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by Charalambos Pissouros

Fed Minutes Under the Microscope; GBP Gains on the UK Services PMI

 US 03

USD-Traders on the Edge of Their Seats in Anticipation of the Fed Minutes

The dollar traded mixed against its G10 peers yesterday. It gained against AUD, CHF and CAD, while it underperformed versus SEK, NOK, GBP and JPY. The greenback traded virtually unchanged against EUR and NZD.

USD perf 050718

Today, USD-traders will be sitting on the edge of their seats in anticipation of the minutes from the latest FOMC policy meeting, just a day ahead of the US employment data. At that meeting, the Committee decided to increase the Federal funds rate by 25bps, while the new “dot plot” pointed at two more rate increases by year end, instead of just one as the previous plot suggested. This was due to the fact that one of the policymakers who previously supported a total of three hikes in 2018 has changed his mind and called for four, which was enough for the median to move 25bps higher. What’s more, in the statement accompanying the decision, the Committee reiterated that the stance of monetary policy remains accommodative, but removed the part saying that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run”.

Having all these in mind, we will scan the minutes to see whether any other members were close to raising their dots, and if so, what kept them back, as well as whether there was any discussion on how close interest rates are to their neutral level, and what this means for policymakers’ future policy plans. With some Fed officials supporting that rates are nearing that level, it would be interesting to see whether there was any debate around stopping the tightening cycle once rates get there.

Something like that could hit market expectations with regards to two more hikes this year, as it would mean policymakers are not in a rush to lift rates, and thereby, the dollar could come under pressure. On the other hand, the absence of any discussion around a halt in tightening, combined with hints that more officials were tempted to raise their dots at this meeting, could make market participants more confident that the Committee will end the year with a total of four hikes and the greenback could strengthen.

FedFunds 050718

Of course, market expectations – and thus the dollar’s direction – could well take a 180-degree spin tomorrow, when we get the US jobs data for June. Some market participants will try to get an idea of how the labor market performed through the ADP report, which comes out today. Expectations are for the private sector to have gained 190k jobs, following May’s 178k. This could raise speculation that the NFP number, due out on Friday, may come slightly below its forecast of 200k. However, we have to repeat for the umpteenth time that although the ADP is the only major gauge for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are taken into account) has fallen in recent years. Taking into consideration data from January 2011, the correlation stands at around 0.45.

ADPvsNFP 050718

USD/CHF – Technical Outlook

USD/CHF is slowly getting into the squeeze zone, as seems to be forming a small ascending triangle, clearly visible on the 4-hour chart. That said, this doesn’t necessarily mean that the pair could only move higher from here. We should carefully continue monitoring the activity within the formation and wait for a clear signal. This will come when USD/CHF breaks through one of the sides, which could be a first sign that it is establishing a direction for the near-term. For now, although we stand flat with regards to the broader picture, we see the case for some more recovery within the formation.

Certainly, we can say that USD/CHF is trading above its short-term upwards moving trendline (lower side of the ascending triangle), that’s why we expect a continuation to the upside. The first good area of resistance could be the 0.9955 mark, a break of which could send the pair towards the slightly more important area of resistance at 0.9990 (upper side of the ascending triangle). This is where the big battle between the bulls and the bears could start again over the faith of USD/CHF. If the bulls take control, then they could drive the rate towards the 1.0035, or even the 1.0055 level, marked near the highs of May. We should also mention that USD/CHF could drop a bit lower from current levels to test the upwards moving trendline, from which it could bounce back up towards the mentioned levels above.

If the previously mentioned trendline is not able to withstand the downside pressure, then a further decline could open the door towards the 0.9890 level, a break of which could be seen as the green light for the bears to drive USD/CHF towards the 0.9855 barrier, marked by the low of the 25th of June. Slightly below sits another good area of support at 0.9825, which if broken could spark some more interest from the bears, in order to push the pair down to test the 0.9790 zone. This area is near the lowest point of June.

2018.07.05 USDCHF 240 Logo

GBP Gains After the UK Services PMI; BoE Governor Carney Speaks

The pound traded higher against all but two of the other G10 currencies on Wednesday. It lost ground only against SEK, while it ended the day virtually unchanged against NOK. The main losers against the British currency were AUD, CHF and CAD in that order.

GBP perf 050718

Sterling came under buying interest yesterday following the better-than-expected UK service-sector PMI for June. The index rose to 55.1 from 54.0, confounding expectations of a tick down to 53.9. Following the increases in both the manufacturing and construction indices for the month, the rise in the more-important services PMI to its highest point since October 2017 suggests that following the slowdown in Q1, the economy may have indeed turned the corner.

UK PMIs 050718

In the PMI report, Markit’s Chief Business Economist noted that “The survey data indicate that the economy likely grew by 0.4% in the second quarter, up from 0.2% in the opening quarter of 2018”, which is in line with the BoE's view at its latest policy meeting. The first estimate of the Q2 GDP is scheduled to be released on the 26th of July, just a week ahead of the next BoE meeting, and thus it would be very interesting to see whether the economy indeed accelerated to +0.4% qoq or not.

Although yesterday’s data may have encouraged market participants to put more August-hike bets on the table, we still have a lot to get before that gathering. As we already noted, on the 26th of July, the first estimate of the Q2 GDP is coming out, while on the 17th, 18th and 19th of the month, we get employment, inflation and retail sales data respectively.

As for today, pound traders are likely to turn their attention to BoE Governor Mark Carney, who is scheduled to deliver a speech in Newcastle. Any comments supporting the case for a rate increase at the Bank’s upcoming gathering are likely to give another boost to the pound, while a cautious stance could pour cold water to hike expectations and thereby, bring the pound under selling interest.

That said, even if Carney appears upbeat and the pound strengthens today, we will stay on guard, as tomorrow is the meeting between UK PM Theresa May and her senior ministers, where they will try to reach a common ground on the UK’s trade relationship with the EU after Brexit. Another failure to agree on the matter could further increase investors’ anxiety over Brexit and could keep any pound gains limited.

GBP/AUD – Technical Outlook  

GBP/AUD has been moving sideways since around the 19th of June, within a range between 1.7980 and 1.7735. But this activity could be seen as the calm before the storm and could lead to a push higher. The pair has started creating higher lows, since it reversed from its short-term downtrend that ended around the 5th of June. This makes us think that the sideways activity, which we observed over the past few week could be a pause within the trend.

GBP/AUD is not far from the upper bound of the aforementioned channel. If the pair starts breaking the 1.7950 level, this could straight away open the path towards the 1.7980 zone. A break of that zone, which is the upper side of the range, could set the stage for more bulls to jump in and drive GBP/AUD towards 1.8040, or even to the 1.8110 level, marked by the peak of 16th of May.

Looking at our oscillators, the RSI is in support of the upside as well, as it has moved further up from its 50 mark and continues to aim higher. The MACD is also looking promising, as it is above both its zero and trigger lines and is also pointing to the upside.

Alternatively, a drop down from near the 1.7950 area could start raising concerns, whether the upper bound of the previously mentioned range could be too much for GBP/AUD to overcome for now. If the bears take the driver’s seat, we could see a move back down towards the 1.7795 level, a break of which could force the rate to test the lower side of the range, at around 1.7735. This is where the pair could stall for a bit, until the bulls and the bears decide who will take control at least for the short-run.

2018.07.05 GBPAUD 240 Logo

As for the Rest of Today’s Events

During the European morning, we get Switzerland’s CPI for June. Expectations are for Swiss inflation to have accelerated to +1.1% yoy from +1.0%. Although this would be a move in the desired direction, inflation would still be below the Bank’s objective of 2%, and thus, we doubt that such a modest acceleration could impact SNB policymakers’ view around monetary policy. At their latest meeting, they kept interest rates unchanged at -0.75%, and although they upgraded their inflation forecasts for this year, they downgraded the long-term ones. They now see inflation averaging at +1.6% yoy in 2020 compared to +1.9% previously. What’s more, the forecasts are based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.

In the US, besides the ADP report and the Fed minutes, we have the final services and composite PMIs for June, as well as the ISM non-manufacturing index for the same month. Initial jobless claims for the week ended on the 29th of June are also coming out and expectations are for a small increase to 231k from 227k the previous week.

As for the speakers, besides BoE Governor Mark Carney, ECB Governing Council member Jens Weidmann and ECB Executive Board member Yves Mersch will also speak.



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