In anticipation of FRS decision

Uncertainty forces players to actively reduce long positions in dollar
The noise made by ECB has settled down, the election in Greece and talks regarding extension of Euro-QE until 2017 have not been in focus so far. The market is waiting for the event of the year - the decision regarding the American rates. The week was noted with a united opposition of interested parties (banks, investors, officials) against the planned FRS rate increase; however, those who can make this decision have avoided making any comments. Two ranges of possible increase are being considered: 0.15 - 0.35 and 0.25 - 0.50, where the first variant looks more logical - then the lower boundary will be almost equal to the current federal funds rate.

FRS experts lowered GDP and inflation forecasts, as well as made a revision of employment maximum below 5.0%, which is considered as a sufficient basis for transfer of increase date at least to December. The inflation forecast also directly depends on FRS actions, since oil price will grow in case of unchanged rate and will decline in case of raise. Presently, the following variant are possible depending on two sets of information:

The rate will not change, Yellen's tone of speech will be negative.
Possible results: downfall of stock market - decline of consumer demand - decline of GDP/inflation. Negative rhetoric with the threat of increase at the closest meetings will force markets to put up with inevitable; however, the liquidation of bubbles on the US stock and debt market will be very slow (can be regulated through investments). Then, the stock bubble may deflate completely by December, the yield of 10-tear state treasury bills will reach 2.0%-2.70%, which will suppress the outflow of investors after rate increase. If S&P is around 1900 or below before the FRS decision, then this variant will be the most likely outcome. It is the most favorable for prudent Yellen; besides, the transfer of FRS rate increase to the end of the year will pull together the monetary policies of FRS and ECB. The later FRS will go into action, the closer the end of Euro-QE and the shorter the period of USD rate growth will be after the increase of the American rate.

The rate will be raised in the range 0.15% - 0.35%, the tone of speech will be positive.
Possible results: satisfaction of those who want rate increase and reduction of pressure on the stock market; in this regard, enough time will be left for the required growth of economy and improvement of consumer sentiments before 2016 presidential election. It is a quite likely variant for Yellen who is worn out with uncomfortable questions; moreover, there will be an opportunity to shift a part of responsibility to the Congress, which continuously blames FRS for lying and electorate manipulation.

The rate will not change, Yellen's tone of speech will be - positive.
Possible results: growth of stock and raw material markets, stock bubbles will only grow, the yield of state treasury bills declines to minimums along with an active flight of investors from long-term securities. That is the most improbable variant. In that case, the field for further FRS economic maneuvers will narrow, it will not be possible to change rates and control stock market in the nearest future. The detailed plan for such actions has not been developed at all; however, if Yellen thinks of her future as the FRS Chair under the next US President, we can't rule out this variant. Sunday's "brushed" data regarding Chinese statistics, traditionally, do not have any credibility; however, they have fulfilled their task - the Asian stock market slightly stabilized by the beginning of the week.

The Bank of Japan disappointed speculators - no changes in the monetary course were voiced in the so much expected statement, also, there were no hints regarding the increase of stimulation volumes. All the implemented measures were recognized as effective (US FOMC has been making the same "wording" for several years), and the global process of slowing down of developing markets is to be blamed for the export volume and PPP decline. After two yesterday's sessions of decline, JPY continues to grow stronger in all the market, putting pressure on the global stock indexes. The symmetrical triangle that was formed was penetrated downward, it is necessary to watch the basic support at level 119.00, from which an upward turnaround is possible after Wednesday evening.

Eurozone data have no special meaning this week. Today, Great Britain will publish inflation statistics, if CPI drops down to zero again, the pressure on GBP/USD will grow. The pair is still in the range 1.5470 - 1.5330. German ZEW, French inflation (Tuesday), Eurozone countries' inflation (Wednesday) data may cause short-term movements in the current range of 60-80 points. It is recommended to turn our attention to rates, and the statement made by the Swiss National Bank - that regulator makes statements only once in a quarter and has been fond of making surprises lately. The most important data on the USA: retail sales on Tuesday and inflation on Wednesday - in any case, the response, taking into consideration those data, will be delayed until the FRS meeting.

Uncertainty forces players to actively reduce long positions in dollar. Before the FRS meeting, besides carry traders' operation, it is expected to have large currency positions in dollar and strong influence on pairs through funding currencies via crosses. Stock markets, raw materials, and raw material currencies may produce the most sharp reaction to the FRS decision. The following can be noted from the basic currencies: GBP/USD - growth under unchanged rate, since it is expected that BoE must raise its rate prior to FRS; EUR/USD - will operate in about the same way; however, in case of Yellen's hawk rhetoric and lowering of forecasts on the US economy, the growth of EUR/USD will last for a long time. And something else regarding euro: in case of rate increase, we should wait for a short-term downward peak by about a figure, with a fast upward movement due to active crossflow of capital form stock assets. Intraday resistance: 1.1270 - 1.1290. Crossing 1.1360 will be restrained by mid-term range 1.1410 - 1.1440. There is quite a strong barrier of those who want to buy dollars at level 1.1390, they make about 7% of the whole market. General strong support: 1.1220 - 1.1190. Regardless of the direction of the FRS first jump, the basic movement at this stage will go upward.

Author: Navsher Bartash,
ForexChief Currency strategist