FOREX: Awaiting the FOMC Minutes

Following the heavy Greenback profit taking that occurred on Monday ahead of tonight’s FOMC Minutes release, Tuesday was a slightly quieter day in regards to the currency pairs. However, that doesn’t mean there was limited movement in the stock markets where an unexpected downgrade of economic growth from the International Monetary Fund (IMF) encouraged a sell-off. Noticeable comments from the IMF included the global recovery being “weak and uneven” and progress being “slow and tentative” in many countries. The S&P 500 and NASDAQ each declined by around 1.5%, while the sell-off in stocks carried into Wednesday’s Asian opening with Japan’s benchmark, Nikkei 225 falling by 1.4% and the Hang Seng Index 0.8%.

The Eurodollar recorded its second consecutive days of gains, concluding trading at 1.2668. The pair attempted to make a run at 1.27 for the second day running, but appears to have the road blocked by resistance around the 1.2682. To be honest, if the EURUSD is going to consolidate around 1.27 it will require Greenback weakness because if anything, the EU economic sentiment weakened even further on Tuesday. German Industrial Production contracted by 4%, another blow for Europe’s largest economy. Within the past fortnight, German IFO data missed forecasts, ZEW expectations disappointed and German manufacturing suffered a contraction. Further fuel is being added to the fire that there are still problems in Germany and concerns have emerged that the German economy could contract in Q3.

With the right collaboration of the US Federal Reserve moving towards normalizing monetary policy and as long as EU economic data continues to disappoint, particularly in Germany – I will remain bearish on the EURUSD. ECB President, Mario Draghi was explicit in August “that the fundamentals for a weaker exchange rate are better now” and poor EU economic performances have continued to accelerate the EURUSD lower since.

The Cable traded as high as 1.6128 on Tuesday, before pulling back and concluding trading at 1.6095. There are some indications that the GBPUSD is struggling to clear 1.61 at the moment, with the pair already pulling back below this level after reaching 1.6128 in the early hours of Wednesday. Economic data from the United Kingdom was in line with expectations yesterday, calming down fears following last week’s Markit Manufacturing PMI miss that EU economic problems were starting to have an impact on UK sector growth. With the exception of a Bank of England (BoE) meeting taking place ahead of Thursday’s rate decision, UK data is quiet today.

I am keeping an eye on the Cable’s struggle to maintain itself at 1.61 though and currently feel it might take rumors of a third member of the Monetary Policy Committee (MPC) voting for a rate rise, or a dovish FOMC Minutes release tonight to reignite the bulls. If there is an unexpected hawkish comment from the FOMC minutes release this evening that excites the markets, GBPUSD support can be found at 1.6023, 1.5972 and the current yearly low, 1.5953.

After failing to stay around the 110 area approached on Friday afternoon, the USDJPY continued its pullback and concluded trading on Tuesday at 108.013. Early morning comments from an advisor to Japan Prime Minister Shinzo Abe, Kozo Yamamoto that the JPY could fall as low as 120 against the USD in the future seems to have caused some JPY weakness on Wednesday morning. Where this pair trades as Wednesday’s trading continues really is dependent on how the markets react to tonight’s FOMC Minutes. A hawkish comment could encourage an upside rally, where some resistance can be found around 108.529 and 108.984.

If the profit taking that occurred on Monday due to some anxiety among investors that tonight’s FOMC minutes might be perceived as dovish are proved correct, the USDJPY pullback could continue. Support can be found at 107.730, with a potential downside break below this level possibly finding support at 107.330.

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