FOMC's rate decision day - will the Fed shift tone?
Economical News
USD
The USD has been weakening steadily during the last two months, and continued to do so yesterday. There were two news releases yesterday, the housing starts which came a bit higher than expected at 1.53M, after coming in at 1.40M last month. The positive housing figure did not change a lot for the USD, as it was offset by a lower than expected building permits figure which came in at 1.53M. The mixed data did not help to alleviate the recent concerns regarding the slowdown in the housing market and the sub-prime mortgage slump. Consequently, the USD lost ground against most counterparts, ahead of today's Fed rate decision.
The Fed is widely expected to keep the rate unchanged at 5.25%, and the decision itself is already priced in by traders. However, markets really price in expectations, not the actual figures themselves. The recent USD weakness came on the back of expectations that the Fed will take into account recent warning signs from the housing sector and change its tone to a more dovish tone in today's interest rate statement. In our opinion, this is why the EURUSD is looking for direction below and above 1.3300, in a tight range - should the Fed deliver what is expected from it, the EURUSD might very well break the 1.3370 December high. Should the Federal Open Market Committee hold to its relatively hawkish tone, or even decide to address inflationary pressures more than the possible slowdown, we might see the USD rebounding all across the board.
EUR
The European trading session started with the German PPI yesterday, as it was inline with wide expectations at 0.3%. A bit later we saw the UK CPI reaching a slightly higher than expected 2.8%, and with a core figure of 1.7%.
There is one major news event expected from the European market - the BOE Minutes.
The Bank of England minutes will be watched closely for further evidence of the bank's likely policy over the next two months.
There is a strong probability that some members of the nine-member committee voted for a rate increase at the meeting and one key issue is the number of votes cast for an increase. A 5-4 vote for unchanged rates would increase speculation that the bank will tighten policy again in April while a wider margin would swing the odds towards May.
The degree of bank concern over inflationary pressure in the minutes will also be an important consideration for the markets.
Overall, the GBP is unlikely to find further buying support based on the minutes given the amount of tightening priced in.
JPY
Yesterday, Matching all market expectations, the Bank of Japan kept rates unchanged at 0.5%, which caused all carry traders to get back in the game, despite relatively indifferent market behavior. BoJ Governor Fukui stated in his speech that the static nature of consumer prices supported his decision in keeping the rates unchanged, and that a further hike is not expected soon.
The JPY trade Balance is expected to be released today early in the Japanese trading session, and is expected to be around 0.7T, which might give the JPY a very strong boost, as it is a great improve from last month's flat 0.0T. Most of today's USD/JPY price movement will most probably derive from the US market and the rate decision release.
Technical Analysis
EUR/USD
The pair bases itself around the 1.3300 level, hopefully in order to make a second attempt for the 1.3370 hill. Intraday oscillators are bullish. Although slightly overbought, a strong uptrend can make an overbought condition sustain for quite a long time.
GBP/USD
The GBPUSD hovers near the 1.9650 resistance area, but judging by the daily and intraday studies the pair has the necessary momentum to shutter such a resistance. We are looking for 1.9754 to be taken, and then 1.9830.
USD/JPY
The symmetrical triangle in the 4H chart is past its 2/3 and is now ripe for a breakout. Oscillators are pretty neutral, but given the recent JPY weakness the upside seems more likely. Either way, 118 is the upper boundary of this triangle and 116.60 is its lower boundary. The triangle's base is about 300 pips wide, leaving us enough flash to act a "wait and see" approach and see whether this triangle indeed develops to a breakout, and in which direction.
USD/CHF
The downtrend continues but the daily chart's MACD and Slow S produce a positive divergence that might send the pair to a correction. In such case, the target would be 1.2185.
Wild Card
GBPJPY
The 38.2% correction wave of the 189.04-241.20 move seems to be over, and the uptrend seems to resume. We see no significant resistance for this forex pair before 238.15.
Market Trend
| EUR/USD | GBP/USD | USD/JPY | USD/CHF | AUD/USD | EUR/GBP | |
|---|---|---|---|---|---|---|
| Daily Trend |  |
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| Weekly Trend | |
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| Resistance | 1.3400 | 1.9830 | 120.58 | 1.2255 | 0.8157 | 0.6888 |
| 1.3367 | 1.9750 | 119.52 | 1.2213 | 0.8072 | 0.6869 | |
| 1.3340 | 1.9650 | 118.45 | 1.2160 | 0.8015 | 0.6836 | |
| Support | 1.3237 | 1.9490 | 117.39 | 1.2047 | 0.7981 | 0.6770 |
| 1.3191 | 1.9380 | 116.44 | 1.1975 | 0.7949 | 0.6727 | |
| 1.3112 | 1.9220 | 115.80 | 1.1841 | 0.7813 | 0.6694 |
Indicators
| Date | Time GMT | $€£¥ | Event | Period | Prev. | Forecast | Imp |
|---|---|---|---|---|---|---|---|
| 21/03/2007 | 9:30 | GBP | Bank of England Minutes for March 7-8 Meeting | Mar |  | ||
| 21/03/2007 | 18:15 | USD | Federal Reserve Rate Decision | Mar | 5.25% | 5.25% | |
| 21/03/2007 | 23:50 | JPY | Trade Balance | Feb | -1.9B | 7.1T |  |