Market’s view of Fed policy is too volatile

EUR USD (1.2785)
Yesterday’s US PPI numbers prompted a hasty revision of the hawkish opinions that prevailed following Friday’s import prices number. This earlier reaction had anyway been overdone: we suspected at the time that the release’s proximity to the Fed ‘pause’ decision had caused market participants to overweight the information. Today, we are equally surprised to hear commentators claiming that the Fed might already have done too much. Could traders be doing the same thing this time around, just in the opposite direction? Certainly, some strategists are eying the ‘devil in the detail’ and highlighting risks for future inflation. But one thing is clear from the recent opinion swings: the market view of monetary policy is infinitely more volatile than the Fed’s and therefore wrong by definition.

Indeed, it is arguable whether any release this month will cause the FOMC to hike in September. Although the stock markets were in celebratory mood yesterday and bond yields shifted markedly lower across the curve, the dollar’s reaction was more modest. Against the euro, the day’s range was less than average and the single-currency failed to overcome the first solid resistance at 1.2810. This level remains an important upside hurdle; a break there would herald a move back to the recent 1.2910 high. To the downside, the euro is at least better supported now, both at 1.2720 and 1.2635.

USD JPY (116.05)
Tuesday’s US inflation data resulted in an abrupt slide below ¥116. But this move probably did not cause too much discomfort among short-term traders, due to the absence of any positioning bias. In the morning, the market discussion circulated around the sudden drop in the yuan and the prospects of a US acquisition by a Japanese bank. But, by the end of the day, the arguments had shifted effortlessly back to US growth prospects and to the FOMC. The first support was nonetheless pushed aside and a key level is now exposed at 115.45. A break there would indicate a 200-pip slide in the pipeline. Whether we will be able to construct a bearish strategy depends on how and when it gets to the trigger point. For the moment, the useful resistances are too far at 116.75 and at 117.35.

EUR JPY (148.40)
The euro regained the recent high at 148.60 yesterday. However, even in the case of a new record, we would still expect to see offers coming in at 148.80. Only beyond there will the going become easier up to 149.50. The critical level to the downside remains at 146.10. Intermediate support comes in at 147.90.

GBP USD (1.8935)
As Cable has acquired a few more longs during its recent correction, it was not able to get too much mileage out of yesterday’s US PPI numbers. We would expect to see more offers emerging as it climbs towards the first good upside point at 1.9050. Only once this level is overtaken could we call an end to the corrective phase. In the meantime, the risk remains for lower prices again – although this should probably be revised to 1.8700.

AUD USD (0.7640)
The A$ tested the critical demand zone at 0.7580/90 yesterday and recovered again. The rebound took it to our first 0.7655 supply point. Above this upside point, further bullish potential would be unleashed up to 0.7735 and the general demand situation would improve. Until this happens, however, the critical downside point is the only support and a violation there would still trigger a further weakness.