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The struggling greenback has finally found a lifeline after the Federal Reserve maintained its intention to raise interest rates in 2017 and begin the process of trimming the balance sheet.

Before the Fed announced its decision, there were high expectations that monetary policymakers would drag interest rate expectations lower for 2017. This sentiment was due to persistently low inflation and the negative impact of Hurricanes Harvey and Irma on economic growth. Instead, the U.S. central bank decided to look past low inflation and said the harm of the Hurricanes would have no lasting economic impact.

The relatively hawkish statement and unchanged interest rates projections for 2017 and 2018, have forced market participants to adjust their expectations for an interest rate hike in December 2017, from a chance of 50% to above 70%. The repricing has boosted U.S. 2-year treasury bills by 5 basis points or 3.5%, to trade at the highest levels since Nov 2008, while the longer-dated 10-year bond yields hovered near a one-month high.

The primary beneficiary of the higher bond yields was the U.S. dollar, which rose to a two-month high against the Yen and sent the Euro below $1.19. For a couple of years, economists have been predicting the end of the three decades bull bond market, but this has never occurred due to investors pessimistic long-term inflation outlook. It is yet to be seen whether the reversal in yields will resume towards the end of the year.

The Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) for the next two to three months, are likely to be primary drivers of the U.S. dollar until the year-end. Janet Yellen herself does not know whether the slowdown in inflation is transitory or persistent, she simply described the slowdown as a "mystery" and said if the fed view changes on inflation, it would require an alteration in monetary policy.

Surprisingly, U.S. stock indices did not fall on a hawkish Fed. I believe lowering the estimated long-term neutral interest rates from 3% to 2.8%, prevented stocks from falling as overstretched valuations will continue to look acceptable, every time long-term interest rates are dragged lower. Back in 2012 longer run interest rates were seen around 4.25% and if they remained close to this level, it would have been tough to justify a PE ratio of 24 on S&P 500. However, it does make sense now.

Currency traders should continue to focus on interest rate differentials, as it will remain the primary driver of FX markets. Safe havens will also come under further pressure if U.S. yields manage to recover further and given no geopolitical surprises. If gold ended Friday below $1,295, this would attract sellers with the potential of testing the 50% retracement from $1,204 to $1,357 around $1,280.

The EURUSD pair has come under heavy selling pressure, as the U.S dollar index surged higher, following yesterday FOMC meeting. Following the monetary policy statement release, the 1-hour price-candle immediately spiked to 1.2031, then fell to 1.1861.

Price-action has subsequently recovered above the pairs 50-month moving average, at 1.1870, and is now probing the EURUSD monthly pivot point, at 1.1884.

Today's daily price close will be critical, as yesterday we saw the euro move price above the former weekly price high. Today the EURUSD must hold price above the former weekly price low, at 1.1838, to keep medium-term bullish trading sentiment intact.

Key intraday technical support is found at the 1.1870 level, and the pairs 50-day moving average, at 1.1851.

Below 1.1851, the former weekly low is found at 1.1838, with further support at 1.1815.

Resistance above the 1.1884 level is found at the Monday price low, at 1.1915, and the pairs weekly pivot point, at 1.1938.

Today's EURUSD daily calculated pivot point is found at the 1.1929 level

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The USDJPY pair has moved to its highest trading level since July 17th, hitting 112.64, after the Federal Reserve announced that they will start to taper their balance sheet in October and look to raise U.S interest rates one more time in 2017.

The Bank of Japan interest rate decision and press conference has largely been a non-event for foreign exchange markets, as the BOJ choose to keep monetary unchanged. The USDJPY pair trades close to its 8-week high, with price-action currently around the 112.40 region.

The USDJPY pair now trades above its monthly pivot point and 200-week moving average, indicating that the pair is now bullish in the medium and long-term while trading above these important technical levels.

Key intraday technical USDJPY resistance above the current daily price high is found at the 112.86, 113.20 and 113.89 levels.

Key intraday USDJPY support is found at the July 26th price high, at 112.19, and the pairs daily pivot point, at 111.98.

Below the 111.98 level, further intraday support is found at 111.87, and the USDJPY monthly pivot point, at 111.65.

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It has been a highly active week in the financial markets, with investors tracking a deluge of economic data and monetary policy developments. On Thursday, market participants will continue to dissect a pair of central bank meetings that shed important insights about the future.

The US Federal Reserve voted to keep interest rates on hold Wednesday and said it would begin to unwind its portfolio of bonds next month. Beginning in October, the Fed will reduce its portfolio holdings by $10 billion per month. At this pace, it'll be a few years before the central bank goes through half of its $4.5 trillion balance sheet.

Officials also voted to keep the federal funds rate on hold at 1.25%, and signaled that December was still primed for a rate adjustment.

The Bank of Japan (BOJ) also kept monetary policy on hold Thursday amid unexpected dissent. One member of the policy committee, Goushi Kataoka, voted against the decision to leave the target interest rates and asset purchase program unchanged.

The Japanese yen wasn't impacted by the decision, with the USD/JPY trading slightly higher during Asian trade.

Monetary policy will continue to drive the markets later in the day, with key speeches from European Central Bank (ECB) President Mario Draghi and Peter Praet, a member of the ECB's Executive Board. The ECB will also release its Economic Bulletin at 08:00 GMT. The publication takes a deep dive into the performance of the euro area economy.

Shifting gears to economic data, investors can expect a steady stream of reports over the next few hours. UK National Statistics will report on public sector net borrowing at 08:30 GMT. At the same time, the British Bankers' Association will release mortgage approvals for the month of August.

North American releases include US weekly jobless claims, the Philadelphia Fed's Manufacturing Survey and the Housing Price Index courtesy of the Federal Housing Finance Agency (FHWA). These reports will be released between 12:30 and 13:00 GMT.

USD/JPY

The USD/JPY is trading at two-month highs after risk appetite burned a hole through the yen. The pair was last up 0.1% at 112.46 after breaking sharply higher on Wednesday. The next psychological test comes just ahead of 113.00. On the downside, Tuesday's high at 111.87 provides a solid support zone.

GBP/USD

Cable held within a narrow range on Thursday after losing 100 pips during the previous session. It's still too early to conclude that the dollar bulls have regained control of the market. As such, the pair remains strongly supported at 1.3440.

EUR/USD

Like the pound before it, the euro dropped more than 100 pips after the FOMC meeting. The EUR/USD has fallen below the 1.19 handle. The September low of around 1.1835 offers good short-term support, but a break below that level would damage the euro's bullish outlook

The dollar advanced against a basket of major currencies on late Wednesday, rising to a one-week high after the Fed's rate-setting committee decided to set October as the starting date of unwinding their overloaded balance sheet, while they also agreed to keep interest rates unchanged as markets had projected. Likewise, the BOJ's monetary decision early on Thursday matched expectations, with the central bank maintaining its monetary strategy steady. However, the BOJ's monetary outcome had little impact on market actions.

In a widely expected move, the Fed policymakers agreed unanimously on late Wednesday to keep interest rates steady in a range of 1-1.25%, while the FOMC statement signaled another rate hike of 0.25 percentage points probably in December. Besides that, the Fed reiterated in its statement that the rates will likely rise in a gradual path with the so-called dot plot of interest-rate forecasts showing three-quarter rate hikes in 2018, as was also signaled in June's meeting.

Regarding the withdrawal of quantitative easing, Fed officials voted unanimously to reduce the size of the $4.5 billion balance sheet next month, saying that $6 billion in Treasuries and $4 billion in mortgage-backed securities will be cut every month. The reductions in the holdings of the bonds are expected to rise every three months until they reach the amount of $30 billion and $20 billion respectively (for Treasuries and MBS).

Despite the financial damage from the recent powerful hurricanes, the Fed policymakers claimed that the negative impact from those storms will affect the country's economic performance only in the short term. In the medium term though, they anticipate the economy to continue strengthening, with improvements in the labor market driving inflation towards the Fed's 2% goal. Fed Chair Janet Yellen, commenting on inflation in her press conference after the two-day monetary meeting concluded said that the recent price slowdown was “mysterious”, while she added that if factors contributing to this slowdown are proven persistent, then the central bank will have to change its monetary strategy.

Following the FOMC statement, the dollar index surged by almost 1.20% to a one-week high of 92.46 before it slipped to 92.30 during the Asian session.

Dollar/yen hit a two-month high at 112.61, with markets showing a muted reaction to the BOJ's monetary decision early on Thursday. The Japanese central bank kept its charge on excess reserves from other financial institutions at -0.1%, while it also maintained its yield target for 10-year government bonds at 0% with an eight to one vote. In addition, the BOJ expressed its optimism on economic performance in its monetary statement, suggesting that there was no need for additional stimulus as economic activities are expected to recover gradually and push inflation towards the central bank's 2% target. However, the new member, Goushi Kataoka, seemed more dovish, arguing that the current policy was not sufficient to lift prices up to the target during 2019. In contrast, the BOJ's Governor, Haruhiko Kuroda, said in his press conference after the release of the monetary statement that current monetary strategy is supporting inflation but adjustments to this are not excluded if they are needed to maintain price momentum.

In other currencies, the aussie sank by 1% to $0.7956, in the wake of the Fed decision as well as due to comments made by RBA Governor Philip Lowe. Lowe stated at a business event in Perth that inflation is unlikely to rise to 2.5% anytime soon, with interest rates remaining at low levels for some time. Moreover, commenting on the direction of interest rates, he said that rates “are more likely to go up than down”.

The kiwi dropped by 0.60% to $0.7309 ahead of the national elections on September 23 although GDP figures for the second quarter published early today came in as expected. Specifically, New Zealand's output expanded by 0.8% q/q and by 2.5% y/y.

Regarding oil prices, WTI crude dropped by 0.24% on the day to $50.57 per barrel and Brent declined by 0.18% to $56.19 after the EIA weekly report indicated that US crude inventories during the past week rose more than expected.

Gold was down by 0.53% at $1,294.30 per ounce.

EUR/USD

Current level - 1.1887

Yesterday's reversal at 1.2035 has been confirmed with the break through 1.1915 and the bias is negative, for a tight test of 1.1830 major support. The latter is the last hurdle before 1.1660 area.

USD/JPY

Current level - 112.43

The recent consolidation built a base at 111.10 and the uptrend is intact, heading for a tight test of 112.80 resistance area. Initial intraday support lies at 111.90 and crucial on the downside is 111.10.

GBP/USD

Current level - 1.3498

The sharp reversal at 1.3655 signals a negative bias, for a test of 1.3440 support and a break through that area will challenge 1.3340 zone. Initial intraday resistance lies at 1.3530.

USDJPY remains neutral in the medium term and has been trading in a broad range between 108 and 114 over the past 6 months. The near-term bullish phase that started last week from near solid support in the 108-area is still in place.

Momentum indicators are providing bullish signals, as the RSI has crossed above 50 and the MACD above zero. Ichimoku cloud analysis shows the market has risen above the cloud, while the Tenkan-sen line has crossed above the Kijun-sen line, giving a bullish signal.

The bounce off the September 8 low of 107.31 is still in progress. The short-term bias is strongly bullish after USDJPY rose above the 200-day MA to hit a high of 112.64 so far. There is scope for another push higher towards the top of the range at 114. Breaking above the July 11 high of 114.49 would allow the uptrend to extend further to target the next major peak at 115.50. From here the market would shift its neutral medium-term bias to a bullish one.

Failure to rise above resistance at 114 could see USDJPY reverse back down towards the lower end of the range. Immediate support is at the top of the cloud at 111.60. A drop into the cloud would change the short-term bullish technical tone and focus would turn to the 108-support area. Should this solid support level be broken, USDJPY would move out of the 6-month range and the medium-term picture would turn from neutral to bearish.

In the short term, there is limited risk to the downside but the medium-term outlook remains neutral within the established 6-month range between 108 and 114.

USD/CHF - 0.9720

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 0.9724

Kijun-Sen level                    : 0.9667

Ichimoku cloud top                 : 0.9621

Ichimoku cloud bottom              : 0.9615

Original strategy :

Sold at 0.9625, stopped at 0.9650

Position : - Short at 0.9625

Target :  -

Stop : - 0.9650

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The greenback only fell to 0.9589 yesterday before staging another rally (after Fed) above resistance at 0.9705, suggesting recent rise from 0.9421 low is still in progress and may extend gain towards 0.9761-66 (50% Fibonacci retracement of 1.0100-0.9421 and previous resistance) but reckon another previous resistance at 0.9773 would hold on first testing due to near term overbought condition, risk from there is seen for a retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside for now. Below 0.9685 would bring test of the Kijun-Sen (now at 0.9667) but break there is needed to signal an intra-day top is formed, bring retracement to 0.9635-40 but said support at 0.9589 should remain intact. 

Key Highlights

• The New Zealand Dollar likely made a short-term top near 0.7430 against the US Dollar.
• The NZD/USD is attempting a close below an important support at 0.7330 on the 4-hours chart.
• Fed kept the interest rates unchanged, but the central bank’s hawkish tone caught the market attention.
• New Zealand Gross Domestic Product in Q2 2017 increased 0.8%, similar to the forecast.

NZDUSD Technical Analysis

The New Zealand Dollar made good ground this past week and traded above 0.7400 against the US Dollar. However, the NZD/USD pair struggled to sustain momentum and currently trading below 0.7360.

Looking at the 4-hours chart of NZD/USD, it seems like the pair is forming a short-term top near 0.7433. The pair started a downtrend and moved below the 38.2% Fib retracement level of the last wave from the 0.7182 low to 0.7433 high.

During the recent slide, the pair broke a major support area near 0.7335. At the outset, it is attempting a close below an important support at 0.7330 on the same chart.

If there is a close below 0.7330 followed by a break of the 50% Fib retracement level of the last wave from the 0.7182 low to 0.7433 high, there can be more declines towards 0.7280-0.7250 in the near term.

New Zealand Gross Domestic Product

Today in New Zealand, the Gross Domestic Product for Q2 2017 was released by the Statistics New Zealand. The forecast was slated for a rise of 0.8% in the GDP compared with the previous quarter.

However, the actual result was in line with the forecast as there was an increase of 0.8% in the GDP in Q2 2017, but it was more than the last revised 0.6%. Looking at the yearly change, there was an increase of 2.5%, similar to the forecast and the last +2.5%.

Commenting on the same, the national accounts senior manager, Gary Dunnet, stated:

Strong export and domestic demand underpinned growth this quarter. Demand for exports has resulted in strong production growth in manufacturing and service industries. Eleven of 16 industries increased in the latest quarter, with retail trade and accommodation having the biggest rise.

Overall, the result was positive, but the market sentiment is bearish for NZD/USD, which could take it towards the 0.7280 level in the near term.

Unsurprisingly, the Federal Reserve kept rates on hold following the end of its 2-day meeting on Wednesday. They did, however, indicate that one more hike is possible before year-end. The recent drop in inflation appears to not have unsettled the policymakers, with Fed Chair Yellen commenting “What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent” if they do “it would require an alteration of monetary policy”. In justification of the decision for an additional hike later this year the Fed cited low unemployment, growth in business investment and a moderate but durable economic expansion. Fed projections are suggesting 3 rate hikes in 2018, 2 hikes in 2019 and 1 hike in 2020. Also, as expected, the Fed said it would begin to reduce its massive holding of bonds and mortgage-backed securities in October. With an estimated $4.2 Trillion in assets, the reductions will take place gradually and moderately in the coming months and years.

In another unsurprising move on Thursday, the Bank of Japan kept their monetary policy unchanged, keeping interest rates on hold and their asset purchase program unchanged.

EURUSD gave up recent gains to trade as low as 1.18653 overnight. Currently, EURUSD is trading around 1.1895.

USDJPY climbed to 3-month highs reaching 112.643 in early Thursday trading. Currently, USDJPY is trading around 112.40.

GBPUSD is currently trading around 1.35 in relatively quiet early trading.

Gold gave back gains against USD, as the precious metal traded overnight to a 3-week low of $1,295.80.

WTI remains strong against USD, with WTI trading up to $50.82pb in early trading. Currently, WTI is trading around $50.70pb.

Major economic data releases for today:

At 13:30 BST, the US Department of Labor will release Initial Jobless Claims for the week ending September 15th and continuing Jobless Claims for the week ending September 8th. The forecast is for an increase to 300K from the previous 284K. The US Labor market has been robust throughout the year, and whilst a higher reading would generally be bearish for the USD, the impact of the recent storms makes this less impactful.

At 14:30 BST, the ECB President, Mario Draghi, is due to provide welcome remarks at the 2nd ESRB annual conference in Frankfurt, Germany.