FXstreet.com (Barcelona) - EUR/USD continues to seek higher targets ahead of the highly anticipated FOMC meeting, with the market leaving behind a carrousel's of days fully pricing-in a pro-QE3 announcement later today.
As Kathy Lee, Founder at BK AssetManagement, notes: "The recent price action of the U.S. dollar tells us that investors are prepared for QE3 from the Federal Reserve. Knowing this, savvy traders will immediately wonder how much impact a third round of Quantitative Easing can really have if the market has already discounted the announcement"
Amid such extreme unload of USD across the board, EUR/USD sentiment appears to be the most bullish YTD, with the spot rate having peaked at 1.2937 yesterday in last European trade, a number worth noting as it the 61.8% retracements of this year's peak-to-trough fall from 1.3490 to 1.2040.
So what will the Fed do?
The vast majority of commentators expect some form of easing or at a minimum, as Business Insider Joe Weisenthal puts it, "everyone expects some kind of language change (verbal easing)"
An overwhelming majority, as reflected by recent USD selling, sees it obvious that the economy in the US is weak, and with Bernanke reminding how well past QEs have worked in his speech at Jackson Hole, not to forget the last straw being the big miss in last Friday's NFP reports, talking about a fresh wave of money printing announced today seems logical.
On the other hand, there is a case that points towards 'disappointment' being a prospect not that distant. With Europe having kicked the can down the road yet again thru new stimulus policies by the ECB - subject to Spain bailout request - , and the economic data in the US modestly upbeat in general in early September, one may also make the case for another month of 'wait-and-see" by the Fed. Not to forget is election time in the US, and any new 'money printing' may be controversial.
According to Standard Chartered research analysts, they do not expect the Fed to ease today, despite recognizing that the risk of QE3 has risen; "We look for asymmetric trades that will perform well whether or not Fed enacts QE3."
From NAB research team: ""There is "a fairly strong consensus view that the Fed will announce both an extension of the forward guidance regarding the commitment to keep rates low (until well into 2015) and announce a new bound buying program."
UBS economists expect "a new six-month program of asset purchases will be unveiled, totaling at least $500 billion and primarily focused on Treasury securities" Mr. Berry notes
Goldman is expecting something it calls a "double punch" which would mean that the Fed extends its low rates guidance and initiates QE3. Here's Goldman's Jan Hatzius: explaining it further: "A combination of large-scale asset purchases (QE) with a lengthening of the forward guidance for the funds rate from late 2014 to at least mid-2015.
Extension of easing program key for USD reaction - Kathy Lien
Kathy Lee notes: "If the Fed were to announce QE3, there's no doubt that the asset purchase program would extend into January, beyond the elections and the fiscal cliff. At that time, they will probably reassess and see if program needs to be expanded. The smaller the size and span of time that the commitment covers, the better it is for the dollar whereas open-ended QE, which is a low probability scenario would probably be very bearish for the greenback."
"If the Fed passes on QE and only makes changes to their rate guidance, the dollar would most likely soar as investors reverse their QE3 bets. Aside from Quantitative Easing, we are also looking for the central bank to alter the rate guidance language in the FOMC statement and extend their low rates pledge from late 2014 to mid 2015" Kathy adds.
Kathy shares her vision about possible scenarios:
- Low Rates Pledge Extended to Mid 2015 > Dollar Bearish
- Low Rates Pledge Extended Beyond Mid 2015 > Very Dollar Bearish
- Open Ended QE3 > Very Dollar Bearish
- Limited QE3 > Dollar Bearish but Magnitude to Depend on Size and Length of Program
EUR/USD at risk of falling on 'buy the rumour sell the fact'?
"Most QE3 has already been priced in" were the opening remarks from Valeria Bednarik, Chief Analyst at FXstreet.com, at today's Asia open tech report. However, Valeria is prudent on supporting a meaningful USD recovery, saying "yields eased in Italy and Spain, without the ECB spending a cent, a sign that confidence starts to build up in the EU, ergo, such news will only put more pressure over the greenback."
The EUR/USD "could continue to blow higher", says The Saxo Bank analyst John J Hardy, "well above 1.300 and possibly to the 1.33 to 1.34 range if we have a risk positive outcome," from tomorrow's Fed meeting. "With more sideways to eventually downside and a slower position reduction if market risk appetite quickly sours."
Westpac believes that "USD atmospherics have soured quickly as the sluggish US job market has fueled expectations for yet more Fed asset purchases while EUR shorts are squeezed by a proactive ECB. Dollar Index could easily re-test the 2012 lows at 78.095 in coming weeks," Westpac team adds. "That would put EUR/USD near 1.31 with stretch targets of 1.33-1.34."
Sean Lee, Founder at FXWW notes, the EUR/USD may go higher, but he warns, "I sense the easy money has already been made. We can expect some positional adjustment ahead of the FOMC."
John Noonan, Head of IFR Markets, comments: "The market is aggressively pricing in Fed QE III - so the risks are skewed towards disappointment. If the Fed holds off - the EUR/USD could slide towards 1.2650. If the Fed does deliver QE III - the "buy the rumour/sell the fact" effect could result in dip to 1.2750."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.