Daily Market Outlook, September 23rd, 2021

Overnight Headlines

  • Fed Tees Up Taper And Signal Rate Rises Possible Next Year
  • Fed Doubles Reverse Repo Counterparty To Buoy Short-End
  • US House GOP Squeezes Pelosi On Bipartisan Infrastructure
  • Senate Dem See Debt Limit Deadline Showdown Next Week
  • Biden Tap Crypto, Big-Bank Critic To Run Banking Watchdog
  • China Pumps $17Bln Into System Amid Evergrande Concern
  • Fitch Drop China 2021 GDP Forecast On Property Slowdown
  • Evergrande Chair Seeks To Reassure Investors, Shares Surge
  • Evergrande Second-Biggest Shareholder Plans Sell All Shares
  • Australia's Lockdown, Vaccinations Appear To Suppress Delta
  • BoE Expected To Keep Rates Steady As Inflation Risks Mount
  • FDA Clears Pfizer Covid Booster For Older, At-Risk Americans

The Day Ahead

  • Ahead of the Bank of England announcement at midday, expect the UK ‘flash’ PMIs to show the manufacturing measure edging down further in September to 58.0 from 60.3, but services may see a modest rebound to 55.5 from 55.0. The Eurozone flash PMIs are expected to show continued robust growth, albeit with a further slight loss of momentum. Markets will also be on the lookout for the Norwegian central bank to raise interest rates by 25bps to 0.25%.
  • The BoE will be providing a policy update against a background of mixed economic data. The pace of growth appears to have slowed in recent months, while CPI inflation, jumped sharply in August to 3.2% and is expected to potentially reach 4% before year-end. The BoE will also be aware that the Budget on 27 October may see some further tightening of fiscal policy, while the impact of the furlough scheme ending this month also needs to be factored in by policymakers.
  • This is not one of the meetings where the MPC issues a new Monetary Policy Report and a forecast update, so there is no scheduled press conference. The Committee’s vote on the continuation of the current £895bn tranche of asset purchases may again be split 7 to 1, with external member Michael Saunders once more voting for an early ending. This month’s deliberations also includes two new MPC members: Huw Pill (the Bank’s new chief economist) and Catherine Mann.
  • Overall, the MPC’s policy guidance may have implications for market interest rate expectations. No change in interest rates is likely today, but markets are now discounting 40bps of increases to 0.5% by end 2022. In hardening its forward guidance in August, the MPC acknowledged that “some modest tightening in monetary policy” will probably be necessary over the forecast period, but an interesting question is whether they now feel that the market is now too hawkish.
  • One thing that could complicate the MPC’s message is whether a majority think that minimal (necessary but not sufficient) conditions for policy tightening has been met (4 out of 8 thought so in August). Markets may see that as a hawkish development, although that does not mean a policy move is imminent.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

  • USDJPY - 112.00 618m. 111.00 665m. 110.50 415m. 110.10/20 622m. 110.00 805m. 109.80/90 650m. 109.60/70 1.32bn (1.02bn C). 108.80/109.00 852m. 108.20/30 699m.
  • EURUSD - 1.1790/1.1800 1.87bn (1.04bn C). 1.1740/50 2.73bn (2.00bn P). 1.1720/30 972m. 1.1700 4.14bn (3.68bn P).
  • GBPUSD - 1.3800 742m. 1.3700 756m. 1.3600 596m.
  • AUDUSD - 0.7300/20 558m. 0.7250/60 765m. 0.7230/40 1.72bn (1.27bn P). 0.7170/90 826m. 0.7150 769m.
  • NZDUSD - 0.6950 416m.
  • USDCAD - 1.2850 698m. 1.2820 471m. 1.2690/1.2700 1.19bn (1.11bn P). 1.2650/60 1.05bn (50/50 C/P). 1.2620/30 1.26bn (715m P). 1.2600 1.75bn (1.30bn C).
  • AUDNZD - 1.0900 470m.
  • USDSGD - 1.3540 816m.
  • USDCNH - 6.50 836m. 6.48 414m. 6.47 759m.

Technical & Trade Views

EURUSD Bias: Bearish below 1.19 Bullish above

  • Moves back above 1.1700 as option expiries underpin
  • EUR/USD opened 0.32% lower at 1.1687 after FOMC deemed hawkish
  • It traded 1.1683 before attaining a bid tone on small EUR/JPY demand
  • Large option expiries around 1.1700 helped to draw the price action
  • Heading into the afternoon the EUR/USD is at session high around 1.1700
  • Technicals lean bearish after EUR/USD completed a bearish outside day
  • The 5, 10 and 21-day MAs are aligned in a bearish formation and tilt lower
  • Resistance is at the 10-day MA at 1.1758 and break would ease pressure
  • Support and objective of move lower is the 2021 low at 1.1664

GBPUSD Bias: Bearish below 1.39 Bullish above.

  • Bid above major support zone into Bank of England
  • +0.1% with USD softer, at the top of a 1.3615-1.3632 range, modest volume
  • China-Evergrande issue calm for now, but plenty of hurdles
  • BoE to keep rates steady, focus on the impact of inflation outlook
  • USD strength weighs on sterling - little reason for this to change
  • Charts; momentum studies slip, 5, 10 & 21 day moving averages slide
  • 21 day Bollinger bands expand- strong bearish setup while 1.3765 21 DMA caps
  • 1.3602 August low under pressure, with 1.3566/72 Feb July base support below
  • Sustained 1.3566 break targets 1.3166, 38.2% of 2020-2021 rise

USDJPY Bias: Bullish above 109 Bearish below

  • Gently bid with risk – cloud likely resilient
  • +0.05% at the 109.86 cloud base, after trading in a 109.78-109.92 range
  • Tokyo holiday obviously diminishes both liquidity and interest
  • Positive markets; E-mini S&P +0.25% and AsiaxJP +0.35% and Brent +0.35%
  • Wednesday's bounce saw a bullish outside day and a strong base above 109.00
  • Charts; daily cloud remains major September resistance, 109.86-110.19 today
  • Horizontal 109.63 Tenkan and 109.78 Kijun lines suggest range trading
  • 109.11 has survived four tests since mid August, so significant support
  • Trading 109.10 110.20 range with tight stops provides value

AUDUSD Bias: Bearish below 0.75 Bullish above

  • AUD/USD opened 0.12% higher at 0.7241 as risk rally trumped hawkish Fed...
  • After trading 0.7244 - the AUD/USD came under gentle pressure in Asia
  • It traded to 0.7223 and heading into the afternoon it is 0.7225/30
  • The 0.7220/25 level has held the past 4 days as bids tipped at 0.7220
  • A break below 0.7220 targets the 76.4 of the 0.7106/0.7477 move at 0.7194
  • AUD/USD likely to remain vulnerable after Evergrande relief rally runs its course
  • Divergent central bank expectations between RBA and Fed should limit upside
  • Resistance is at 10-day MA at 0.7289 and break would ease downward pressure