FX Faces FOMC

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Market Drivers September 26, 2018
Kiwi pops on improvement in sentiment
All eyes on FOMC
Nikkei +0.39% d Dax -0.09%
Oil $72/bbl
Gold $1199/oz.
Bitcoin $6400

Europe and Asia:
NZD ANZ Business confidence -38 vs. -50

North America:
FOMC Statement 14:00 USD

A quiet night of trade in Asia and Europe today as markets geared for the marquee event of the week awaiting the FOMC decision at 1800 GMT today.

In Asia, the action was centered on the kiwi which popped to a high of .6685 after ANZ business sentiment printed at -38. The data was still sharply negative, but a marked improvement from all time low of -50 set last month so caused a relief rally in the pair. The rally did not last as the NZDUSD drifted down to .6655 as the night wore on, but the pair appears have carved out a solid bottom at the .6500 level and unless the RBNZ is decidedly dovish (which is unlikely given the improvement in GDP growth) kiwi should hold those levels regardless of the FOMC news.

In Europe, the focus was on Italy where the wrangling over the budget continued. The negotiations have taken on a constructive tone, however, as the consensus is coalescing around the 2% deficit figure which is within the EU rules. Furthermore, the ruling coalition is hinting at business tax cuts which could jump-start growth in the sclerotic Italian economy. The EURUSD was steady at 1.1770 for most of the night, but of course, could see much more volatility in the US session.

In North America, the focus will be on FOMC with markets anticipating another 25bp rate hike to 2.25%. The key question, however, will be the Fed outlook going forward. At this time the consensus view is that the Fed will remain on a hike-a-quarter path but recent escalation of trade war rhetoric with China may give Fed officials pause. Although no one expects Fed Chairman Powell to be dovish if he focuses on policy being “data-dependent” rather than emphasizing the recent spate of growth the dollar could take a hit regardless of the rate hike.

As our partner Kathy Lien pointed out USDJPY is in danger of carving out a double top at the 113.00 level and any hesitation from the Fed is likely to seal the pair fate to the downside. On the other hand, if Mr. Powell remains unambiguously bullish, dollar bulls could finally push the 113.50 resistance which would put the pair on a path towards the key 115.00 figure which it hasn’t seen in more than 18 months.

Boris Schlossberg
Managing Director

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