rallying through much of yesterday. US stocks closed in mixed territory as they thread water for Wednesday’s Fed decision, while overnight Asian markets where marginally lower.

Looking ahead to the Fed decision this week and only two major banks expect any hike in rates from the FOMC meeting, due to begin today and end tomorrow evening. The FOMC have continued to voice their rationale that they will look to raise rates again by the end of the year, should conditions warrant. The last three words are key here. The recent run of slightly weaker data from the US has seen the markets position against this happening in this meeting but that does leave the USD exposed to upside potential should the Fed actually surprise markets, or adopt a more hawkish rhetoric. Now, we still feel it is unlikely they will raise in this week’s meeting and we favour the December meeting, but similarly to last year we feel the market has to be ready before the Fed can act. In that we need to see clear, consistent communication from the Fed that they are ready to act and raise rates, and we need to see the data supporting this also. Thus far we have yet to get both together and until then the dollar may remain in the doldrums. That being said, there is considerable scope for the greenback to rally once communication and data fall in line, especially as other major central banks are still leaning towards loosening policy rather than the Fed’s tightening path.

Looking at major currency pairs.

EURGBP has broken above 4 week support and is now looking like testing higher towards .8630, with post brexit highs above .8700 next in line above that. Downside support should hold ahead of .8550.

EURUSD continues to find support between 1.1135 and 1.1150, which had previously formed resistance. Progression above 1.1270 should run into some selling but 1.1350 area is the next major level of resistance.

GBPUSD has managed to recover back above 1.3000 for now, 1.3090 hold moves higher, a break back below 1.3020 should see downside support towards 1.3000 once again, a break below here will open up additional pressure on the downside.