While the past week had promised volatility in the foreign exchange markets as three central bank meetings were expected to move markets, EUR/USD failed to make a technical break, remaining within the current range.
The FOMC meeting was the highlight of the week for EUR/USD. The statement and press conference carried a slightly dovish slant as the Fed was seen somewhat backtracking previous comments. Markets remain optimistic of a rate hike by the end of the year, as futures markets show a small deviation in December probabilities from the prior week, but had little reason to further price in an upcoming rate increase. Comments from Yellen and Fischer in late August suggested that the Fed has nearly achieved their targets and are very close to moving forward with normalization, but the communication in the past week was not consistent. The Fed continues to point to a strong possibility of a rate hike this year, but has decided to further assess incoming data prior to providing a signal to the markets that an increase of the federal funds rate will materialize. This has given that them an option to opt out in the event a deterioration is seen in incoming data releases or a subdued pickup in inflation. With the Fed remaining data dependent, the urgency to position for a hawkish scenario has been removed, and markets will once again look to data in the upcoming week in pricing in the potential for a rate increase this year.
In contrast to the past week where one risk event dominated the currency pair, several economic releases are scheduled for the upcoming week that stand to impact the pair. A speech from Draghi, US inflation figures, and a speech from Yellen will likely drive volatility to EUR/USD in the upcoming week.
A bulletin from the ECB in the past week put a spotlight on inflation within the Euro area, and Draghi’s speech in the upcoming week will be closely scrutinized in determining if the EBC will follow the BoJ in further easing monetary policy, of if the central bank will rely upon the Federal Reserve to tighten their policy to assist in lowering their exchange rate.
Yellen will speak on Wednesday and Thursday, and she has been known to slightly alter rhetoric following an FOMC meeting if it is believed that markets have misunderstood the Fed’s intentions. The risk in her speech falls to the downside in EUR/USD in the event the Fed chair’s communication results in an increase of market expectations for a near-term rate hike. It is unlikely that she would attempt to reduce market expectations as the Fed will want the markets to price in a rate hike ahead of its occurrence to reduce market volatility.
PCE price index figures are scheduled for release on Friday, and stand to impact the markets as the data release is the preferred method of measuring inflation by the Federal Reserve. With a focus on inflation during the FOMC meeting this past week, and inflation generally viewed as the biggest hurdle in the path of normalization, the release will be closely watched. There will be some expectation for an improvement in the figure following the positive surprise in CPI data at the latest release. Analyst expectations have been set for a rise of 0.2% in the core figure, with the prior two readings indicating a rise of 0.1%.
Other notable economic releases include Final GDP and core durable goods out of the United States. The GDP figure is expected at 1.3% with the prior revision reported at 1.1%. The data can offer volatility but will tend to have less of an impact as it is the final revision. Core durable goods data will contribute towards the overall economic outlook for the US but may have less of an impact following the Fed meeting and as the data is not directly tied to the Fed’s dual target mandate.
Positioning in the EUR/USD continues to show a clear bearish bias as the COT report indicates a further build in the bearish Euro position and bullish US Dollar position. In the week to September 20, Non-commercials were reported to increase the net short position in the Euro by $425mn to a net short of $11.85bn. Positioning in the Greenback rose by $907mn for a net long of $9.39bn. The latest CPI reading and technical break in EUR/USD in the week prior to the reading is likely to have attributed to the positioning shift, while it is probable that there would have been some position covering following the Fed meeting.
A further continuation of the current range is expected for EUR/USD in the upcoming week, as the data scheduled for release is not likely to change the underlying tone set by the Fed in their meeting this past week. To the upside, the first level of resistance is seen at 1.1253 reflecting a horizontal level from highs during a consolidation period dating back to September 6 as seen on a daily chart. Further resistance takes the form of a declining trendline that connects late June highs with mid-August highs. Support for the week remains in a zone between 1.1130 and 1.1150 reflecting lows from August 11 and the 200 DMA. The August 11 lows were once again respected during a three-day consolidation from August 30, and during this past week. Janet Yellen’s speech and the inflation data release carries some potential for a break lower, albeit unlikely. The Fed chair speech would have to provide a clear hawkish viewpoint, while the inflation data would need to show an improvement by a significant deviation.
EUR/USD Daily Chart
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