US dollar slumps after as-expected FOMC
A holiday in Japan will limit FX volumes in the region today. Overnight, the US dollar slumped after the FOMC hiked the Fed Funds by 0.50% as expected and signalled that 0.50% hikes are coming in the next two meetings. With the threat of 0.75% hikes off the table, for now, markets had an excuse to reduce extended US dollar long positioning. The US dollar slumped against DM and Asian currencies, with the dollar index plummeting 0.90% to the breakout level at 102.50. From a technical perspective, the dollar index should hold around these regions and resume its uptrend. The moves seen overnight in currency and equity markets appear to be more about positioning rather than a structural shift in sentiment. Nevertheless, given how far the US dollar has risen, I am not ruling out a deeper correction to the 101.00 area.
EUR/USD staged a corrective 0.90% rally to 1.0620 post-FOMC overnight, before easing to 1.0610 in Asia. The euro rally was a US dollar story and not a euro one, and as such, I believe the move higher is corrective. Rates are going nowhere in Europe and the proposed European oil embargo on Russia has brought Eastern European risks rightfully back to front and centre. Retaliation via natural gas from the Russian side can’t be ruled out. The EUR/USD technical picture remains extremely bearish, even without the external risks to the single currency. It remains well below its multi-decade breakout at 1.0800, and only a weekly close above there would suggest the downtrend is over for now. Rallies above 1.0700 will remain hard to sustain with risks skewed to a resumption lower.
As mentioned yesterday, the sterling was due a relief rally as well and overnight it climbed 1.10% higher to 1.2635 post-FOMC. The rally has quickly faded, and GBP/USD has slumped by 0.56% to 1.2565 in Asia, ahead of the BOE rate decision this evening and the Northern Ireland election today heightening Brexit risk. Although the BOE should hike by 0.25%, there are, I believe, risks that the BOE may be more dovish in their policy outlook than the market believes. That will snuff the sterling rally out. Rallies will likely be limited to the 1.2700/1.2800 region, while support lies at 1.2450 and 1.2400.
Asian currencies rallied overnight, led by the Indian rupee after the unscheduled rate hike by the RBI yesterday afternoon. The relief rally gained more momentum after the FOMC, with US strength proxies, the KRW, THB and SGD leading the gains. Notably, the offshore Chinese yuan (CNH) posted only modest gains, USD/CNH falling to 6.6220 overnight, before it and the onshore USD/CNY rose to 6.6280 and 6.6010 respectively today. A lack of downside follow-through by USD/CNH today is a warning shot that China slowdown worries continue to hobble any material gains by the yuan. By default, they will also limit gains among the rest of Asia FX. Much will depend on whether the general US dollar correction overnight is reactionary, and position-driven, or whether the market starts to price in “peak hawkishness” over the next week. My money is on the former.
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