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Wednesday saw the release of the minutes of the recent Federal Open Market Committee (FOMC) meeting, an event which traders and investors are keen to pore over the details of in the hope of sensing a change in sentiment at the Federal Reserve.
There are always many ways to interpret the minutes, but generally we are looking for key takeaways we can use as themes for trading decisions.
Within these minutes, it was apparent that the Fed were comfortable with continued US dollar strength. This has given renewed impetus to US dollar bulls over the last 36 hours.
The Fed also demonstrated they are committed to raising rates as high as necessary. Further, policy makers continued to talk up the need for further interest rate hikes, though now the focus will be on whether it is a 0.50 or 0.75 percent rise.
Presently, we have futures traders pricing in a more likely 0.5 percent rise. There are still three big event risks ahead of the next FOMC meeting on 21 September, which will help policymakers decide what size hike is required. We have the Fed’s Jackson Hole symposium later this month, followed by the August NFP jobs report on the 2 September and the August CPI data on 13 September. These are dates worth adding to your diary.
We have also seen fresh conversations regarding energy independency – or, rather, the lack of it - and that has weighed heavily on the Euro and JPY.
US Dollar Index
After the strong run in the US dollar in the first half of the year we saw a retrace in the US Dollar Index from recent highs between mid-July and mid-August. We saw support on the daily chart in the region of 105 along with the daily 50 Period Moving Average (Red). This week we have seen renewed bullishness in the USD, which takes it back above the daily 20 Period Moving Average (Blue) and above the 106.50 level of resistance.
Traders will now wait to see if those three big risk events mentioned above will power the USD to new highs before the FOMC meeting.
The dollar’s strength has been amplified by the weakness within the Euro region and its currency. While both regions are raising rates the spectre of energy disruption in Europe - and in particular Germany - is weighing heavily on the Euro.
The weekly chart reflects this clearly, as we have seen a decline from highs above 1.20 to a price now holding just above the Big Round Number (BRN) of parity at 1.00. While there is likely to be major support there, we believe it is only a matter of time before the level is retested.
In a similar vein to the Euro, high energy costs are also weighing upon Japan and the yen. Japan is completely dependent upon energy imports and the high prices of this year have been one contributing factor towards the deprecation of the yen. We entered the year at Y115 against the dollar and have so far seen a yearly high above Y139.
From a technical perspective on the daily chart, we see that after the summer retrace the USD has this week reclaimed the Y135 handle, along with rising above the daily 20 and 50 period moving averages. A move back above Y137 may well result in a further assault of the yearly high of Y139.39.
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