The euro saw volatile trading yesterday on the ECB decision. The Bank kept rates unchanged but paved the way for new easing measures. The euro slid on the statement, but rebounded later and was found higher against all the other G10s this morning. As for today, attention is likely to turn to the 1st estimate of the US GDP as investors prepare for next week’s FOMC decision.
The US dollar traded higher against all but one of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most against NZD, CHF and AUD in that order, while it was found slightly lower only against EUR.
The common currency was the main winner among the G10s, but its ride was anything but smooth. It rather traded in a roller-coaster mode and responsible for that was the ECB. Yesterday, the Bank decided to keep interest rates unchanged, which instantly pushed the euro slightly higher, due to the decent amount of expectations with regards to a rate cut at this meeting. Remember that according to the Eurozone money markets, ahead of the decision, investors were assigning a 48% chance for a 10bps cut in the deposit rate at this gathering.
That said, the currency hit resistance at 1.1160 (against USD) and tumbled as soon as participants dug into the details of the accompanying statement. The first notable change was the alteration of the Bank’s forward guidance. Officials noted that interest rates are likely “to remain at their present or lower levels at least through the first half of 2020”, with the “or lower levels” being the important addition that officially lays the groundwork for a potential cut in September. But in our view, this was largely expected. After all, the market has been already more-than-fully pricing in a 10bps cut for the September meeting. What may have triggered the selloff was the part saying that a cut may be accompanied by more measures, such as a restart of QE.
At the press conference following the decision, President Draghi reiterated that the risks surrounding the euro area growth outlook remain tilted to the downside, and added that incoming data and survey information continue to point to somewhat slower growth in the second and the third quarters of this year. However, EUR/USD hit support a pip above the 1.1100 hurdle and rebounded to even trade above its pre-decision levels. This may have been a short squeeze as Draghi did not reveal anything much more dovish than the statement did, and/or because he said that there was no discussion about taking action at this gathering. The ECB Chief said that they want to see the next projections before taking action, as all this is pretty complex and needs preparation.
Moving ahead, although the euro could continue trading north for a while, we believe that its fortune heading into the September meeting will depend on incoming data. Bearing in mind headlines suggesting that after the meeting ECB officials said that a September cut appears certain, we believe that the focus will now fall on whether the cut will indeed be accompanied with the restart of QE or not. Further disappointment in Euro area economic numbers could raise concerns that only a 10bps cut may not be enough and thereby bring the euro under selling interest. On the other hand, data improvement may suggest that no other measures are needed, which in turn, may keep the currency supported.
In the beginning of the day yesterday, the euro kept depreciating against all of its major counterparts. The Japanese yen was no exception. But in the afternoon, during the Mario Draghi’s press conference, the common currency reversed and EUR/JPY moved sharply to the upside, breaking above its short-term tentative downside line, taken from the high of June 30th. After that, the rate climbed a bit higher, where it found good resistance near the 121.37 area, from which it corrected back down, but remained above the aforementioned downside line. For now, we will take a cautious approach and in order to aim further north, we will wait for a confirmation break through the above-mentioned resistance area.
A strong push through the 121.37 barrier could open the door to the next potential resistance zone, at 121.68, marked by the high of July 16th. That zone coincides with the 200 EMA on the 4-hour chart, which may also help keep the pair lower, for a while. We may even see a small correction back down from there, but as long as EUR/JPY stays above the aforementioned downside line, we will continue aiming higher. If the bulls make another run and push the pair above the 200 EMA, this may lift the rate a bit higher, where it could test the 121.85 hurdle, marked by the high of July 15th.
Alternatively, a drop back below the downside line and a rate-fall below the 120.78 zone, marked by the lows of July 18th and 21st, could spook the bulls from the field and EUR/JPY may slide further. This is when we will target the 120.56 obstacle, a break of which may push the pair towards the 120.20 level, marked by the low of July 24th.
Flying back to the US and its greenback, with Wednesday being the exception, the US currency has been performing very well this week, perhaps as market participants have been digesting even more the idea that the Fed may not proceed with an aggressive 50bps cut when it meets next week. With that in mind, we believe that today, USD-traders are likely to turn attention to the 1st estimate of the US GDP for Q2.
The forecast suggests that the economy slowed to +1.8% qoq SAAR from 3.1% qoq SAAR. That said, according to the Atlanta Fed GDPNow model, the economy grew only 1.3% qoq SAAR, while the New York Nowcast points to just a +1.4% growth rate. Therefore, we would consider the risks surrounding the official GDP forecast as tilted to the downside. The case for a slowdown is also supported by the slide in the 3-month rolling average of a weighted composite index we built based on the ISM PMIs.
A more-than-expected slowdown could add more credence to the notion of a Fed cut next week, and it may revive bets with regards to a “double” decrease. However, we repeat for the umpteenth time that we don’t expect the Committee to act so aggressively. Even St. Louis Fed President James Bullard, who was the only member voting for a quarter-point rate decrease at the latest FOMC meeting, said that he would like to go with 25bps.
As for the dollar, although it could slide on a disappointing GDP print, we stick to our guns that there is not much downside room. Although investors have recently pared bets with regards to a “double cut” next week, they remain overly pessimistic over the Fed’s future plans. According to the Fed funds futures, besides next week’s 25bps cut, they see another one in October and a third one in March next year. We believe that matching market expectations may be a hard task for the Fed if future data and developments are on the positive side. On the contrary, investors would have to adjust their bets, pricing out some of the basis points they expect to be cut. This could prove supportive for the dollar, but of course we first have to wait and see what signals we will get from the Fed next week.
Yesterday, USD/CHF had a good push through its medium-term tentative downside resistance line taken from the high of May 7th, which may have opened the door to some higher levels. At the same time, the pair is trading above a couple of tentative upside lines, one of which is taken from the lowest point of June, and the other, a slightly steeper one, is drawn from the low of July 22nd. After finding good resistance near the 0.9919 barrier, USD/CHF corrected slightly lower. Given the yesterday’s sharp rise, there is a possibility to see some more correction before another leg of buying, hence why we will stay cautiously-bullish for now.
A small correction back down could test two of our lines, the aforementioned downside line from above and the steeper short-term upside one as well. This may be around the 0.9875 area, which also is the high of July 24th. If the rate struggles to move below all of those obstacles, this is when the bulls could take advantage of the situation, step in and drive USD/CHF back up towards the previously-mentioned 0.9919 barrier. If that barrier fails to withstand the bull-pressure, a break of it might clear the way to the 0.9950 level, marked near the high of July 9th.
Alternatively, in order to shift our view towards the downside, we will take a more conservative approach and wait for a break of the aforementioned short-term upside line taken from the lowest point of June. Only then we will consider a possible further slide, where the next potential support area might be seen at 0.9805, which is near the lows of July 18th and 22nd. Initially, we may see a hold-up around there, but if eventually that support area breaks, this could send USD/CHF to the 0.9775 level, marked by the inside swing high of June 28th.
Apart from the US GDP data, we don’t have any other tier-1 indicator on today’s agenda. The only release worth mentioning is the UoM consumer sentiment index for July, but again, this is the final print, for which no forecast is currently available. Just for the record, the preliminary stands at 98.4.
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