Mild Risk Prior To FOMC

US data on Monday was a mixed bag and the thin trading volumes meant that the reactions were less sure than usual. regardless, there was an overall risk-on tone to the price action with EUR/USD, GBP/USD and AUD/USD all coming off lows and beginning to look higher. We are still firmly in the next year camp and most likely the spring camp in terms of taper timing which implies a bearish view of the dollar (which is also very seasonal at the moment) so the slow grind higher was welcome. In these thin markets though a few large orders can wreak havoc which tends to make the price action a little jumpy. RBA Stevens is on the wires later with traders keen to see if the recent jawboning has substance, although there is a suspicion that house price inflation is preventing any further rate cuts from the RBA at the moment.

Tuesday also sees the German ZEW Economic Sentiment and US and UK CPI releases so there remains significant risk to navigate in the slow trading conditions before the main event on Wednesday.

USD% Index

Further dollar weakness was observed on Monday which could merely be some position squaring ahead of the FOMC risk event following last week’s rally in the greenback. Our estimation of spring taper suggests no change to the asset purchase program to drive the dollar lower again and provide the risk-on Santa rally typical of this time of year, although there is an outside chance that we may see a taper. Stocks recovered on Monday and were well bid indicating a belief that there will be no taper this time around at least by equity traders. I am bearish USD

USD% Index Resistance (EUR/USD support): EUR/USD 1.3756, 1.3739, 1.3700
USD% Index Support (EUR/USD support): EUR/USD 1.3783, 1.3800

EUR% Index

The EUR% index had another crack at a fresh high on Monday, helped by strong German manufacturing PMIs although offset by mixed European numbers elsewhere. Bullish trend seems to be gaining strength again for another push higher so it seems only a matter of time, with a hold on asset purchases from the Fed likely to be the make or break decision for direction. Late Asian/early European trading on Tuesday saw the index rise once again which helps back this idea up. I am bullish EUR

EUR% Index Resistance: EUR/USD 1.3807, 1.3866, 1.3900
EUR% Index Support: EUR/USD 1.3755, 1.3700

JPY% Index

Although still holding above strong support the JPY% index failed to break through the bearish trend lines that have halted the previous three rallies and we continue to see lower highs and lower lows. The Nikkei is still looking unsure with a narrowing triangle formation although for the moment is still holding above the important 15000 level described by the BOJ as an important threshold for growth. Like the EUR% index, brave decisions will likely wait until after the outcome is known for the FOMC meeting, although a no taper will likely be bullish for stocks and therefore bullish Nikkei which should slightly weaken the Yen once again.

I am bearish JPY

JPY% Index Resistance (USD/JPY Support): USD/JPY 102.81, 102.19
JPY% Index Support (USD/JPY Resistance): USD/JPY 103.15, 103.92, 104.00

GBP% Index

Still holding above critical support, the GBP% index was flat on Monday although there seems to be demand growing, with brief, although faded bouts of buying. The bullish flag assumption is still holding and a break to fresh highs will likely meet strong buyers since there seems no let up in the growth out of UK data currently. EURGBP also stalled slightly on Monday which may be constructive for the GBP% index. I am bullish GBP

GBP% Index Resistance: GBP/USD 1.6331, 1.6350, 1.6400, 1.6440, 1.6433
GBP% Index Support: GBP/USD 1.6278, 1.6219, 1.6170

AUD% Index

We have Stevens back on the wires on Tuesday evening following the less than upbeat release of the RBA meeting minutes just after midnight on Tuesday morning, a negative outlook from the RBA and with Chinese data slightly off par at the moment we could see a further drop in the Aussie towards the quoted 0.8500 handle. Kiwi fared better on Monday which is typical recently. I am bearish AUD

AUD% Index Resistance: AUD/USD 0.8955, 0.8989, 0.9000
AUD% Index Support: AUD/USD 0.8894, 0.8852, 0.8800

CHF% Index

The Swiss Franc has continued higher and remains one of the stronger currencies at the moment. Traders are starting to find EURCHF longs attractive again though at these levels so this could become a hindrance for future rallies in the index. We currently have plenty of upside potential though for the index before meaningful resistance is met.

I am bullish CHF

CHF% Index Resistance (USD/CHF support): USD/CHF 0.8850, 0.8800, 0.8764
CHF% Index Support (USD/CHF resistance): USD/CHF 0.9992, 0.8925