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Ahead the FOMC: Market fears the hawks; will the USD go up?

FXStreet (San Francisco) - The foreign exchange market is trading quietly on Wednesday before of the FOMC minutes. The EUR/USD is moving above 1.2550; the GBP/USD tested the 1.5700 area before retracing to 1.5665; while the USD/JPY extended gains above 117.50.

However, the US market appears to be stressed before the minutes since small-cap stocks and US high yield debt are declining sharply. The Russell 200 index in falls 1.54% so far today after bottoming at 1,152. High yield Corp bond is falling as the HYG is down 0.31% in the day. In addition, US 10-year bond is just 3 basis points higher than it scored in the FOMC October meeting.

Is the market worried about a hawkish FOMC statement? The declines could be signaling the fear of a hawkish bias in the minutes'. An optimistic outlook could signal a rise in interest rates sooner than expected and then a drop in stocks, but a bullish sign for the dollar.

Credit Suisse's team recently published its opinion about the USD. The experts "believe the Fed will be tightening sooner and more than the market is expecting." This idea underscores Credit Suisse's "bullish USD outlook, especially against currencies where we expect the central bank to ease further."

In this framework, the USDX trades near 4-year highs just below 88.00 with the next significant resistance at MA 200-month level at 89.90. However, investors should pay attention to the concerns of members about the strength of the US dollar.

According to Ashraf Laidi from Citi Index, "The rise in the dollar between the September and October Fed meetings was more modest than that between the July and September meetings, but this is unlikely to prevent the Fed from re-expressing concerns over the currency, especially as the Bank of Japan took the plunge into further QE, days after the Fed’s official end of QE3."

On the EUR/USD deck, the pair is holding above the 1.2550 level as the pair showed little progress over the last two sessions. According to Valeria Bednarik from FXStreet, the pair is "maintaining a short term neutral stance," while approaching critical resistance area around 1.2570.

Bednarik affirmed that the pair must trade above 1.2620 to show signs of strengthening.

The Federal Reserve will publish the FOMC minutes of the October 28/29 meeting on Wednesday at 19:00 GMT; 2pm EST.

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