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The recent USD strength following the Fed meeting did not last very long. Since yesterday morning EURUSD has already been enjoying support again and is trading around 1.1950. However, the rate expectations have remained largely unchanged since yesterday.
The recent rebound in the dollar index (about 0.6%) was the largest weekly rally seen this year, and came amid shifts in the dollar backdrop across multiple fronts including improvement in Washington dynamics, some relief from the latest CPI report. This suggest a less uniformly bearish USD environment as yet, but potential for near-term upside catalysts for the dollar is tenuous at best, whether from the cyclicals/Fed, or from Washington DC developments.
A rate hike in December is still only priced in at only two thirds. Of course we have racked our brains trying to understand why this may be the case that the financial markets simply do not want to believe the Fed that it will be much more aggressive than the market is assuming.
EURUSD has achieved the initial objective at 1.2070, which corresponds to the 2012 lows.
Near term consolidation is likely given that weekly momentum indicators are at the graphical ceiling.
Previous highs of 1.1714/1.1618 will provide near term support.
While USDJPY has been oscillating between two converging trend lines at 115.50/116 and 106.45/106.
The pair could be forming a broad triangle pattern and recently probed the lower bound of the formation.
A choppy near term recovery is unfolding, but 115.50/116 will be a key resistance.
Sterling was able to recover notably since early August. That was mainly due to the Bank of England signaling a rate hike for “the coming months”. Currently, cable is attempting to extend gains at 1.3583 struggling for the momentum as the leading technical oscillators (RSI & Stochastic curves) reach overbought zone.
The rally in 3M-6M ATM vols and compression of USD risk-reversals of the past 3 months is due a pause. Short USD portfolios can consider selling USD puts as a yield-enhancing, delta-reducing strategy that has historically improved risk-adjusted returns. Two pockets of value left in GBP options after the run up in front-end vol are the relative cheapness of forward volatility and the richness of 6M-1Y risk-reversals.
