The dollar tumbled against all the other G10 currencies yesterday after the Fed kept its monetary policy unchanged but opened the door to lower interest rates. Overnight, the BoJ stood pat as well, keeping its forward guidance untouched. As for today, the central bank torch will be passed to the Norges Bank and the BoE. We believe that Norwegian policymakers are likely to hit the hike button today, while with regards to the BoE, we expect it to stay on hold and keep its outlook for an ongoing tightening unchanged.
The dollar traded lower against all the other G10 currencies on Wednesday and during the Asian morning Thursday. It fell the most against CAD, NOK, CHF and GBP in that order, while the currency against which the dollar underperformed the least was AUD.
Responsible for the greenback’s tumble was the FOMC. The Committee decided to keep interest rates unchanged yesterday, within the 2.25-2.50% range, but the decision was not unanimous. One member, St. Luis Fed President Bullard, voted for a rate decrease. In the accompanying statement, officials dropped their “patient” language and instead noted that in light of increased uncertainties surrounding the economic outlook and muted inflation pressures, they will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
As far as the much-awaited dots are concerned, the median for 2019 remained unchanged at 2.375, but looking at the dots independently, we see that 8 out of the 17 members were in favor of lower rates this year. One member voted for one cut, while the other seven supported the case of two, near what market participants anticipated ahead of the gathering. The medians for 2020 and 2021 were revised down to 2.125 and 2.375 respectively, both from 2.625. In other words, the median dots now suggest no cuts this year, one cut in 2020, and a hike in 2021. With regards to the other economic projections, officials upgraded somewhat their GDP forecast for 2020, but downgraded their inflation ones for this year and the next. At the press conference following the decision, Fed Chief Jerome Powell highlighted the increased uncertainty surrounding the global trade front and noted that, though some officials wrote down rate cuts and others did not, their deliberations make clear that a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since the May meeting.
Yesterday, we noted that a median dot pointing to 2 cuts this year was needed for the greenback to come under strong selling interest. However, it seems that investors went beyond the median dot, paying close attention to the details and the decent number of members supporting the case for two quarter-point cuts by December. The dots, combined with Bullard’s dissent and Powell’s remarks over a strengthening case for easing, have encouraged market participants to add to their cut bets, thereby selling the greenback and buying stocks. According to the Fed funds futures, investors are now fully pricing in a cut for the next gathering, in July, while another one is nearly priced in for September. Even a third one is almost factored in for December.
Overnight, it was the BoJ's turn to decide on monetary policy. Japanese policymakers decided once again to keep their ultra-loose policy unchanged via a 7-2 vote, also maintaining the forward guidance that the current extremely low levels of interest rates are likely to stay unchanged “at least through around spring 2020”. They also noted that Japan’s economy has been on a moderate expanding trend and that it will continue to do so, despite being affected by the slowdown in overseas economies for the time being. The yen strengthened somewhat at the time of the announcement (around 15 pips against USD), perhaps as the Fed’s dovish shift may have raised expectations that the BoJ would also sound more dovish, perhaps by pushing back its forward guidance on interest rates.
USD/JPY traded lower following the FOMC’s decision to open the door to lower US rates, while during the Asian morning today, it dipped below the key support barrier of 107.85, to trade in territories last seen in the beginning of January. The dip confirmed a forthcoming lower low on both the 4-hour and daily charts, which, combined with the fact that the rate is trading below the downtrend line drawn from the peak of April 24th, keeps the outlook negative.
At the time of writing, the rate is sitting slightly above the 107.50 barrier, which is marked by the low of January 4th. If the bears are strong enough to overcome that level soon, then we may see them pushing towards the low of the day before, at around 106.75. That said, before the next leg south, we see the case for a small corrective bounce, perhaps for the rate to test the 107.85 hurdle as a resistance this time, or even the 108.15 level.
Both our momentum studies detect downside speed and support the notion for some further declines in the short run. The RSI moved lower and hit its 30 line, while the MACD lies below both its zero and trigger lines. However, the RSI ticked up after hitting 30, which enhances our view with regards to a small rebound before the bears take charge again.
In order to start examining whether the near-term outlook has turned positive, we would like to see a decent recovery above 108.75. Such a move would drive the rate above the aforementioned downtrend line and would also confirm a forthcoming higher high. The bulls could then aim for the 109.15 area, the break of which could carry larger bullish implications, perhaps setting the stage for the high of May 30th, at around 109.90, or even the psychological figure of 110.00.
As for today, the central bank torch will be passed to the Norges Bank and the Bank of England. Kicking off with the Norges Bank, at its latest meeting, it noted that its next hike would most likely come in June. Since then, data showed that GDP for mainland Norway slowed to +0.3% qoq in Q1 from the stellar 1.1% qoq in the last three months of 2018, which is below the Bank’s latest forecast of +0.6%. Inflation slowed as well, with both the headline and core rates now standing slightly below officials’ projections for May. The data may have put a June hike into some doubt, but with both the CPI rates still above the Bank’s aim of 2%, we believe that there is still a decent chance for officials to push the hike button today. That said, the rate increase may be accompanied by lower economic forecasts, as well as a downside revision in the Bank’s rate path projections, which may prevent NOK from strengthening notably in the aftermath of a potential hike.
Passing the ball to the BoE, this would be one of the smaller meetings that are not accompanied by a quarterly Inflation Report, neither a press conference by Governor Carney. Thus, with the Bank almost certain to keep monetary policy unchanged, we believe that the focus will fall on the accompanying statement and the meeting minutes. At the previous gathering, the Bank reiterated the view that if the economy develops in line with its projections, an ongoing tightening would be appropriate, but also noted that the appropriate monetary policy path will largely depend on the nature and timing of the EU withdrawal.
Latest data revealed that GDP contracted in April, with the National Institute of Economic and Social Research (NIESR) projecting a 0.2% contraction for the whole second quarter. The Bank’s latest projection was for a 0.2% growth in Q2. However, with the unemployment rate holding steady at its 45-year low of 3.8%, earnings above the Bank’s own projections, and headline inflation at the BoE’s 2% price objective, policymakers are unlikely to alter their policy stance at this gathering. Recent comments by several BoE policymakers add more credence to that view. Deputy Governor Ben Broadbent said that there was no reason for officials to change their outlook, just after the Bank’s Chief economist Andy Haldane and MPC member Michael Saunders backed the case for higher rates. Haldane said that the time for a hike is nearing, while Saunders said that Brexit uncertainty was no reason for delaying rate increases.
Comments by the latter two officials suggest that there could even be some dissent in favor of higher rates, but we don’t expect any members voting for a hike at this gathering. That could be the case in the next few months, if signs with regards to a solution in the Brexit riddle start to emerge. Having that in mind, we will scan the minutes of the meeting to see how strong the likelihood of seeing some dissenters in the near future is.
As for the pound, it has been in a recovery mode the last couple of days, even after Boris Johnson cemented his position as the favorite for being the UK’s next PM. In the third round of the elimination process, Johnson got 143 out of 313 votes, with Foreign Secretary Jeremy Hunt staying in the second place, but far behind, with 54 votes. In our view, this was the result of liquidating prior GBP-short positions in a “buy the fact” fashion as a Johnson’s victory was largely anticipated well before the process starts, or it could be just short-covering ahead of today’s BoE decision. The pound could gain some more if the Bank maintains its hiking bias at a time when other major Banks are already cutting rates, or signaling that they could start doing so soon. However, we remain reluctant to trust a long-lasting recovery in the currency. Boris Johnson has clearly stated that the UK must leave the EU by October 31st, with or without a deal. With the EU sticking to its guns that it will not renegotiate a new deal, a potential lack of progress towards securing an orderly exit could start weighing on the pound again as we get closer to the October deadline.
GBP/USD has been in a recovery mode since Tuesday, when it hit support near the 1.2510 zone. Today, the rate emerged above the 1.2670 hurdle and appears able to continue drifting north for a while more. We would continue aiming for some higher levels in the short run, but as we already noted, we are reluctant to trust a long-lasting recovery in the pound.
For now, we believe that the break above 1.2670 may have opened the way towards the 1.2760 key resistance zone, which stopped the rate from drifting higher on June 7th and 12th. The rate could retreat after testing that hurdle, but if the bulls are willing to recharge from above 1.2670, we may then see the forthcoming positive leg bypassing the 1.2670 obstacle, and perhaps aiming for the 1.2820 area, which is fractionally above the peak of May 21st and slightly below the low of May 15th.
Taking a look at our short-term oscillators, we see that the RSI moved higher and now appears ready to challenge its 70 level, while the MACD, already above its trigger line, has just turned positive. These indicators detect positive momentum and support the case for some further near-term advances.
In order to start assuming that the bulls have abandoned the field, we would like to see a clear dip below 1.2570. This could aim for the 1.2515 key support, marked by Tuesday’s low, but we would need to see a clear close below there before we clearly turn bearish. Such a dip would confirm a forthcoming lower low on the daily chart and may see scope for extensions towards the low of January 2nd, at around 1.2430.
From the UK, apart from the BoE decision, we also have the UK retail sales for May, while in the US, the Philly Fed manufacturing index for June, the current account balance for Q1, and initial jobless claims for the week ended on June 14th are due to be released. With regards to the UK retail sales, both the headline and core rates are expected to have declined to -0.5% mom, from 0.0% and -0.2% respectively. This would drive both the yoy rates down to +2.7% and +2.4%, from +5.2% and +4.9%, something supported by the tumble in the yoy rate of the BRC retail sales monitor for the month. As far as the US releases are concerned, the Philly Fed index is expected to slide to 10.6 from 16.6, while the nation’s current account deficit is anticipated to have narrowed somewhat. Initial jobless claims are forecast to have declined slightly, to 220k from 222k.
As for tonight, during the Asian morning Friday, Japan’s National CPIs for May are scheduled to be released. Both the headline and core rates are expected to have declined to +0.7% yoy from +0.9% in April. The case for slowing National inflation metrics is supported by the slide in both the headline and core Tokyo CPI rates for the month.
We also have two speakers on today’s agenda. Although he will not hold a press conference after the BoE’s decision, Governor Mark Carney is scheduled to speak later in the day. ECB Vice President Luis de Guindos will also step up to the rostrum.
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