Tight FX trade through the day, but USD looking stretched. Commodity USD’s faring well though. GBP trade 2 way as EUR cross rate finds support.
Looking ahead to the FOMC meeting tomorrow night, traders are looking past the 25bps hike which is fully priced in, and focusing on Fed chair Yellen’s rhetoric on the rate path in the year ahead. The 2yr yield has priced a large part of this in, but given the rampant USD gains seen in recent weeks, the EUR/USD and USD/JPY look vulnerable to any degree of detraction to the hawkish view.
Some of this has already been discounted, modestly so, as EUR/USD has found support again ahead of 1.0500, while yesterday’s USD/JPY rally through 116.00 ran into heavy selling interest. 120.00 is the longer-term view, but such impulsive gains towards this level suggest a correction here could be significant. Similarly, sub 1.0500 (1.0456 last year’s low) could be out of bounds in EUR/USD this side of new year.
The same could be said for the commodity currencies, which have strengthened against the USD as well as the EUR and JPY. CAD/JPY traded to within 35 ticks of the April (2016) highs, while AUD/JPY is now close to its respective levels from start of the year – 87.80 or so – hitting 86.60 or so yesterday. USD/CAD touched on 1.3100, while AUD/USD spiked above .7500, but stops through .7525 intact. NZD/JPY has traded through 83.00, with spot NZD above .7200, but this looks to be purely on risk on sentiment – which should also be in line for a pause, if not a notable correction.
Mixed flow in GBP today, with the UK inflation stats broadly in line with expectations. Early buying saw Cable through 1.2700 again, while EUR/GBP retested the mid-low .8300’s, but these levels are deemed overstretched given the ongoing uncertainty, as well as real money flow impacting also. In recent weeks however, concerns over a hard Brexit have been tamed – largely due to the more conciliatory tone coming out of Europe.