By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
As expected, Obama’s government had to accept a painful defeat at the mid-term elections for Congress. In the future, President Obama has to work closer together with the Republicans. The results of the elections shouldn’t have any major impact on the FX market, since the focus is definitely on the decision of the Fed tonight. Against this backdrop, US economic data due for publication today (ADP employment change index, ISM non-manufacturing index, factory orders) is unlikely to gain much attention. Especially since it is clear that even if economic data surprises positively the Fed will not refrain from announcing further measures of quantitative easing (QE2).
A strong group within the Fed does not seem to be satisfied with growth rates around potential for the US economy in the near future. Do they want to “artificially” reduce unemployment with more rapid growth? It is far from certain whether that can be achieved by monetary policy means. The only thing that can help the dollar today is if things turn out to be not so bad regarding the quantitative easing as some of the real pessimists have been predicting.
So that leaves the question what markets are really expecting. Other than in the case of fundamental data (or as is the case with the BoE these days) there is no consensus poll on the expected QE extension. That is also due to the fact that it was not even clear how exactly the Fed would announce further steps. After all 53 of the 56 analysts polled by Bloomberg expect the Fed to extend its QE measures. Just under half of them also expect it will immediately promise to buy a further USD 500bn. worth of US Treasuries. 12% of the analysts bank on the Fed purchasing between USD 50bn. and 100bn. per month, without announcing a total volume. The remaining analysts either predict a volume of up to a maximum of USD 500bn. or have not quantified their expectations. The uncertainty among analysts reflects the disagreement among the Fed members. Only a few days ago some Fed members clearly set out their very contrasting views. In the end, the continued USD weakness is due to the obvious disagreement of the FOMC members. If the most important decision makers cannot agree on an important issue such as this, the matter must be far from simple.
Against this background what can we expect for EUR-USD today? We consider the following market reactions to be possible: Should the Fed announce a careful approach with monthly purchases we consider it more likely that EUR-USD will come under pressure. Should the Fed announce a total volume we consider a volume of approx. USD 500bn. to be neutral. Should the Fed clearly exceed this level EUR-USD is likely to breach its range between 1.37 and 1.41 to the upside. On the other hand the Fed could also surprise with other announcements, which exceed a specific volume, such as an inflation target, a growth target, a yield target or a change in its communication (“extended period of time“) etc. etc.
GBP
The manufacturing PMI easily beat expectations on Monday, but Tuesday’s construction PMI fell short of consensus.
We expect the BoE’s policy meeting on Thursday to come sharply into focus once the outcome of today’s FOMC meeting is known. Investors are concerned that the BoE may embark on another round of Gilt purchases if the FOMC eases again today. Although the upcoming BoE meeting may be a be a non-event, the fear of a surprise announcement could cause some near-term sterling weakness.
TECHNICAL OUTLOOK
EURUSD BULLISH Look for a break above 1.4159, which would trigger another bullish run towards 1.4373. Support holds at 1.3698
USDJPY BEARISH Outlook is bearish; next big support below 79.75 lies at 77.91. Resistance at 81.41, Monday’s reaction high.
GBPUSD BULLISH Stalled in front of 1.6107; climb through the level would expose 1.6276 and 1.6458 next. Support comes in at 1.5878 ahead of 1.5606
USDCHF BEARISH Bounce-off from 0.9463 pushed through resistance at 0.9929. Near-term support at 0.9703.
AUDUSD BULLISH Push through 1.0004 exposes 1.0222, measured target. Support at 0.9866 ahead of 0.9542 reaction low.
USDCAD BEARISH Momentum is negative; the pair targets 0.9981 with scope for 0.9820. Resistance at 1.0203 ahead of 1.0380
EURCHF BULLISH Targets 1.3924 with scope for 1.4041 next. Near-term support at 1.3540
EURGBP BULLISH Break of 0.8772 would expose 0.8942 and reinstate the bull trend. Support holds at 0.8636
EURJPY BULLISH Only a break below 110.66 would hurt the positive tone. Resistance at 113.78 ahead of 115.68
Forex Daily Market Commentary provided by GCI Financial Ltd.
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