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The US dollar is weaker going into the FOMC rate decision

This week is always tricky due to the chances a central bank can change policy direction. The talk is all about the FOMC as they are expected to change monetary policy this year and we’re running out of dates that they can make that decision.

Market Wrap

The forex heatmap sums up the mood of the market very well going into the London close. The risk-on end to the London session has meant that the equities markets are mostly green and up around 1% today. The Nikkei225 is notably red once again and for once the UK FTSE100 is the outperformer rising 2.00% ahead of the FOMC tonight and the Bank of England policy rate decision tomorrow.

A move out of the US dollar and the yen resulted in a positive USDJPY today showing how much weaker the yen is following on from the overnight session BoJ rate decision. The central bank decided to keep rates below zero whilst they closely monitor the impact of COVID-19, vowing to use additional measures if necessary.

The US home sales data unexpectedly fell by -2% with each of the four major U.S. regions experiencing declines on both a month-over-month and a year-over-year perspective, breaking a two-month streak of increases.

Ahead of the FOMC statement, policy decisions, and press conference the US dollar declined which gave the commodity pairs a boost. If we get a particularly dovish fed today, I expect the DXY to decline further and complete the H&S chart pattern. One macro reason for a more dovish Fed is the uncertainty around the Evergrande demise in China. This plus ongoing COVID-19 variant disruptions could be enough to spook the Fed from tapering in November without a couple more good US jobs data releases. So today is too early in my opinion for the Fed to get Hawkish like they were in June.

With Evergrande and FOMC in mind, it is interesting to see the S&P500 really hard today. Looking left across the chart we definitely broke key support and the daily 50 ema, so this market structure is different from times before. Though we saw a similar pattern in September 2020 so maybe a seasonal occurrence as we get close to the end of the fiscal year.

The British pound remains weak against the greenback today ahead of the two main central bank’s policy decisions. I am going to leave the CCI oscillators on the chart for now and see if we get another clear trade signal. My personal view is that the US dollar comes off and we get a chance to buy the dip on GBPUSD but until we get through central bank week, I am happy to sit on my hands. One thing that could be market moving is if the US government defaults on its liabilities and debt payments. Minority Leader Mitch McConnell has called on the Democrats to raise the debt ceiling alone. "We all agree America must never default," the Republican leader is reported to have said, claiming that the opposing party "has an obligation" to lift the debt limit without the GOP because it controls the whole government. We have seen the US government shut down before and this posturing happens each time unless we have some sort of massive market disruption like a war or pandemic.