Walking in at the start of the week it seems the short-term theme of the moment is a USD revival ahead of this Wednesday’s FOMC meeting. Speculators are anticpating US policy-makers could take this opportunity to signal their intent to end QE; a move which would gesture the first step of normalization in fiscal and monetary policy. An expected driver of FX markets going forward is indeed likely to be the divergent path of monetary policy across central banks, and of late, currency traders have penalized those currencies whose central banks are engaged in QE (namely USD, GBP and CHF). If the Fed were to confirm their intent to withdraw stimulus, it would almost certainly give the USD a boost by differentiating itself from the GBP and CHF, and ease some of the selling pressure that has come about in this low interest rate environoment. However, with Asian markets subdued by the 3-day holiday in Japan and slim-pickings on the economic calendar to excite much movement, it feels a lot like the market is bored and looking for any excuse to trigger a correction on recent USD moves. Certainly the short USD trade has paid off well over the past couple of weeks and it’s felt like we’re due a retracement. What few data releases there are on the docket are likely to be pushed to the sidelines until the Fed announcemnt on Wednesday night, so expect sideways trading until that point. While G10 central bank activity will hog most of the week’s coverage, the EM space is also anticipating a week of high-profile risk events; with rate decisions expected from SARB on Tuesday followed by Israel and Czech central banks on Thursday. Consensus forecasts are for SARB to maintain interest rates at 7%, but around 20bps of cuts are priced in to this meeting which, if realised, may trigger a retracement of some of USDZAR’s steady decline over the past 9 months. The Bank of Israel is also predicted by most to remain on hold at 0.75%, but there are increasing murmurs that a 25bps hike may also be a possibility. The BOI was the first central bank to raise rates since the recession began to show signs of easing, and we look for further confirmation from governor Fischer that he wants rates rather than FX to bear the load of monetary normalisation. Very little surprise is expected from the Czech central bank, who will likely stay on hold at 1.25%. Overall though, we believe the larger trend remains intact; namely that risk sentiment is on the up and USD in decline – this correction ahead of FOMC should be taken as an opportunity to buy risky assets on dips and sell USD on rallies.

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Today's Key Issues (time in GMT):

00:00 JPY Japan: Public holiday

00:01 GBP BoE publishes Quarterly Bulletin Q3

07:00 EUR ECB Executive board member Tumpel-Gugerell speaks at a conference

10:05 GBP BoE MPC member Andrew Sentance speaks in London

16:30 AUD Austrian Central Bank Governor Nowotny speaks in panel discussion about One Year After The Crisis

14:00 USD Leading indicators, %m/m (y/y) Aug 0.7 (1.7) exp, 0.6 (0.2) prior

22:45 NZD Current a/c bal nsa NZD bn Q2 -1.72 exp, -1.25 prior

The Risk Today:

EurUsd We highlighted a tradeable downtrend on the EUR USD 15 minute chart last week and it continues to play out rather well. By picking up support at 1.4653 the pair has now formed a small intraday head and shoulders so any break below 1.4640 should target a move to 1.4569. Expect intraday short interest on the downtrend at 1.4684. A break above 1.4705 would negate this formation and likely result in a resumption of the uptrend but for now the risk reward lies with the short side.

GbpUsd The head and shoulders that we have been talking about since early September is now becoming mainstream bank analysis yet it is EXTREMELY important to make sure you know where the neckline is. Those who are short from the sweet spot on the top of the second shoulder at 1.6660 / 6750 will likely be covering some of their position at the major support between 1.5947 and 1.5985, right where some analysts are encouraging shorts so it would be sensible, as always, to wait for a break of the neckline and short on the retest. There is every chance that the pair hits the neckline and bounces all the way back up to second shoulder downtrend at 1.6450, providing yet another great shorting opportunity and a compund head and shoulders in the process.... after all it does have two shoulders on the first side.

UsdJpy On Friday we mentioned that the USD JPY looked to be carving out a short term bottom with an ascending triangle pattern and we have now broken out from the triangle, moving very swiftly to 92 +. Here the pair faces its first major resistance and the 6 week downtrend so expect some short interest intraday around 92.25 / 50 (also the target from the ascending triangle). A close on the 4 hour chart above 92.50 should give the USD bulls plenty more gusto and likely trigger some medium term short stops on the pair.

UsdChf After a long run shorting the pair on a short term basis the pick up in USD strength has pushed the currency slightly out of the core trend channels and into a resistance zone at 1.0350/65. Some short interest can be expected on the first visit to these levels and the next major downtrend comes in around 1.0390 where again one can expect some short interest. Any continued long interest will likely come in on the intraday uptrend at 1.0310/20.

Resistance and Support:

EURUSDGBPUSDUSDJPYUSDCHF
1.4910 1.6410 93.70 1.0540
1.4705 1.6700 92.75 1.0390
1.4684 1.6660 92.50 1.0365
1.4662 1.6187 92.07 1.0343
1.4653 1.6115 91.25 1.0310
1.4569 1.6040 89.90 1.0220
1.4520 1.6000 89.20 1.0135
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot