The Fed kept interest rates unchanged yesterday, and announced it will begin to reduce the size of its enormous balance sheet in October, as was widely anticipated. In line with our view, policymakers kept the “dot plot” broadly unchanged as well to signal one more rate hike this year and another three in 2018.

This may have surprised investors looking for a downward revision in the rate path due to the recent soft patch in inflation. As a result, the probability for another rate hike by December jumped to 70%, and the market bought dollars aggressively.

What we also found interesting was Chair Yellen’s comment during the press conference that the shortfall in inflation this year is largely a mystery, and that idiosyncratic factors don’t fully explain the recent softness. In any case, the Fed chief made it clear that the Committee still expects inflation to rise in the future, mostly as a result of a very tight labor market that should, over time, push wages higher. This is in line with our view that the Fed could raise rates once again this year despite below-target inflation, like it did in June.

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As for the dollar, we believe that it may remain under buying interest this week, as markets digest the “hawkish” Fed. As for the coming months, however, we believe that the USD’s performance may depend primarily on its counterparts. For example, it could continue to gain against the weaker yen, but underperform against the almighty euro.

Gold fell yesterday as the Fed kept the door open for another hike this year. The slide came after the metal tested as a resistance the crossroads of the 1315 (R1) level and the prior uptrend line drawn from the low of the 10th of July. Subsequently, the bears managed to overcome the key support (now turned into resistance) obstacle of 1300 (R1). In our view, if the day closes below that hurdle, sellers may remain in the driver’s seat and perhaps push the price below 1292 (S1). Such a dip may pave the way for our next support territory of 1280 (S2).

BoJ: The song remains the same

Overnight, the BoJ kept its policy unchanged as well, providing absolutely no hints that it is considering to alter its ultra-loose framework anytime soon. We share that view, given that even though inflation has risen a bit in recent months, it still remains very far away from the Bank’s 2% target. If seen in isolation, the fact that the BoJ remains committed to ultra-expansionary policy should work against JPY over time, in an environment where other major central banks are either raising rates or showing signs they could do so soon. As such, we expect the yen to remain on the back foot in coming weeks, especially amid a risk-on market environment.

USD/JPY surged yesterday following the Fed decision. The pair rebounded from near the key support territory of 111.00 (S3), and rallied to emerge above two resistance barriers in a row. At the time of writing, the rate is trading above the 112.20 (S1) level and we expect it to challenge the 112.90 (R1) resistance soon. Given that the rate continues to trade above 111.00 (S3), and that yesterday’s rally confirmed a forthcoming higher high on the 4-hour chart, we maintain the view that the near-term outlook is positive. A break above 112.90 (R1) may carry more bullish extensions and perhaps open the way for our next resistance of 113.60 (R2).

Today’s highlights:

The Norges Bank will announce its own rate decision today, and the forecast is for the Bank to stand pat. When it last met, the NB removed its easing bias, while it revised slightly higher its expected rate path for 2017 and 2018. Since then, economic data have been mixed. The nation’s GDP accelerated notably in Q2, which is in line with the Bank’s forecast, while the unemployment rate slid further in August. On the other hand, inflation slowed in August, confounding expectations of accelerating. Given this slowdown in inflation, we think officials could push further back the timing of when they expect to start raising interest rates, something that could weigh on the NOK.

As for the economic indicators, in the US, the Philly Fed business activity index for September and initial jobless claims for the week ended September 15th are due out.

We have two ECB speakers on the agenda: President Mario Draghi and Executive Board member Peter Praet. Following the latest media reports suggesting there is division within the ECB regarding its QE exit, any further hints that the Bank may be headed for a “dovish tapering” could work against EUR.


Support: 1292 (S1), 1280 (S2), 1265 (S3)

Resistance: 1300 (R1), 1315 (R2), 1333 (R3)


Support: 112.20 (S1), 111.80 (S2), 111.00 (S3)

Resistance: 112.90 (R1), 113.60 (R2), 114.30 (R3)

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