Time of writing: 03:30 GMT

The big picture

FOMC likely to remain on hold The dollar continued to recover overnight, gaining against most G10 currencies. It rose the most against JPY and CHF while gold was the biggest loser, indicating that the perceived need for safe haven assets is diminishing. Once again the market ignored weak US data. Although retail sales rose in line with expectations, that was data for September; the October consumer confidence figure fell far more than anticipated as the expectations index collapsed and the “jobs hard to get” measure moved back up. Yet stocks rose for the 13th day out of 15 on low volume (owing to an absence of sellers) as the flow into equity funds in October was the fifth highest on record. One can only conclude that investors are anticipating a continuation of the Fed’s loose monetary policy at today’s FOMC meeting, although why that should support the dollar is somewhat unclear – probably the growth story, I should think.

I think the most likely result of today’s meeting will be that the FOMC decides to “wait and see.” The committee has made it clear that it wants to begin tapering off its monthly bond purchases as soon as the economic outlook allows. At the September meeting, when they voted to delay tapering, only two of the 17 participants said it should begin later than December. Since then, the economic news has been mixed. In particularly, payrolls have been disappointing, averaging less than 150k a month although the unemployment rate has fallen steadily. On the other hand, the fiscal uncertainties that encouraged the FOMC to delay have passed (for now) and financial conditions, which they noted specifically as a concern, have eased notably (30-year mortgage rates are now 4.13% vs 4.57% before the September meeting). So while the odds are against them beginning to taper at this meeting, it’s not impossible that they cut a small amount, say $5bn a month. It certainly would be possible by December if the data improves. On the other hand, if they focus on the worsening employment picture, declining confidence, and soft capital goods orders and home sales, they could even consider increasing their bond purchases! Given these contradictions, the most likely decision in my view is that they feel they don’t have enough information yet to change policy because of the delay in data releases and they decide to “wait and see.”

The question then becomes, when can they start tapering? That will be decided by the data. Currently the market seems to be assuming the process begins in March, but it could start as early as December if the data allows. Look for the market to become more data-driven over the next month.

The European day today starts with German unemployment for October, which is expected to remain unchanged at 6.9%. Eurozone final consumer confidence for October is estimated to remain at -14.5. Later in the day, the preliminary German CPI data for October is coming out; the national CPI is forecast to show no change from the previous month, the same as in September. This would bring the yoy rate down to +1.5% from +1.6%. As for US indicators, the ADP employment change for October is expected to fall to 150K from 166K in September, which could be USD-negative even on an FOMC day. Both the headline and the core CPIs for September are expected at +0.2% mom, a faster pace than +0.1% mom in July, but with neither inflation nor deflation a policy concern right now, that isn’t likely to be market-affecting.

The Market

EUR/USD

• EUR/USD continued moving lower, breaking below the 1.3750 barrier (yesterday’s resistance) as expected. Early in the European morning the rate is heading towards February’s highs at 1.3706 (S1). A downward break from there would extend the bearish wave towards the top level of the triangle formation. Both momentum indicators continued their downward path with the MACD crossing below zero, enhancing the scenario for the continuation of the pullback. I still consider any downward move as a retracement for now, since the bullish cross of the moving averages remains on hold. On the daily chart, a long term uptrend remains in effect.

• Support: 1.3706 (S1), 1.3644 (S2), 1.3568 (S3)

• Resistance: 1.3750 (R1), 1.3832 (R2), 1.3935 (R3).

EUR/JPY

• EUR/JPY moved higher after finding support at the blue uptrend line and the 50-period moving average. Currently the price is finding resistance at the 134.91 (R1) barrier. If the longs are strong enough to overcome it, they may target new short-term highs. On the other hand, a decisive dip below the blue support line may be the first signal for further bearish extensions. Nonetheless, the upward path remains in force for now, since the rate is trading above both moving averages and the uptrend line.

• Support: 133.86 (S1), 132.75 (S2), 132.16 (S3).

• Resistance: 134.91 (R1), 135.48 (R2), 136.72 (R3).

GBP/USD

• GBP/USD moved significantly lower, breaking below the 1.6059 level (yesterday’s support) and the blue-long term trend line. Currently, the rate is finding support at the 200-period moving average. A dip below that level could drive the battle towards the key barrier at 1.5890 (S1) as a downward penetration of that hurdle would signal the completion of a double top reversal formation. Short-term momentum studies confirm the negative picture of the cable since both oscillators follow downward paths, with MACD lying below its trigger in a negative zone.

• Support: 1.5890 (S1), 1.5772 (S2), 1.5700 (S3).

• Resistance: 1.6059 (R1), 1.6162 (R2) and 1.6260 (R3).

Gold

• Gold moved slightly lower after finding resistance slightly below the 61.8% Fibonacci retracement level of the prior short-term downtrend. As European trading gets under way the metal is supported by the 1342 (S1) barrier, where a rebound might encourage the longs to challenge once more the 1363 (R1) hurdle. The price remains above both the moving averages, forming higher highs and higher lows, but both momentum studies are relatively neutral and do not provide many clues for the next directional movement. On the daily chart, the metal is forming a possible inverse head and shoulders pattern, but is not completed yet.

• Support: 1342 (S1), 1320 (S2), 1305 (S3).

• Resistance: 1363 (R1), 1391 (R2), 1415 (R3).

Oil

• WTI moved lower yesterday. During the early European morning the price was stopped by the 97.70 (S1) support level. A rebound near that support would mean the continuation of the corrective phase mentioned in previous comments. However, as long as the wave is within the channel, there is no reason for concern. We would reconsider our analysis upon a violation of the channel’s upper boundary and the 101.00 (R2) key hurdle. At present, the overall downtrend remains in effect since WTI is trading within the downward sloping channel and below both moving averages.

• Support: 97.70 (S1), 96.00 (S2), 93.61 (S3).

• Resistance: 99.32 (R1), 101.00 (R2), 102.92 (R3).

BENCHMARK CURRENCY RATES – DAILY GAINERS AND LOSERS

MARKETS SUMMARY