FX Update: EURUSD pivotal after FOMC minutes pushed on a string

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The headlines touted a dovish set of FOMC minutes, further reducing the recent spike in expectations for Fed rate hikes and supporting US treasuries, but the US dollar was not particularly reactive. EURUSD has risen to a critical tactical level that must hold if the USD bulls are to maintain a key pillar of support. Meanwhile, low volatility suggests a market that is lacking inspiration here, in search of a catalyst.


FX Trading focus: EURUSD (and USDJPY) inflection points front and center

US STIR futures and treasuries rallied again yesterday and are trading near the top of the recent consolidation after providing the bulk of the energy for recent moves among currencies, particularly the lowest yielders, as noted in yesterday’s FX Update. It is doubtful that the market can milk much more out of the nominally dovish FOMC minutes released late yesterday. Yes, it is rather novel to see the tone of “unanimity” in waiting for inflationary and labor market outcomes to be realized before even wanting to discuss an eventual tapering or other unwinding of policy accommodation, but this was.

The more interesting question is perhaps whether the market is buying into the story that inflation and growth will prove as transitory as the Fed says – a narrative that would support recent developments in the treasury market, if not equity markets (save for the “relief” provided by falling yields.) Supporting that notion is the razor thin majority the Democrats enjoy in the Senate, which could make further rounds of stimulus tough unless the economy and sentiment are clearly tanking again, and the fact that the touted infrastructure bill (quite modest in terms of yearly outlays despite the $2 trillion touted) may be offset with tax increases.

So tactically speaking the most urgent question is whether the US dollar is setting up for a trend reversal here, with the EURUSD Exhibit A on that account after its rise to the key levels as noted in the chart discussion below. Elsewhere, the USD situation is not as immediately pivotal – for example in USDJPY, which can afford a deeper consolidation lower without reversing the trend (for example, 107.75-108.00 as a possible next step area for consolidation). And in general, implied volatilities in options point to little drama. Across markets, many may want to sit on their hands to see how the macro environment pans out and how the economy behaves as covid restrictions are lifted in rolling fashion and after this last round of stimulus fades, for example whether pent-up savings remain pent up.

AUD traders, beware the RBA Financial Stability Review up tonight in Asian hours - the currency looks eerily quiet and the RBA rather escalated the housing issue in the most recent policy statement - could be some follow up on that front if there is a strong indication suggesting something "macroprudential" is in the works (leaning AUD negative if the central bank raises a bigger fuss).

Chart: EURUSD
EURUSD is trading up against key levels here, the first of which was the 61.8% retracement of the recent sell-off wave, coming in around 1.1880 and tested and broken briefly yesterday (with the price action above 1.1900 smacking a bit of stop-loss driven flows ahead of the release of the FOMC minutes.) Slightly higher is the 200-day moving average, all leading to the impression that this 1.1900 area is important resistance as a move significantly above that level would begin to more fully neutralize the latest sell-off wave. A deeper consolidation in US treasuries (rally sending yields lower) with accompanying extension of recent strong risk sentiment are the biggest risks for the bears here – watching this level carefully. Meanwhile, the scale of the rally has helped take considerable momentum out of the medium-term falling trend, strengthening the support of the 1.1704 low – and in general we see the 1.1500-1.1600 as a significant longer term value zone unless some new exogenous shock roils markets.

Source: Saxo Group

Table: FX Board of G-10+CNH trend evolution and strength
This recent consolidation in the US dollar has taken the broader USD trend reading from +4.7 all the way back to +1.1, meaning we’re not far from a flip to negative if the USD extends lower in the next couple of sessions. Likewise, the JPY recovery has eased the downtrend strength to -1.6 and the boost to the Euro and Swiss franc have taken these two into positive trending territory – developments that are only likely to extend on a further rally in US treasuries. Sterling has stumbled into the negative and the Aussie has been parked in limbo for a full two weeks. (Note RBA Financial Stability Review tonight mentioned above! And note EURAUD near clearly pivotal 1.5600 area recently).

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1130 – ECB March Meeting Minutes 
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims 
  • 1500 – US Fed’s Bullard (non-Voter) to speak on economy and monetary policy 
  • 1600 – US Fed Chair Powell to participate on IMF Panel 
  • 1800 – US Fed’s Kashkari (non-Voter) to speak 
  • 0130 – China Mar. CPI / PPI 
  • 0130 – Australia RBA Financial Review
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