all eyes on the fed to drive market sentiment this week

Weekly Outlook

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16th March 2015 by Richard Perry, Market Analyst

Macro Commentary

The dollar rally ever since last week’s Non-farm Payrolls has been simply incredible. The market has clearly taken a view

now that the data is strong enough to drive the FOMC to adjust its statement and prepare for a rate hike. This would

likely to come in the form of removing “patient” from the wording. In front of the FOMC there is very little that will

result in the dollar rally being derailed now. There may be a consolidation before the announcement but the chances are

that there will be continued dollar strength. However, what if Yellen and the FOMC (which are dovish by their individual

traditional voting histories) do not remove the word “patient” and instead take a more cautious approach? Apart from

strong labor market data (specifically Non-farm Payrolls and unemployment), the US data has been good without being

spectacular. The personal consumption expenditure (the FOMC’s preferred inflation statistic) is sluggish, as are hourly

earnings, whilst the participation rate is falling, retail sales remain weak, the housing data has rolled off the top and the

ISM Manufacturing is down for 4 straight months. Could this be enough to see the FOMC sit on its hands? If so you can

expect a significant dollar correction near term. It would only delay the dollar bull run, but the volatility could be huge.

WHEN: Wed, 18th Mar, 1900GMT

LAST: 0.25%

FORECAST: 0.25% (month on month)

Impact: Simply put, this is massive. The market has

built itself up into a dollar buying frenzy since the

Non-farm Payrolls report and the feeling is that

the FOMC will remove the word “patient” from

the statement which would open the floodgates of

expectation over when rate tightening will begin.

(I believe that the market has got ahead of itself

and it could be primed for disappointment.) Dollar

bull runs tend to overstretch but whatever the

decision it could provoke a strong reaction either

way. A hawkish move would drive Treasury yields

and the dollar higher, but negatively hit equities.

Must watch for: FOMC Monetary Policy

Key Economic Releases

Date Time Country Indicator Consensus Last

Mon 16th Mar 13:15 US Industrial Production (MoM) +0.3% +0.2%

Tue 17th Mar n/a Japan BoJ Monetary Policy No change No change

Tue 17th Mar 10:00 Eurozone German ZEW Economic Sentiment 59.0 53.0

Tue 17th Mar 12:30 US Building Permits (Housing Starts) 1.07m (1.05m) 1.05m (1.07m)

Wed 18th Mar 09:30 UK Unemployment 5.6% 5.7%

Wed 18th Mar 09:30 UK Bank of England meeting minutes 9-0-0 9-0-0

Wed 18th Mar 19:00 US FOMC monetary policy + Yellen presser 0.25% 0.25%

Wed 18th Mar 21:45 New Zealand GDP +0.7% +1.0%

Thu 19th Mar 08:30 Switzerland SNB monetary policy

Fri 20th Mar 12:30 Canada CPI (YoY) +1.0% +1.0%

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1

US 10 Year Treasury Yield

N.B. Please note all times are GMT, data source Reuters

Weekly Outlook 16th March 2015

by Richard Perry, Market Analyst

Foreign Exchange

The strength of the US dollar has been incredible The dollar index shows incredible upside over the past 8 months of this

rally. In terms of speed of rally this is the strongest move on DXY since mid 2008 and in the last two weeks the dollar has

rallied around 5%. The question we want to know is that is it overstretched at 100 which is the highest level on DXY since

2003. Short term technical indicators do not show an excessive move, just the strength of the trend. This would suggest

any negative signals should be taken as profit triggers on long positions rather than opportunities to go short on the

dollar. The way this trend is running, trading counter trend could be a very risky strategy. There is likely to be a strong

move either way this week as volatility will be ramped up by the FOMC meeting which could remove on of the final

hurdles that stands in the way of a Federal Reserve rate hike. Key near term levels that are preventing a dollar correction

includes the resistance of $1.0820 on EUR/USD; $1.5020 on GBP/USD; $0.7740 on AUD/USD; and $0.7440 on NZD/USD.

The support levels to watch include 120.60 on USD/JPY, $1.2625 on USD/CAD and parity on USD/CHF .

WATCH FOR: It would be easy to think that the FOMC was the only factor this week, but there is also

monetary policy from the Bank of Japan and the Swiss National Bank, whilst the Bank of England also

provides meeting minutes. US industrial Production could lend volatility as could German ZEW for the euro

EUR/USD

Watch for: Weakness in front of

Wednesday’s FOMC

Outlook: The break down below the 61.8%

Fibonacci projection of $1.2569/$1.1098

measured from $1.1532 has now opened the

100% Fib projection at $1.0055. The near

term 8 day trend is still pulling the price

lower in the near term. Daily RSI reached 15

on Wednesday which was the most extreme

level dating back to 1997, however this

suggests the strength of the selling pressure

and with technical indicators suggesting

rallies are a chance to sell. The trend is your

friend.

GBP/USD

Watch for: Very little support now until

$1.4230

Outlook: Since the bearish key one day

reversal at $1.5552, Cable has been

smashed. The move has now taken it below

the July 2013 low at $1.4812 to drag it to

levels not seen since June 2010. This means

there is little support now until the next key

low at $1.4230. The concern is that

momentum is bearish but still reflects

further downside potential. The RSI is

around 30 but the move in September (on

the Scottish referendum) dragged the RSI

down to 13. MACD and Stochastics are also

strongly negative and show little appetite for

a rally this week.


FX Outlook

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Indices

There is a definite dichotomy across equity markets currently. Those that are backed by the ECB’s QE programme are

remaining supported and are the strong performers. Of the major markets look at the German DAX which continues to

storm to new highs and the French CAC which is around 7 year highs. However, compare that with the performance of

Wall Street, where traders appear to be petrified by the impending impact of the beginning of the Federal Reserve

tightening cycle which has driven the US dollar 5% high in just two weeks. In that time the S&P 500 is trading around 4%

lower (by contrast, in the same time the DAX is over 4% higher). Unfortunately, the FTSE 100 is laden with oil and basic

resources stocks (market cap in total around 28% of the index) whose sectors are negatively correlated to the strength of

the dollar. The FTSE 100 subsequently is closer aligned to the performance of Wall Street and has dropped around 4% in

the past two weeks. It may be no exaggeration to suggest that the performance of Wall Street and London will be closely

aligned to the outcome of the FOMC meeting this week. In the mean time a stronger dollar means equities lower.

WATCH FOR: The dollar strength driven by expectations of the FOMC on Wednesday will drive Wall Street

and subsequently FTSE 100, it is unlikely that traders will be focusing on too much else. DAX traders will

take interest in the German ZEW on Tuesday too. Any surprises out of the Bank of Japan could also impact

on the Nikkei.

FTSE 100

Watch for: Underperformance versus the

DAX to continue

Outlook: The index broke below a key

support band 6730/6780 with a rebound

that has subsequently failed at 6800. This

now becomes the immediate barrier this

week for the bulls to recover. The

momentum indicators have taken on more

of a corrective outlook and this could weigh

on the index in the coming days. The key

pivot support remains intact at 6640 for now

and this is a key medium term level that

needs to hold to prevent a much deeper

correction.

DAX Xetra

Watch for: Continued gains on the DAX

Outlook: I made the call of the DAX moving

to 12,000 in the wake of the decisive break

above 11,000 but I cannot believe how

quickly it is now getting there, closing on

Friday within 1% of this target and up again

today. The outlook is as bullish as you could

imagine and any hint of a correction is being

pounced upon as a chance to buy. With QE

underpinning the German market now this

is unlikely to change any time soon. Even

Wall Street’s wining over the strength of the

dollar has failed to hold back the advance.

Momentum is stretched but I would not bet

against further gains this week.


INDEX Outlook

3



Other Assets: Commodities & Bonds

Commodity prices are being smashed by the strength of the US dollar. Precious metals and oil prices have been really

badly hit in the past few days. This is certainly a strong dollar move, with the suggestion from the IEA suggesting that

there is no let up in the global oil supply glut. Key support levels have been breached and the bulls are cowering. If the

Fed removes “patient” from the FOMC statement then be ready for further commodities weakness towards key levels.

The critical low at $1132 could be pressured on gold, whilst the WTI bears will be eying the critical low at $43.58.

Eurozone sovereign yields have been pushed to record lows, however there is a hint of a bit of near term profit taking as

the Bund yield curve has steepened in the past couple of sessions. Do not expect it to last though as there is now a

consistent buyer in size across the Eurozone markets and it is not going away until September next year at the earliest.

US Treasuries look set to have a volatile week looking ahead to the FOMC. The yields are likely to push strongly higher in

the event of a hawkish shift. Key resistance comes between 2.300%/2.400%

WATCH FOR: US Industrial Production could have an impact Treasuries but this will pale in comparison to

the reaction on Wednesday’s FOMC meeting which could send shockwaves through commodity markets

Gold

Watch for: Rallies to be sold into for

further downside pressure on $1132

Outlook: Medium term bears have been

in control for 7 weeks amid a decline in a

big downtrend channel. Trading clear of

support at $1168 now means a retest of

the old critical low around $1132 is likely.

It looks as though rallies continue to be

sold into and we can expect further

weakness. As ever old support become

new resistance so $1168 becomes the

initial barrier in the coming week. Whilst a

move above $1176 would be needed to

point to a recovery of any substance.

Brent Crude oil

Watch for: Weakness amid continued dollar

strength

Outlook: The strong dollar is really

impacting negatively now. The recovery has

now lost its way and momentum indicators

which had been positive are now more

corrective again. The RSI fell to a 6 week low

last week and MACD lines also completed a

bearish crossover sell signal. The price is also

firmly below the 21 day moving average (c.

$59.80) which is a key trend gauge. Key

support band $53/$54 becomes extremely

important for the outlook this week as it

protects a much bigger correction back

towards the lows.


COMMODITIES & BONDS Outlook

4

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all eyes on the fed to drive market sentiment this week

Economy & Finance