Currency markets becalmed ahead of the FOMC

Currency markets saw some volatility intra-day over the US data overnight, with decent ranges seen on the dollar index and some of the majors. However, once the dust had settled and the 20-year bond auction had passed with firm demand, currency markets drifted back to finish near to their opening levels. Momentum seems insufficient ahead of the FOMC to maintain directional momentum.

The dollar index finished unchanged at 90.50, where its remains this morning. Nearby support/resistance is at 90.35 and 90.70. EUR/USD showed no reaction to the cessation of aircraft manufacturing hostilities between the US and Europe overnight. The single currency did trade in a handy 1.2100 to 1.2150 range before settling unchanged at 1.2125. The risk is still skewed to a deeper correction lower with support at 1.2100. Only a failure of 1.2000 changes its longer-term bullish outlook.

GBP/USD traded in a near 100 point range between 1.4030 and 1.4130 before finishing only slightly lower at 1.4085. It was buffeted by EUR/GBP volatility as its Northern Island disagreement with the EU continued. However, it received a modest tailwind from the UK/Australia free trade agreement announcement with the pandemic restrictions extension well telegraphed. Only a failure of the 1.4000 support zone will signal a much deeper correction; otherwise, it remains a buy-on dips for the medium-term.

USD/JPY continues to consolidate above 110.00, being almost unmoved overnight. However, its ability to maintain those gains is entirely dependent on the reaction of the US yield curve post the FOMC outcome. If US yields move lower tonight, USD/JPY will follow. Similarly, USD/CNY is unchanged at 6.4040 today, with no liquidity changes at the repo from the PBOC. Therefore, USD/CNY and USD/Asia will remain circling in the holding pattern until tonight’s main event.

The Australian, New Zealand and Canadian dollars look most vulnerable to further US dollar strength. All three fell overnight as investors continue to unwind risk-facing positioning into the FOMC, and commodity prices, ex-oil, come off the boil for now. Ironically, two of the three have central banks that are signalling tightening of interest rates ahead. Key support for AUD/USD is 0.7600 and 0.7100 for NZD.USD. A rise through 1.2200 by USD/CAD will signal more loonie weakness.