US Dollar Strength to Pressure Asia-Pacific Markets Ahead of Fed Decision

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US Dollar, DXY, APAC Market Sentiment, FOMC, Technical Outlook – Talking Points

  • Asia-Pacific markets may turn cautious ahead of the Federal Reserve’s rate decision
  • Russian President Vladimir Putin to speak on Wednesday, grains react upward
  • DXY supported by key Fib level, but oscillators signal potential weakness ahead

Wednesday’s Asia-Pacific Outlook

Asia-Pacific markets may open lower after a downbeat trading session in New York. Traders took a defensive turn ahead of tomorrow’s FOMC rate decision. The chance for a 100-basis point rate hike fell to 17.3% via overnight index swaps (OIS), down from 32% following last week’s US CPI report. That hasn’t stopped traders from selling Treasuries. The 10-year yield rose as high as 3.604%, coming within 13 basis points from the 2011 high. An updated set of growth and inflation targets via the Summary of Economic Projections (SEP) and the “dot plot” will be in focus as well.

The Chinese Yuan fell against the stronger Greenback, with USD/CNH now trading above the 7 level. An aggressive daily Yuan fixing failed to temper CNH selling. The People’s Bank of China (PBOC) set its Yuan reference rate at 6.9468 against the US Dollar. The Bloomberg estimate saw a 6.9984 fix. The central bank kept its 1- and 5-year loan prime rates (LPRs) unchanged, as expected.

The risk-sensitive Australian Dollar fell more than 0.5% against the USD. A dovish tone in the RBA’s September minutes, released yesterday, showed some appetite among members to slow the pace of rate hikes, stating, “All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises.” The pace of tightening may slow as soon as next month. Market bets show around a 1-in-2 chance for a 50-basis point rate hike. Deputy Governor Michele Bullock is set to speak about the RBA’s review of bond purchases.

Australia’s Westpac leading index will cross the wires today. AUD/NZD rose to its highest mark since August 2015. A fall in New Zealand’s yield premiums over the last several weeks versus major peers has dragged on the Kiwi Dollar’s fundamentals. The RBNZ’s early and front-loaded policy response is now translating to a weaker NZD as major peers keep tightening at an accelerated pace. Elsewhere, grain prices rose ahead of a speech by Russian President Vladimir Putin, who is seen potentially escalating efforts to annex eastern portions of Ukraine.

US Dollar Technical Outlook

The DXY Index remains supported by the 23.6% Fibonacci retracement level and now a rising 20-day Simple Moving Average (SMA). Prices are within striking distance of the multi-decade high of 110.78, but a moderating MACD oscillator and negative divergence in the RSI are troubling signals for bulls. A drop below the 23.6% Fib would put the 26-day Exponential Moving Average in focus.

DXY Index – Daily Chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter





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