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Currencies AUD FOMC Preview and Trade Setups in EUR/USD, USD/JPY, AUD/USD

Talking Points:

  • EURUSD breaks uptrend from December 9 low.
  • USDJPY back to neckline of potential top..
  • December forex seasonality foresaw a modestly weaker Euro.

As fear and tumult rage on in emerging market currencies, one must not forget the headline event of the week: the Federal Reserve’s last policy meeting of 2014. Undoubtedly, market participants will give more attention to the FOMC today, letting other influences lose their gravitational pull if only momentarily this afternoon at 14:00 EST.

As the US Dollar takes back some of its losses ahead of the announcement and Fed Chair Janet Yellen’s ensuing press conference, it’s a good time to reflect on what key policymakers have said in recent weeks.

Janet Yellen, Chair
“As employment, economic activity, and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries based on differences in the pace of recovery in domestic conditions. This normalization could lead to some heightened financial volatility.” – November 7, 2014

William C. Dudley, Vice Chair
“In fact, if my own forecast is realized, I would expect to favor raising the FOMC’s federal funds rate target sometime in 2015…my view is that the likelihood of another disappointment has lessened…Nevertheless, I expect inflation will begin to move back towards our 2 percent objective in 2015. As the economy expands and the labor market continues to tighten, resource slack should decline and this should gradually exert some upward pressure on prices.” December 1, 2014

These comments made by two of the doves at the FOMC bear a whiff of hawkishness – perhaps the best indication that officials are feeling confident that 2015 will be the year that the ZIRP era ends, at least in the United States. Other members of the FOMC have recently expressed that they’re leaning this way, too:

Charles I. Plosser
“To me, that means we should no longer be conducting monetary policy as if we were still in the midst of a financial crisis or in the depths of a recession…Keeping the funds rate target near zero when inflation is close to our goal and the economy is near full employment is both unprecedented and risky in my view.” – December 3, 2014

Stanley Fischer
“If the labor market continues to strengthen, and if we see some signs of inflation beginning to increase, then the natural thing is to get the interest rates up.” – December 8, 2014

Today, the phrase to watch for – or see if it’s removed from the statement entirely – is “considerable time.” Removal of said language would indicate that we’re within a 12-month period in which the Fed would raise rates – probably Q3’15. The most dovish outcome could result from comments on foreign financial market developments and the impact of plummeting oil prices on inflation expectations.

See the above video for technical considerations in AUDUSD, EURUSD, GBPUSD, and USDJPY.