As the month of October draws to a close, with the ghouls and ghosts of Halloween preparing to frighten and alarm us in equal measure next week, it is the trick or treaters at the FOMC conference table on October 27-28, who should be frightening us more, as their lack of clarity and breathtaking indecision continue to rattle markets which are now at a dead stop. Like the cinema audience at a horror movie, the auditorium is eerily quiet, as tension builds towards the inevitable, unexpected crescendo of fear as the frightening apparition suddenly appears on screen.
Whilst Janet Yellen and her colleagues may not have the power to frighten, they certainly have the power to confuse, and whether they trick or treat next week is anyone’s guess. The stream of economic data would suggest that once again interest rates will be put on hold, and more splinters will have to be removed from the backsides of the fence sitters. The only argument for a hike is to save face, something which is entirely possible given the rhetoric that has been flowing over the last twelve months.
What we can say with certainty is that at present, virtually every market is rangebound to a greater or lesser extent as we await the outcome of next week’s meeting. For evidence of this we need look no further than the US Dollar Index, the Euro Index and the Yen Index.
If we start with the dollar index, the daily chart neatly reflects the market’s rise on the expectation of an increase in rates, duly followed by a fall on the decision to delay, with the rounded tops providing a visual picture of this rolling monthly cycle. From a technical perspective, the ceiling of resistance is now clearly defined with the failures in both September and October to breach the 12,100 area. With next week’s meeting now only a few days away, it seems unlikely this level will be tested again beforehand.
Over the last few days we have seen a modest return of bullish sentiment with wicks to the lower body of Monday's and yesterday’s candles confirming this view, but should the Fed fail to act once again next week, the low of last week at 11,860 is likely to be taken out, with a possible deeper move to test the 11,820 region of late August. Should there be a yes vote, market reaction in the index may be more muted than we might otherwise expect given the extent of the prevarication and delay it has taken. In other words, there is no longer a surprise element involved, and indeed markets may simply breathe a sigh of relief.
Moving to the Euro Index, price action here has been contained throughout September and into October with any move lower finding support in the 124 region, while to the upside resistance is building in the 126.80 region. Both of these levels are now very clearly defined, and as always, the longer this phase of price action continues on the index, the more explosive will be the breakaway once it occurs.
Finally to the Yen Index, with the dramatic candle of late August denoting the panic which swept the markets as risk appetite evaporated with a consequent surge in the Yen Index on yen buying across the board. Since then, as fear levels have subsided and equity markets recovered their equilibrium along with a return to bullish sentiment, so the Yen Index has continued to slide lower, initially breaking through the support platform in place at 7600, before moving to test the 7300 area where the index has now entered a further phase of price congestion.
Should equity markets maintain their bullish momentum, then we can expect to see the Yen Index break below this level and move down to test the next level of support in the 7150 region in due course.