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by Charalambos Pissouros

Fed Delivers Another Cut, BoC and BoJ Remain on Hold

Yesterday, the Fed decided to cut rates as was widely expected but signaled that it is now planning to stay sidelined. That said, the dollar slid, and US equities gained, perhaps as investors remained unconvinced that no more cuts will follow. Ahead of the Fed, the BoC stood pat, but its statement had a more dovish flavor than previously. Today, it was the BoJ’s turn, which decided to stay on hold as well, and changed its forward guidance to signal more clearly the chances of a future rate cut.

FOMC Cuts Rates, But Signals a Pause

The dollar traded lower against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. The greenback underperformed the most against NZD, AUD and SEK in that order, while gained only versus CAD.

USD performance G10 currencies

Yesterday, the Fed decided to cut interest rates by 25bps, to the 1.50%-1.75% range, as was widely anticipated. However, in the statement accompanying the decision, officials changed their wording and 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 removal of the “act as appropriate” part could have been meant to signal that after this cut, the Fed is planning to stay sidelined, unless things fall out of orbit. Indeed, at the press conference following the decision, Fed Chair Powell said that “monetary policy is in a good place” and that it is likely to “remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook.”

The dollar strengthened somewhat on the Fed’s decision to signal that no more cuts are on the table, but it turned south during Powell’s press conference and today it was found as the second biggest loser among the G10s. It could be due to Powell’s remarks that a significant inflation rise is needed before they start considering hiking again and/or it could be due to investors’ disbelief on the Committee’s decision to end rate cuts. After all, in September, the dot plot pointed to no more reductions this year and the next, and just at the next gathering, they pushed the cut button, with only two members opposing the decision. Those were Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, who opposed all three cuts delivered this year. We believe that the latter is a reason for the dollar’s slide, and this is evident by the yields of the Fed funds futures, according to which investors still see another rate reduction in July next year, as well as by the gains in the US equity markets.

Fed funds futures market vs FOMC interest rate expectations

EUR/USD – Technical Outlook

Yesterday’s boost helped EUR/USD to move sharply to the upside and it is now close to its current high of October, at 1.1180. Given the sharp move up in a short period of time, the pair might go for a small correction first, before another round of buying. That said, in order to get comfortable with higher areas, a break of the 1.1180 zone would be needed, hence why we will stay cautiously-bullish for now.

A strong push above the 1.1180 barrier, marked by the current highest point of October, could open the door to some higher areas. First, we will target the 1.1191 hurdle, a break of which could lift the rate to the high of August 13th, at 1.1228. Initially, EUR/USD might stall around there for a bit, or even correct back down slightly. However, as long as the pair remains above the 1.1180 hurdle, we will continue aiming north. The pair may rise again and move in the direction of the 1.1228 obstacle, a break of which could set the stage for a test of the 1.1249 level, marked by the high of August 6th.

On the downside, if EUR/USD moves back below the 1.1123 hurdle, which is the high of October 25th, this could lead to a deeper move lower. We will then aim for the 1.1107 obstacle, a break of which could clear the path to the 1.1073 zone, which held the rate from moving lower on October 25th and 29th. Slightly below that sits another potential support area, at 1.1064, marked near the high of October 11th and 17th.

EUR/USD 4-hour chart technical analysis

BoC and BoJ Stand Pat, Turn More Dovish

Ahead of the FOMC, we had another central bank deciding on interest rates and this was the Bank of Canada. This Bank decided to hold its target for the overnight rate at +1.75%, but the statement accompanying the decision had a more dovish flavor than previously. Officials said that they are mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persists, and that in considering the appropriate path for monetary policy, they will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment.

Bank of Canada interest rates

The Canadian dollar tumbled at the time the statement was out, perhaps as investors thought the dovish shift meant that policymakers have started flirting with the idea of easing. Indeed, at the conference following the decision, BoC Governor Poloz said that they considered whether the downside risks were significant enough for an insurance cut, but they decided that they were not worth the risks. He added that the situation will require monitoring.

The Loonie was found as the main loser among the majors today, and it could continue trading lower for a while more. Up until yesterday, the BoC was among the very few major central banks that have not turned their eyes to the cut button. However, yesterday’s shift suggests that if incoming data start coming on the soft side, the chances for a rate reduction could grow. With market participants already aware of the easing signals and actions of other Banks, they may now start pricing in the chances of the BoC to follow suit, and if data starts pointing in that direction, the Loonie is likely to stay under pressure.

Today, during the Asian morning Thursday, the central bank torch was passed to the BoJ. Japanese policymakers decided to keep their ultra-loose policy steady, but in the accompanying statement, they altered their forward guidance to signal chances of a future rate cut more clearly. Instead of saying that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”, they noted that short- and long-term interest rates are expected to remain at their present of lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

The yen reacted very little to the announcement, perhaps due to the fact that the Bank said that there had been no further increase in that possibility. It seems that market participants hold the same view with us. Yesterday, we said that with little space to ease further, the Bank may decide to wait for a while and perhaps rely on its signals to do the work for now. The point saying that there was no increase in the possibility of losing momentum towards the inflation target, enhances that view.

CAD/JPY – Technical Outlook

Yesterday, after the BoC interest rate decision, the Canadian dollar took a strong hit against all of its major counterparts, including the Japanese yen. CAD/JPY moved below some of its key levels, but managed to find support near the 100 EMA on the 4-hour chart. Given the sharp move down, we may see a small recovery, but if this move is just seen as a temporary correction, we may get another round of selling, hence why we will remain somewhat bearish, at least for now.

A small rebound could lift the rate slightly higher, but if it fails to move back above the 82.88 hurdle, which is the low of October 24th, this may invite the sellers back into the game. CAD/JPY could then travel back to the 82.44 obstacle, a break of which might send the pair to the 82.02 level, which is marked near an inside swing high of October 15th and near the low of October 16th. Also, this is the area where the rate could test its 200 EMA, which could provide additional support. If the selling continues, a further move down could bring CAD/JPY to the 81.73 level, marked by the lows of October 14th and 15th.

Alternatively, if the pair reverses back up and pushes above the 83.28 barrier, marked by yesterday’s high, this could send the rate a bit higher, to test the 83.55 hurdle. That hurdle marks the high of October 29th. CAD/JPY could stall there for a bit, but if the bulls are still feeling more comfortable, a break of that obstacle may lift the pair o the 83.91 zone, which is the high of April 22nd.

CAD/JPY 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European morning, we get Eurozone’s preliminary CPIs for October as well as the initial estimate of Q3 GDP. The headline CPI rate is expected to have ticked down to +0.7% yoy from +0.8%, while the core one is forecast to have stayed unchanged at +1.0% yoy. The qoq GDP rate is forecast to have ticked down to +0.1% from +0.2%., which would drive the yoy rate down to +1.1% from +1.2%. Coming on top of the disappointing preliminary PMIs for October, inflation rates still well below the ECB’s target of “below, but close to 2%” and an economy flirting with stagnation are likely to encourage market participants to add to their bets with regards to further stimulus by the ECB. However, given that we will have a new Chief from the upcoming meeting, and this would be Christine Lagarde, monetary policy may stay on hold for a while, as she would prefer to evaluate the situation better herself before she and her colleagues start examining whether (or not) more measures are needed.

In the US, personal income and spending for September are due to be released, as well as the core PCE index for the month. Income is expected to have slowed to +0.3% mom from +0.4%, while spending is forecast to have accelerated somewhat, to +0.2% from +0.1%. With regards to the core PCE index, the yoy rate is anticipated to have slid to +1.7% from +1.8%. From Canada, we get the monthly GDP for August, which is expected to have held steady at +0.2% mom.


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