FX Update: Dissonance across markets ahead of FOMC

Looking at the major US and some other equity indices globally and to a degree the safe haven bonds, we are seeing a relatively robust bounce-back from coronavirus fears as the most liquid markets are trying to erase the two-day slide from Friday and  Monday, while many China-linked commodities like copper, iron ore, and to a degree crude oil, are dead in the water as the market. News of virus spread aside, anecdotal reports of activity on the ground across large portions China having ground to a halt are a concern for near term demand of nearly everything, as are announcements of reductions, and even total halts in the case of British Airways, to air travel in and out of China. In short, we remain cautious on risk appetite.

FOMC preview
The chief focus over tonight’s FOMC meeting likely to be in the Powell press conference more than in any alteration to the policy statement as the next critical step for the Fed is to communicate its balance sheet growth plans from here – both its approach to ongoing repos and the purchases of T-bills after indicating that purchases will continue “at least into Q2 2020”. Does that mean April or June and what is the signaling on the pace of purchases after the $60 billion per month? Otherwise, the market will look for how badly the coronavirus outbreak has impacted the Fed’s near term outlook. Not sure the market will be very reactive unless the Fed bring (unlikely) very dovish guidance today, as the Fed’s moves thus far have failed to weaken the USD – so it may continue its march higher after the meeting – watching EURUSD as the most obvious barometer on that account, as USD/EM is as much affected by coronavirus/risk appetite correlations.

BoE preview
The drama around the Bank of England decision tomorrow is more readily easy to perceive as the market is evenly divided between those looking for a rate cut and those looking for the Bank to stand pat to see if some of the strong resurgence in sentiment surveys begins to show up iin other data. The coronavirus offers the perfect excuse for one last dovish flourish from the Carney BoE before the governor retires on Friday – either way, while tactical moves could prove large either way due to the market pricing 50/50 odds, any rally may be held back by ongoing positioning headwinds and the wait for trade deal developments, while downside move might have more room to cut lower if the 1.2900 area fails in GBPUSD, for example. Short term options strategies for EURGBP downside (long 1-month 0.8400 EURGBP puts) for GBP bulls and GBPUSD downside (long 1.2900 2-week puts) for GBP bears (long GBPUSD puts) are one way to trade tactically while limiting downside risk to the options premium risked on the trade.

Chart: EURUSD
We trot out the EURUSD chart once again ahead of the FOMC meeting as the market focus on the status for the USD and for this important pair on the other side of the FOMC meeting over the obvious 1.1000 pivot area. Momentum points to further downside risks, though every major break over the last eighteen months and more has failed to lead to a notable trend extension in either direction. The 1.0900 area and nominal intraday lows just below are the next obvious focus for bears on a break of the big 1.10 level.