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What will they do? What should they do? Chair Yellen's assessment that the Fed has met its goals and therefore should act, i.e., move in March to raise the funds rate. We now expect three rate increases this year.

Staying with the Dot Plot Projection

We expect the Fed to tighten 25 basis points at the March 15 FOMC meeting. The combination of incoming data that show underlying resilience in the U.S. economy and commentary by Fed officials indicating that rate hikes are likely sooner rather than later have led to a quick shift in market expectations. To follow-on the FOMC's projections in the dot plot (top graph), we expect additional hikes in June and later this year.

The FOMC, by taking on a preemptive policy action in March, avoids the complication that a surprise French election result might upend a June rate hike. A March rate hike would also make it easier for the FOMC to raise rates three times, particularly given that Yellen's term ends in February and the president would likely appoint a successor in December.

Meeting Its Goals: A Question on Inflation and a Fog

Inflation, as measured by the PCE deflator, middle graph, is moving in the right direction, although it is not quite at the FOMC's two percent target. Meanwhile, in our view, the FOMC's full employment target has been more or less met. One of the three FOMC policy pillars is that policy should look forward. We expect the FOMC to work on this pillar as an improving economy pushes inflation toward the Fed's 2 percent goal.

While the short-run path of policy is visible, the longer path remains in a fog. The claim is that the neutral fed funds rate over the long-term is one percent, and with a two percent inflation target, the longer-term target is said to be three percent. This indicates that the FOMC's path remains consistent with the dot plot that yields a three percent fed funds rate at year-end 2019. But such a low real funds rate indicates something about productivity and real economic growth that may not be consistent with the goals of the current administration.

Twos, Tens and the Balance Sheet

Market reaction to Chair Yellen's commentary last week was muted, suggesting that a rate hike has been largely discounted. The two-year Treasury yield has risen 10 bps over the past week (bottom chart). The 10-year Treasury yield has moved similarly. We give the Fed's messaging "credit" for most of the move in the 10-year Treasury yield, with rising equities probably accounting for a few basis points.

Beyond the short-run normalization of monetary policy, it remains to be seen whether the Fed has accomplished the overall goal of truly stabilizing the financial system. In our opinion, another test will occur when the Fed begins to shrink its balance sheet. The move may be particularly challenging for mortgage-backed securities (MBS). However, this speed bump should be quite a way down the road. We look for the Fed to continue to reinvest its MBS at least through 2017, and probably well into 2018.

EUR/GBP - 0.8640

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term down

Original strategy  :

Buy at 0.8550, Target: 0.8650, Stop: 0.8510

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.8550, Target: 0.8650, Stop: 0.8510

Position : -

Target :  -

Stop : -

 
Although the single currency rose briefly to 0.8670, lack of follow through buying and current retreat suggest consolidation would be seen and pullback to 0.8600 cannot be ruled out, however, reckon downside would be limited to 0.8570-75 and support at 0.8547 should hold, bring another rise later, above said resistance at 0.8670 would extend the rise from 0.8403 low towards 0.8700-10 but reckon upside would be limited and price should falter well below 0.8740-50, risk from there is seen for a retreat to take place later.

In view of this, would not chase this rise here and we are looking to buy euro on pullback as 0.8550 should limit downside. Below support at 0.8509 would abort and signal top is formed instead, risk weakness to 0.8460-65 break there would add credence to this view and further fall to 0.8435-40 would follow.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.3383

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term down

 
Original strategy       :

Buy at 1.3300, Target: 1.3450, Stop: 1.3240

Position: -

Target:  -

Stop: -

 
New strategy             :

Buy at 1.3300, Target: 1.3450, Stop: 1.3240

Position: -

Target:  -

Stop:-

The greenback has eased after rising to 1.3437 late last week, suggesting consolidation below this level would be seen and pullback to 1.3345-50 cannot be ruled out, however, reckon 1.3300 would limit downside and bring another rise later, above said resistance at 1.3437 would extend recent upmove from 1.2969 low to resistance t 1.3461 but loss of near term upward momentum should prevent sharp move beyond 1.3500-10 and price should falter well below 1.3558, risk from there is seen for a retreat to take place later.

In view of this, would not chase this rise here and would be prudent to buy on pullback as 1.3300-10 should limit downside and bring another rise later. Below 1.3250 would defer and risk correction to indicated previous resistance at 1.3212 (now support) but only break there would suggest top is formed, bring weakness to 1.3165 first.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

USD/CHF - 1.0089

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As the greenback ran into resistance at 1.0135 and has retreated again after faltering below resistance at 1.0146, suggesting consolidation below this level would be seen and weakness to 1.0060-65 (61.8% Fibonacci retracement of 1.0009-1.0146 and previous support), however, as broad outlook remains consolidative, reckon downside would be limited to 1.0035-40 and price should stay well above support at 1.0009, bring rebound later.

On the upside, expect recovery to be limited to 1.0120 and price should falter well below resistance at 1.0146, bring retreat later. Only above said resistance at 1.0146 would extend recent erratic rise from 0.9661 to 1.0170-80 but reckon 1.0200 would hold from here. 

GBP/USD - 1.2275

Original strategy :

Buy at 1.2220, Target: 1.2340, Stop: 1.2185

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.2220, Target: 1.2340, Stop: 1.2185

Position : -

Target :  -

Stop : -

Although cable dropped to as low as 1.2214 late last week, the subsequent rebound suggests consolidation above this level would be seen with mild upside bias for recovery to 1.2315-20 (38.2% Fibonacci retracement of 1.2479-1.2214), above there would extend gain to 1.2347 (50% Fibonacci retracement and previous support), however, reckon upside would be limited to 1.2375-80 (61.8% Fibonacci retracement of 1.2479-1.2214) and bring another decline later. 

In view of this, we are looking to turn long on dips but one should take profit on such a rebound. Below said support at 1.2214 would extend recent decline from 1.2706 top to 1.2200, then towards 1.2170-75 but reckon 1.2150 would hold from here, risk from there is seen for another rebound. 

GBP/USD has inched lower in the Monday session. Currently GBP/USD is trading at 1.2270. On the release front, there are no major events ont the schedule. BOE Deputy Governor Charlotte Hogg will speak at an event in Lincoln and we'll get a look at BRC Retail Sales. The US will release Factory Orders, with the indicator expected to dip to 1.1%

Will the Fed press the rate trigger next week? Market sentiment continues to heat up regarding a rate move in March, buoyed by strong economic data. Federal Reserve policymakers continue to sound hawkish about a rate move, as the Fed holds its policy meeting on March 15. FOMC members William Dudley and John Williams recently hinted at an imminent hike by the Fed. Dudley said the case for a hike is compelling, while Williams noted that a rate increase will be up for "serious consideration" at the March policy meeting. The markets are taking these statements at face value, sending the odds of a March move soaring upwards. The likelihood of a rate this month has jumped to 80%, compared to 33% just a week ago. Why the huge jump in odds? One reason is that policymakers are now saying they won't wait for Donald Trump to outline tax reform or other economic packages before making a monetary move. This is a significant departure from a few weeks ago, when the Fed sent out signals that it would stay on the sidelines until it had a clearer picture of the economic stance of the new administration.

The pound's troubles continue, as the currency trades below the 1.23 line. On Friday, GBP/USD dropped to a low of 1.2214, marking its lowest level since January 17. The pound responded negatively to key PMI reports. Manufacturing and Services PMIs both missed expectations in February. The softer Services PMI indicates more cautious spending by British consumers, who remain concerned about the ramifications of Brexit on the economy and their pocketbooks.

EUR/USD - 1.0596

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The single currency rallied after holding above previous support at 1.0493, dampening our bearishness and consolidation with mild upside bias is seen for marginal gain, however, as broad outlook remains consolidative, reckon upside would be limited to 1.0660-65 (50% Fibonacci retracement of 1.0829-1.0493) and resistance at 1.0680 should hold, price should falter well below 1.0700-05 (61.8% Fibonacci retracement), bring retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside in the meantime. Below 1.0570-75 would prolong consolidation and risk weakness to 1.0540-45, however, support at 1.0493 should remain intact. Only a drop below this support would revive bearishness and signal recent decline from 1.0829 has resumed for further selloff to 1.0470 and then towards previous support at 1.0454.

USD/CAD has inched higher in the Monday session. Currently, the pair is trading slightly below the 1.34 line. On the release front, it's a very quiet start to the week. There are no Canadian events on the schedule. The US will release Factory Orders, with the indicator expected to dip to 1.1%. On Tuesday, Canada releases trade balance and Ivey PMI.

The US dollar posted broad gains last week, and the Canadian dollar also took it on the chin, dropping 1.9 percent. Canadian GDP expanded 0.3% in January, matching the forecast. Still, this figure was lower than the December reading of 0.4%. As expected, the Bank of Canada held the benchmark rate at 0.50%, but a pessimistic rate statement weighed on the Canadian currency last week. The rate statement noted that the economy faces "significant uncertainties", including a lack of clarity over Donald Trump's economic agenda. Trump has called for the NAFTA trade agreement to be scrapped, although he has since backtracked and said that he only wanted to "tweak" the provisions that affect Canada-US trade. Still, Trump's protectionist stance could hit the Canadian economy hard, as Canada sends 80% of its exports to its southern border. Even if the US does not alter NAFTA, the US could slap import duties on Canadian products, which would have negative ramifications for the Canadian economy.

As the US economy continues to fire on all four cylinders, market sentiment has heated up regarding a Fed rate hike. Federal Reserve policymakers continue to sound hawkish about a rate move, as the Fed holds its policy meeting on March 15. FOMC members William Dudley and John Williams recently hinted at an imminent hike by the Fed. Dudley said the case for a hike is compelling, while Williams noted that a rate increase will be up for "serious consideration" at the March policy meeting. The markets are taking these statements at face value, sending the odds of a March move soaring upwards. The likelihood of a rate this month has jumped to 80%, compared to 33% just a week ago. Why the huge jump in odds? One reason is that policymakers are now saying they won't wait for Donald Trump to outline tax reform or other economic packages before making a monetary move. This is a significant departure from a few weeks ago, when the Fed sent out signals that it would stay on the sidelines until it had a clearer picture of the economic stance of the new administration.

Daily Pivots: (S1) 1.0537; (P) 1.0580 (R1) 1.0663; More.....

EUR/USD breached 1.0630 minor resistance today but fails to sustain so far. Intraday bias remains neutral first. On the upside, firm break of 1.0630 resistance will argue that pull back from 1.0828 is completed. Also, rise from 1.0339 could possibly be resuming. In that case, intraday bias will be turned back to the upside for 1.0828 resistance and above. On the downside, below 1.0493 support will affirm the case that fall from 1.0828 is resuming the larger down trend. In that case, intraday bias will be back to the downside for resting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Daily Pivots: (S1) 1.2236; (P) 1.2268; (R1) 1.2322; More...

Intraday bias in GBP/USD remains neutral for consolidation above 1.2213 temporary low. We're still maintaining a bearish view on the pair. That is, consolidation pattern from 1.1946 should have completed with three waves to 1.2705 already. Hence, current recovery should be limited by 1.2382 support resistance and bring another decline. On the downside, break of 1.2213 will target 1.1946/86 support zone. Break of 1.1946 will confirm our bearish view and resume the larger down trend. Nonetheless, on the upside, above 1.2382 minor resistance will delay the bearish case and turn bias back to the upside for 1.2569.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.