The Macro Backdrop:

The Federal Reserve announced on the 20th September that it would begin its multi-trillion Dollar balance sheet reduction as planned, starting October 2017. The reduction schedule is relatively straightforward: $10bn per month for the first three months, $20bn per month for the next three months and so forth until it reaches $50bn per month.

The market was definitely surprised by this announcement, as Janet Yellen was anticipated to be slightly more dovish. The US Dollar bounced from its lows as sentiment had reached extremely bearish levels. Fed fund futures had reached an extreme where they priced roughly one 25bp hike until the end of 2018 and that was clearly not sustainable. The Dollar has now bounced back – helped by the hawkish Fed – and futures currently price nearly two 25bp hikes for the same period.

The US economy is still not firing on all cylinders and the Fed is likely to continue hiking into a weakening trend (and below-target CPI). The Dollar’s medium term path is probably lower but the recent developments give rise to a scenario where we may see some more near-term strengthening.

Stelios Kontogoulas

The Technical Setups:

Following the FED’s statement and Yellen’s press conference yesterday we are seeing the potential for a $ reversal and a long expected correction for the DXY. We need to stress here that we are not claiming that the DXY has confirmed the reversal (we want to at least see a daily close above 93 to consider it) but we want to explore in advance which are the most appealing setups to go after in such an event.

First of all here is the DXY chart with a clear descending wedge setup. We have already broken above it but given the multi-month $ weakness we need to see a daily close above the 93 horizontal resistance to confirm a break, until then we haven’t even registered a higher high and have nothing to cheer about.

Another chart that is setting up a clear bearish pattern is the EURUSD. As you see on the daily chart we have formed a H&S formation but this will get activated only once we clear the 1.1850 neckline. Exactly on the same level we find the ascending channel support T/L which makes this area even more important. Regardless, until then we confirm the break the pair remains constructive.

Not surprisingly, following the EURUSD, the USDCHF is also near a major resistance area (at 0.9750) which has been capping any attempt of a rebound since May. A break above it will constitute a bullish development, targeting parity once again.

Another FX pair that is currently at a major junction is the AUDUSD which is testing -as we are writing this post- the 0.7950 area which hosts the confluence of the ascending wedge support, and the horizontal demand / supply area marked on the chart.

Last but not least we want to talk about the USDMXN. The USDMXN downside has been limited considering the weakness we have seen in the rest of the USD major pairs. You may be able to attribute the MXN underperformance to the ongoing NAFTA discussions, the rise in yields or perhaps a possible risk of “risk aversion” which has traders selling some Emerging Market currencies (i.e. MXN). Regardless, the USDMXN is popping its head out of a tight wedge consolidation, but the RSI is also showing signs of life too as it breaks a trend line. A meaningful move above the 18.0700 level would be needed to start a squeeze higher, which could be on the cusp of testing that near term resistance.

Blake Morrow & Steve Voulgaridis