Today is FOMC day! This will be one of the bigger meetings, where we also get updated economic projections, including the new “dot plot”. Thus, investors, who are still pricing in another cut next year, will be eager to find out what the new dots will suggest. In the UK, a new opinion poll showed that the Conservatives’ lead has narrowed, raising concerns over another hung parliament.
The dollar traded higher against the majority of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most versus NZD, and NOK, while it underperformed versus CHF, SEK and EUR.
In the equity world, most major EU and US indices closed slightly in negative territory (the exceptions were the French CAC 40 and Italy’s FTSE MIB), while today, Asian bourses were mixed. Japan’s Nikkei slid 0.14%, while China’s Shanghai Composite rose 0.24%. Yesterday, a report said that the December 15th deadline for the imposition of US tariffs to Chinese imports could be delayed. However, the same report noted that US President Trump has not decided yet on doing so, while White House economic adviser Larry Kudlow said that that “those tariffs are still on the table”.
The uncertainty on whether (or not) the tariffs will be imposed kept investors cautious. They may have also remained careful ahead of the FOMC meeting today, as well as the UK elections and the ECB meeting tomorrow.
As for today’s FOMC gathering, this will be one of the bigger meetings, where apart from the statement and the press conference by Chair Powell, we also get updated economic projections, including the new “dot plot”. At the latest FOMC meeting, the Committee decided to cut interest rates by 25bps as was widely anticipated, but in the statement accompanying the decision, they changed their wording. Instead of noting that they will “act as appropriate” to sustain the economic expansion, they said that they will “monitor the implications of incoming information for the economic outlook” as they assess the appropriate path.
The message we got is that the Fed is planning to stay sidelined, unless things fall out of orbit. Nonetheless, investors remained unconvinced that that policymakers are done cutting rates, and according to the Fed fund futures, even after Friday’s strong employment report, they still price in another quarter-point cut next year. They just pushed the timing back, from July to September. Thus, all the attention will be on whether policymakers will stick to their “sidelines” wording, and whether the new dot plot will still point to no further cuts next year. If this is the case, investors may eventually take their 2020-cut bets off the table, something that may help the dollar strengthen.
USD/JPY traded somewhat higher yesterday, breaking above the resistance (now turned into support) barrier of 108.67. The rate appears to be forming a “double bottom” pattern, with the bottoms formed at around 108.43. However, we believe that a move above 108.93 is needed to signal the completion of the formation. Until that happens, we will stay on the sidelines.
If indeed the bulls manage to reach and breach the 108.93 barrier, this may allow them to drive the battle towards the high of December 3rd, at around 109.20. They may decide to take a break near that zone, thereby allowing the rate to correct lower. However, as long as the correction stays limited above 108.93, we would see decent chances for another leg north and another test near 109.20. If that hurdle gets broken this time, the advance may be extended towards the 109.33 zone, marked by the low of November 28th.
Looking at our short-term oscillators, we see that the RSI lies above 50 and points up, while the MACD lies above its trigger line, points up as well, and looks ready to obtain a positive sign soon. Both indicators suggest that the rate may start picking up positive speed, which supports the case for some further recovery.
On the downside, we would like to see a clear dip below 108.43 before we start examining whether the bears have gained the upper hand. Such a move would confirm a forthcoming lower low on the 4-hour chart and may initially trigger declines towards the 108.27 level, defined by the low of November 21st. Another dip, below 108.27, may allow the bears to aim for the 108.07 level, marked by an intraday swing high formed on November 1st.
The pound traded slightly lower against its US counterpart, but the ride was not as smooth as it seems. Cable has been drifting higher during the most part of the day, but hit resistance near 1.3215 and then it tumbled around 100 pips after a poll showed that the lead of the Conservative Party has narrowed. While previous polls have been forecasting a majority of up to 68 parliamentary seats, this one showed that the Tories are now on course for a 28-seat majority.
The poll has raised concerns that a hung parliament is not off the table, a result that would bring back to light the risk of a disorderly exit. As we noted in the past, we would stay sidelined ahead of the actual results as we find it hard to trust opinion polls. After all they were wrong in estimating the Brexit referendum outcome back in 2016, as well as the results of the 2017 election. As for the pound, we repeat that the risks surrounding its reaction may be asymmetrical. It could gain in case the Tories indeed gain majority, but we don’t expect a huge rally, as, judging by the pound’s latest rally, most of that outcome appears to be already priced in. On the other hand, a hung parliament may be a big disappointment, pushing the pound off the cliff. Yesterday’s poll, even still pointing to Tory majority, gave us a taste on how much GBP-traders are afraid of that outcome.
GBP/CAD traded lower on Tuesday after it hit resistance slightly above the 1.7475 barrier. Overall, the rate is trading above the upside support line drawn from the low of October 14th, and thus, even if the retreat continues for a while more, there is still a decent chance for the bulls to take charge from near the crossroads of the upside line and the 1.7270 level.
If indeed this is what happens, the bulls could aim for another test near 1.7475. However, a break above that barrier is needed to signal a trend continuation. Such a move could pave the way towards the high of May 9th, at around 1.7570, the break of which may allow extensions towards the peak of May 7th, at around 1.7630.
Shifting attention to our short-term oscillators, we see that the RSI slid, but hit support near its 50 line and turned up again. However, the MACD, although positive, lies below its trigger line, pointing down, which adds to our view for some more correction before, and if, the bulls decide to shoot again.
In order to start examining a bearish reversal, we would like to see a dip below 1.7190. The rate would already be below the aforementioned upside lie and could initially aim for the 1.7120 zone, marked by the low of December 2nd. Another dip, below that hurdle, may trigger extensions towards the low of November 27th, at around 1.7020.
Ahead of the FOMC decision, we will get the Swedish and US inflation data for November. Kicking off with Sweden’s numbers, both the CPI and CPIF rates are expected to have increased to +1.7% yoy and +1.6% yoy, from 1.6% and 1.5% respectively. We will also pay extra attention to the core CPIF metric, which ticked up to +1.7% in October from +1.6% in September. At its previous meeting, the Riksbank kept its repo rate unchanged at -0.25%, but changed its forward guidance saying that the rate will most probably be raised to zero in December. Thus, accelerating inflation is likely to seal the deal for such an action.
As for the US numbers, the headline rate is forecast to have risen to +2.0% from +1.8%, while the core one is anticipated to have held steady at +2.3% yoy. Although something like that would be encouraging news for USD-traders, we don’t expect a major market reaction, as they will most probably have their gaze locked on the FOMC decision later in the day.
With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude oil inventories. The forecast points to a 2.763mn barrels declines, after a 4.856mn slide the week before. That said, yesterday, the API report revealed a 1.410mn barrels increase and thus, we see the risks surrounding the EIA forecast as tilted to the upside.
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