The US dollar traded higher, while equities slid, in the aftermath of the FOMC decision, as the Fed appeared less dovish than expected, with 4 members seeing interest rates at higher levels in 2023, despite the economic projections pointing to a 2% inflation through that year. As for today, it is the turn of the BoE to decide on policy, with investors looking for clues as to whether more stimulus could be introduced soon.
The US dollar traded higher against all but two of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most versus NOK, SEK, CAD, and EUR in that order, while it underperformed somewhat only against JPY and GBP.
The strengthening of the safe-havens yen and dollar suggests that financial markets traded in a risk-off manner from some point onwards. Indeed, looking at the performance in global equities we see that, although most major EU indices finished in the green ahead of the FOMC decision, in the aftermath, the US and Asian ones traded in negative waters, with the only exception being the Dow Jones, which gained 0.13%.
Yesterday, the main event on the agenda was the FOMC monetary policy decision. The Committee kept its policy unchanged, keeping interest rates within the 0-0.25% range, but changed its inflation language noting that they “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2 percent.” With regards, to the new economic projections, officials revised up their GDP and inflation forecasts, and downgraded the unemployment rate ones, while the new dot plot suggested that interest rates are likely to stay at present levels at least through 2023. That said, looking at the details, we see that one member was in favor of a hike in 2022, and four saw rates higher in 2023. Combined with the inflation forecast of 2023, which is at 2%, this shows that some members may not be willing to tolerate inflation above target for long as pointed in the decision statement. At the press conference, Chair Powell said that the current policy stance remains appropriate, but they remain ready to adjust it if economic conditions change.
The dollar traded higher and equities slid in the aftermath of the decision, something hinting that market participants were positioned for a more dovish outcome. As we noted yesterday, market chatter suggested that officials may switch their purchases towards more long-dated bonds, in order to keep long-term yields low, but there wasn’t any reference to that in the accompanying statement. The fact that four members saw interest rates higher in 2023, even with inflation at 2%, may have also served as a disappointment to those expecting a more dovish outcome. In our view, the dollar may continue drifting north and equities may continue to slide as investors digest the decision, but the Committee’s readiness to do more if deemed necessary may keep those reactions limited. As we noted several times in the past, we believe that the extra-loose monetary and fiscal stance around the globe, combined with positive headlines surrounding a potential coronavirus vaccine, may eventually help equities to rebound, and put the US dollar under renewed pressure.
Following the Fed, during the Asian morning today, it was the turn of the BoJ to announce its monetary policy decision. As was widely expected, this Bank kept short-term interest rates at -0.1%, and the target of its 10-year JGB yields at around 0%. The only notable change was the somewhat upgraded view on the economy. “Japan’s economy remains in a severe state but has started to pick up as business activity gradually resumes,” officials noted, while last time, they said that the economy was in an “extremely severe state”. The yen barely reacted to the release, confirming our view that, due to its safe-haven status, it remains mostly linked to developments surrounding the broader investor morale.
After rebounding from its short-term upside support line drawn from the low of September 1st, USD/CAD also made its way back above the 200 EMA on the 4-hour chart, which some new buyers could see as a positive. That said, in order to get a bit more comfortable with larger advances, a break of the current highest point of September, at 1.3260, would be required.
A strong push above the previously-mentioned 1.3260 barrier may invite a few more bulls into the field, as such a move would confirm a forthcoming higher high. USD/CAD could then rise to the 1.3319 obstacle, or even test the 1.3346 zone, which is the high of August 12th. The pair might get a hold-up around there temporarily, however if the buyers are still feeling confident in themselves, a further move north could set the stage for a push to the 1.3398 level. That level marks the high of August 7th.
On the downside, a break of the previously discussed upside line and a rate-drop below the 1.3158 hurdle, marked by yesterday’s intraday swing low, could spook the bulls from the field for a while. Such a move might increase the pair’s chances of sliding further south, possibly aiming for the 1.3118 and 1.3127 levels, marked by the lows of September 10th and 16th respectively. USD/CAD could stall there or even rebound back up a bit. However, if the rate continues to trade below the aforementioned upside line, the bears might take charge again. If this time they are able to place the pair below the above-discussed support are between the 1.3118 and 1.3127 levels, that could clear the path to the 1.3075 zone, which is an intraday swing low of September 7th.
As for today, the central back torch will be passed to the BoE. This will be one of the “smaller” meetings, where we get only the decision, the accompanying statement, and the meeting minutes. With that in mind, and also taking into account that Governor Bailey recently noted that they are not planning to adopt negative interest rates at the moment, we do not expect any action at this gathering, even after inflation slowed notably in August. However, we will dig into the statement and the minutes to see whether the chances for such an action have increased since the last time the Bank met. We will also look for hints as to whether officials are thinking to expand their QE program, given that negative rates are not appropriate at the moment. One of the members that could vote for an increase in QE even at this gathering may be Michael Saunders, who has recently said that it is “quite likely” that the economy will need more stimulus.
As for the pound, it may react negatively in case there are strong hints for additional stimulus by the BoE. However, its broader path may depend on developments surrounding the political landscape. Remember that, last week, the UK pressed ahead with a draft law that will override key parts of the withdrawal agreement, despite the EU urging them to scrap such plans, with the plan receiving an initial support in the UK parliament this week. In our view, all this lessens drastically the chances for any trade accord before the self-imposed October 15th deadline, and increases the probability for a no-deal Brexit at the end of this year. Although the pound recovered some ground lately against its US counterpart, we are reluctant to call for further advances, as the increasing chances for a no-deal Brexit may eventually bring the British currency under renewed selling interest.
From around September 11th, GBP/JPY is resting on one of its key support areas between the 135.41 and 135.55 levels, marked by the lows of September 15th and 16th respectively. At the same time, the pair continues to trade below its short-term tentative downside resistance line taken from the high of September 1st. As long as that downside line remains intact, the current trend might stay to the downside. That said, to get a bit more comfortable with lower areas, a rate-drop below the 135.41 hurdle would be needed, hence our cautiously bearish approach for now.
If, eventually, we do see a drop below the aforementioned 135.41 zone, that could attract more sellers into the game, as a forthcoming lower low would be confirmed. GBP/JPY might then travel to the 135.00 obstacle, a break of which may clear the path to the 134.00 level. That level is marked near the low of July 14th.
In order to consider the upside again, we would first need to see a violation of the previously discussed downside line and then a push above the 137.75 hurdle, marked by an intraday swing low of September 10th. Such a move may clear the way towards the high of that day, at 138.36, a break of which could clear the way to the 139.60 level, marked by the low of September 7th.
During the European morning, we get Eurozone’s final CPIs for August, but as it is always the case, they are expected to confirm their preliminary estimates.
From the US, we have the initial jobless claims for last week, and the housing starts for August. Initial jobless claims are forecast to have declined somewhat, to 850k from 884k the week before, while housing starts are forecast to have slid 1.2% after surging 22.6% in July.
Tonight, during the Asian session Friday, we have Japan’s National CPIs for August. No forecast is available for the headline rate, but the core one is forecast to have slid to -0.4% yoy from 0.0%.
As for the speakers, we have only one on today’s agenda, and this is ECB Vice President Luis de Guindos.
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