Forex - Markets Wait for the FOMC

Forex News and Events: Since the USD unexpected reaction to Friday stronger than expected payroll data, traders have been held captive to the theory that FX markets are now decoupling from the risk aversions / risk appetite trade. While yesterday’s dip in equity markets could be described as the first real test of this hypothesis (where the EURUSD barely moved), we believe today’s FOMC rate announcement is the first true challenge. Should the reaction to the FOMC meeting today support a shift in core driver, then FX markets will become much more responsive to fundamentals, especially growth and yield differentials (back to central bank watching). The USD continued to hold onto gains, while US treasury yields continued to slide back to pre-NFP levels. On a side note, yesterday’s auction of 3yr notes had a 2.89 bid-cover and 62% awarded to indirect bidders, which was better than recent auctions and a clear indicator that foreign appetite remains robust (an auction of 10yrs is scheduled today at approximately 17.00 GMT). In regards to the key event of the day, we expect the FOMC to hold rates steady, while in the accompanying statement provide a slightly more optimistic tone. In addition, the statement should hold an announcement that the treasury securities portion of the asset purchase program will not be expanded after the scheduled $300bn is spent. Despite the growing confidence in the economic recovery and credit markets, we suspect the Fed will temper the market enthusiasm by signaling their intentions to keep the fed fund rate "exceptionally low and for an extended period." The big winner in FX was the JPY while USD remains supportive. Note on AUD: In Australia Westpac consumer sentiment hit a 2 year high to 113.4 as optimism over the economy overshadowed concerns over potentially higher rates. The bulls put up an extremely good fight yesterday at the 0.8286 level but couldnt manage to push the pair more than 30 pips higher over a 6 hour period. In the process of this battle the number of stops increased hugely as we Iater found out as the pair collapsed over 1% in a few hours during Asian trading. A drop out from a down trend channel usually targets the same number of pips as the range of the channel (in this case100 pips or so) from the lower downtrend line at 0.8286 so at 0.8182 one can assume that the breakdown players are finished with this pair for the immediate term. We have good support also at 0.8182 from prior price action alongside one of the uptrend channels but resistance above at 0.8237 and 0.8286 is not going to be an easy ride.

Today's Key Issues (time in GMT): 08:00 NOK Retail sales, % m/mJ un -0.4 exp 08:30 GBP Claimant count, change, K Jul 26.0 exp 08:30 GBP ILO unemployment rate, %Jun 7.7 exp 08:30 GBP Average earnings growth, % 3m y/y Jun 2.2 exp 08:30 GBP Core average earnings growth, % 3m y/y Jun 2.5 exp 09:00 EUR Industrial production, % m/m (y/y wda) Jun 0.5 (-15.9) exp 09:30 GBP BoE publishes Q3 Inflation Report 12:00 NOK Norges Bank interest rate announcement% Aug 1.25 exp, 1.25% prior 12:30 CAD Int'l merchandise trade, C$ bn Jun -0.5 exp. -1.4 prior 12:30 USD Trade balance, $ bn Jun -28.5 exp, -26.0 18:00 USD Budget balance, $ bn Jul 131.0 exp, -1028 prior 18:15 USD FOMC rate decision, %Aug. 00-0.25 exp, 0.00 0.25 prior

The Risk Today: EurUsd The short term downtrend is remains in place but once again the pair is facing strong positive divergence on the 60 minute chart. Even a look below 1.4100 was met with solid long interest and this now remains a key level intraday, bearing in mind that many of the stops have already been flushed out so the next look below 1.4080 / 4100 may be real money flow rather than synthetic stop triggers. The next support below is 1.4034 / 51 and 1.3938 is the lowest of the 5 month uptrend lines which must hold to keep the Euro in favor. Resistance above at 1.4178 and 1.4240 thereafter. An interesting few days ahead for sure. GbpUsd Lots of noise on cable between 1.6272 and 1.6546 with intraday interest on the long side at 1.6381 and 1.6435. The major level for the bulls remains at 1.6272 but failure there leaves a lot of room to the downside to 1.5947 followed by 1.5724. Most likely that these moves will kick in after the FOMC meeting later this evening so in the meantime risk management would point towards intraday plays between the levels mentioned. UsdJpy We discussed yesterday the anticpated retest of the 2 year downtrend breakout and that a break of 96 would be a problem for the bulls. The retest faileld and the pair is now back under the 2 year downtrend confirming that Friday's break higher on NFP numbers was not a particularly accurate reflection of the underlying fundamentals. In the process we have now broken the medium term uptrend so unless the pair can get back above 96.20 the bulls have their work cut out to say the least. Resistance at 95.85 and 96.15. To the downside 95.16 is key for the bulls to hold and a break lower targets major support at 94.78. UsdChf Rangebound action from USD CHF between 1.0797 and 1.0844. Nothing much else to note on the pair with regards to momentum so keep an eye on a break of either side of those levels and expect intraday trading around those marks to continue until the markets find a volatility catalyst. A move below 1.0797 points towards 1.0739 and to the upside the first resistance after 1.0844 is 1.0891 with 1.0934 as a major hurdle.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4338 1.6730 97.85 1.0934 1.4240 1.6665 96.95 1.0891 1.4178 1.6610 96.15 1.0844 1.4172 1.6465 95.85 1.0775 1.4100 1.6340 94.60 1.0797 1.4080 1.6272 96.00 1.0764 1.4035 1.6435 93.45 1.0739 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot