FOMC Week Could See A Shift In The Current Market Paradigm

The EUR/USD and GBP/USD have been showing signs of fatigue after their recent strong runs, but there's lots more wood to chop before we can call a trend change.

If you missed it on today’s Must Read list, please do have a look at David Rosenberg’s 10 nagging concerns, which run through an interesting laundry list of questions on key economic and market indications. The post does a great job of graphically depicting the driver for the recent euro strength, which is about the lack of ECB accommodation and the effective shrinking of the ECB balance sheet more than it is and the prospect of Fed asset purchase tapering. It’s hard to tell how much more fuel the Euro can get against the U.S. dollar, but it already feels very “rich” and the fading momentum evident on Friday has me on the lookout for reversal setups. However, we need to inflict major damage well back below 1.3200 before we start to suggest a market turn.

The BoJ minutes saw another bout of zany gyrations in JPY crosses, first back higher before the minutes, as U.S. markets recovered sharply from the day’s lows (triple underline that 55-day moving average on the S&P500, by the way, as a general trigger point for risk off when/if crossed) and then a renewed drop back below 95.00. One of the members called for defining a horizon for BoJ policy in order to suppress the volatility in bond markets. The small uptick in the Nikkei was not much of a comfort for the worried JPY shorts…

Chart: US/DJPY again, again
Note how the bottom of the Ichimoku cloud became the upside resistance, just as it was the support on the way down. The JPY remained the global risk appetite barometer of the moment – I would like to see 97.50+ again before calling a local low – the lack of immediate follow through higher and the BoJ minutes suggested the risk could have been higher of another run lower first.
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Chart: GBP/USD
Late Thursday saw an obvious attempt to squeeze stops above 1.5700 in the GBP/USD and (guessing) a run at barriers. The downside on Friday suggested the 200-day moving average could be a major resistance point (as it most certainly should be fundamentally), but support was already there in the 1.5600 area, so this could have been a choppy area for cable to figure out direction. I suspect the immediate downside potential is at least toward 1.5500, as we have seen a very nice five-wave C-wave correction from the 1.5000+ base.
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Looking ahead
Friday’s U.S. calendar saw a few second-tier data points like the PPI (no signs of inflation in this data series) and the Q1 Current Account Balance number, followed by the Industrial Production numbers for May and the preliminary University of Michigan confidence number. Remember that next week is FOMC week. and Wednesday will offer the first major event risk that could see a shift in the current market paradigm.