Dollar rises on the back of the Fed

The main theme in FX markets was further gains in the US dollar on the back of the FOMC meeting.

The Fed came in less dovish than what the market was positioned for and highlighted that the recent fiscal drama only marginally impacted the overall assessment of the economy.

The Fed’s statement was largely unchanged from September as it highlighted it sees progress but is waiting for more evidence that the progress will be sustained. The Fed was very non-committal but mostly glass half-full as it highlighted a moderate pace of expansion. The odds of tapering by December have certainly ticked up but judging from recent data releases, it’s still a stretch for them to taper this year.

Looking at the data released in US trade, ADP non-farm employment change and CPI were both softer than expected. While there are still two more payrolls reports before December, we certainly haven’t seen enough evidence to suggest some bumper reports are on the way. The dollar index pushed higher regardless and was last at 79.78, within striking distance of the 80 mark. As I said yesterday, the 80 mark is the level to look out for in the near term and a close above that would be bullish for the DXY.

USD/JPY looking to break out of its range

USD/JPY spiked to 98.68 and will be in focus, with the BoJ also due out later today. While the BoJ isn’t really expected to add to stimulus, its language will be important and it might use this opportunity to talk down the yen and push USD/JPY higher. The pair is stuck in a triangle pattern at the moment which seems to be tightening up now and this would lead to a break higher/lower in the short term. The triangle consolidation pattern has been in place since July. Apart from the BoJ, we also had manufacturing PMI out of Japan today which showed a strong improvement to 54.2 (from 52.5).

Risk unwinds against the greenback

The Fed put a dampener on risk and it’s really all about whether or not the US dollar can maintain its momentum in the near term. AUD/USD is having an interesting day in Asia. The pair had dropped to 0.944 on the back of the FOMC but has since picked up form in Asian trade. Some impressive building approvals figures have certainly helped the cause locally and seen AUD/USD rally back towards 0.95 again. Building approvals were up 14.4% (versus consensus 2.9%) while import prices surged 6.1% (vs 3.5% consensus). There was also private sector credit which mildly disappointed at +0.3%. Should the pair trade back above 0.95, then consolidation around the 100-day moving average at 0.955 is likely heading into the rate decision. Tomorrow also brings a key reading for risk with China’s PMI reading due out. The reading is expected to come in at 51.2. For an analysis on the euro, please see the piece written by my colleague Chris Weston.


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