Dollar Rebounds Post Dovish FOMC – Why?

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Market Drivers September 21, 2015

Syriza wins in Greece, Greek CA much better euro better bid
Antipodeans weakest on Monday open
Nikkei closed Europe -0.22%
Oil $45/bbl
Gold $1138/oz

Europe and Asia:
EUR German PPI -0.5% vs. -0.3% eyed

North America:
CAD Wholesale Sales 8:30

USD Existing Home 10:00

It’s been a muted rambling night of trade in the currency market as most of the remained in narrow ranges at the start of the week. With Japan out on holiday liquidity was particularly sparse in Asian session trade as euro and yen bounced in 25 pip ranges.

After a sharp selloff in late Friday afternoon trade that saw it fall more than 50 points in the last hour, the euro tried to bounce back above the 1.1300 figure, but every rally failed to hold bid and the pair was back to trading at the 1.1200 handle by mid morning European dealing.

Part of the reason for the weakness may have been due to bank research as both Goldman Sachs and Morgan Stanley came out with recommendations against the euro pairs. Goldman projected that euro could fall by nine big figures by the year end while Morgan shorted EUR/JPY at 136.00 level in a note to clients.

It is ironic that the dollar has actually strengthened against the euro in the wake of a decidedly dovish FOMC presser last week, but it may very well be the market’s judgement that the Fed was simply delaying the normalization policy until the December meeting.

We have argued that the Fed may have simply decided to wait until the budget negotiations in Washington conclude and did not want to tighten monetary conditions ahead of what could turn out to be a tough fiscal negotiation that could roil the markets.

Whatever the case, the greenback continues to enjoy strong bid at the start of this week and may see further strength if US data proves supportive. Today Existing Homes Sales is the only major release on the docket with markets anticipating a small decline to 5.50M from 5,59M the month prior. House sales have seen a strong rise this year trending well above the 5M annual run rate for the past three months running. If the data surprises to the upside it would provide yet another argument for the bulls that the US economy is recovering nicely.

USD/JPY which has been well bid all night could test the 120.50 level on any upside surprise in US trade today while EUR/USD could sink towards 1.1250 as the dollar rebound continues.

Boris Schlossberg
Managing Director

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