The dollar slid yesterday after Fed Chair Jerome Powell reiterated that the policymakers will stay “patient” with regards to interest rates, noting that they are in “no rush to make a judgment” on future interest-rate moves. The main gainer among the G10s was once again the British pound, rallying after May promised lawmakers that they will have the chance to vote on a no-deal Brexit and a three-month extension if no accord is approved by March 12th.
The dollar traded lower against all but one of the other G10 currencies, with GBP being the big winner for the second consecutive day. The currency that failed to take advantage of the greenback’s weakness was CHF, with USD/CHF found virtually unchanged this morning.
Yesterday, Fed Chair Jerome Powell testified before the US Senate Banking Committee. The Fed Chief reiterated that policymakers will stay “patient”, noting that they are in “no rush to make a judgment” on future interest-rate moves. He also noted that the Committee continues to anticipate solid economic growth, but at a slower pace than the estimated 3% for 2018.
In our view, there was no element of surprise in Powell’s remarks and that’s why the dollar’s tumble appears somewhat strange to us. The Fed Chief just reiterated what we already know. Even his comments over a slower economic growth moving ahead are inline with the Fed’s latest projections, according to which the GDP growth rate is anticipated to average at +2.3% qoq SAAR in 2019 and decline further in 2020 and 2021. Perhaps his “no rush to make a judgment” remarks led some participants to believe that the Fed Chief belongs to the Fed’s more dovish camp, the one that does not see another hike this year as appropriate, even with the current state of the economy. Remember that the minutes of the latest FOMC gathering revealed that several members suggested that a hike would be necessary only if inflation accelerates higher than their baseline outlook, while several others argued that they see the case of raising rates later this year as appropriate, even if the economy evolves as expected.
Powell will deliver the same testimony today before the House Financial Services Committee. Given that the prepared text will be the same as yesterday, market participants may prefer to focus on the Q&A session, where they could look for further clues as to whether any hikes this year are likely or not. That said, we don’t expect Powell to comment directly on that front as he may prefer not to pre-commit to anything. We expect a reiteration of the “no rush to make judgement” remarks, and perhaps that future interest rate moves will depend on upcoming economic data and global financial conditions.
After reversing lower from the February peak near the 1.0100 barrier, USD/CHF got back to its 200 EMA and continues to be supported by it. Such trading activity led the pair into a range between the 0.9985 and the 1.0023 levels. For now, we will remain side-lined until we see a clear break out of that range.
A break through the lower side of the aforementioned range, at 0.9985, could invite more sellers into the game, who may lead the pair further down. We will then target the next potential support area at 0.9963, marked by the high of February 1st. If the bears stay in control, slightly below that area there is another good potential support zone at 0.9950, which is near the low of February 4th.
Alternatively, if USD/CHF exits the above-discussed range through the upper side of it, at 1.0023, then we may see the rate pushing further up. But just a few ticks higher sits the 1.0029 resistance zone, which is marked by the low of February 18th and the high of February 7th. A break of that zone could be a good signal for the bulls to step in and drive the pair higher, towards the 1.0060 obstacle, which is the high of February 19th. Just 10 pips higher lies another potential resistance area, at 1.0070, marked by the intraday swing high of February 15th.
The pound was once again the big winner among the G10 currencies, which combined with a weak dollar led Cable above its January high of 1.3215, to trade in territories last seen in September and October 2018.
The driver behind the pound’s strength may have been once again Brexit-delay hopes. Yesterday, UK PM Theresa May addressed the Parliament and confirmed Monday’s reports that she was considering a plan to which includes extending Article 50. Specifically, the PM told lawmakers that they will have a new deal on the table by March 12th, and if it is not approved, another vote will take place the on March 13th. The second vote will be on whether Britain should leave the EU with or without a deal. If Parliament rejects the option of a disorderly withdrawal, a third vote over extending the process, but not beyond the end of June, will be held the following day.
Combined with reports that the EU appears ready to approve a short delay if the UK requests so, May’s proposals have reduced further the chances of a chaotic exit on March 29th. That said, a delay towards the end of June does not take a no-deal Brexit totally off the table. May noted that such an extension will be a one-off and as short as possible. So, if MPs continue to reject any deal offered by the Prime Minister, the remaining alternatives may be a no-deal Brexit, a second referendum, or revoking Article 50. With May dismissing the latter two, we prefer not to get overconfident that the worst is behind us.
Today, MPs will have the option to vote on proposed amendments, but the event could carry less importance after May already offered the option for an extension. Several amendments which included such an option may not be even tabled today in a move of faith to PM May’s promises.
With regards to the pound, it could continue gaining in the short run, on increasing hopes that a disorderly exit on March 29th can be averted. However, we remain reluctant to trust a healthy longer-term uptrend for now, unless May’s updated deal is approved before March 12th and thereby, no extension is needed. That said, if the deal is rejected, we need to see whether an extension will indeed take flesh, how long it will last, and whether there is any progress within this extra time.
Yesterday, EUR/GBP sold off and broke one of its important support areas, at 0.8616, marked by the lowest point of January. The pair travelled lower, where it found good support near the 0.8562 hurdle, which is the low of May 17th, 2017. Given that the British pound had already accelerated strongly over the course of yesterday’s trading day, we may see a small correction in EUR/GBP back to the upside. For now, we will remain somewhat bearish, but with the possibility of seeing a small temporary retracement back up.
If EUR/GBP moves higher but fails to get back above the previously-mentioned 0.8616 barrier, this may trigger another leg of selling. The rate might then hit the recently tested support area at 0.8562, a break of which could drag the pair further down. If the bears are still in the position to dictate the rules, the rate could slide to the 0.8530 level, or even the 0.8510, marked by the highs of April 26th and May 5th of 2017, respectively.
On the other hand, a push above the 0.8616 barrier may raise concerns over the pair’s short-term downside potential. But if EUR/GBP continues to travel north and gets above the 0.8635 barrier, this might attract more buyers and the rate could accelerate further. The next potential area of resistance could be seen around the 0.8672 obstacle, a break of which could send EUR/GBP towards the 0.8710 level, or even the 0.8725 zone, which is marked near the high of February 22nd.
As far as Wednesday’s data are concerned, the main one is likely to be Canada’s CPIs for January. Expectations are for the headline rate to have declined to +1.4% yoy from +2.0% in December, while no forecast is available for the core metric, which rose to +1.7% yoy in December, from +1.5%. At its latest policy meeting, the BoC left interest rates unchanged and kept the door open for more rate increases, at a time when the core CPI rate was at +1.5% yoy. Thus, even if headline inflation slows down, bearing in mind that Governor Poloz repeated last week that the Bank’s plan is for rates to move up towards neutral over time, an unchanged core CPI rate may allow officials to maintain their forward guidance when they meet next. That said, the Governor also noted that the timing of future rate increases remains “highly uncertain”. Thus, following November’s negative growth rate, we believe that a decent GDP report on Friday is needed before investors place bets that the Bank could hike this year.
In the US, pending home sales and durable goods orders, both for January are due out. Pending home sales are expected to have slid again, but at a slower pace than in December, while headline durable goods orders are expected to have slowed to +0.2% mom from +1.2%. The core rate, which strips out transportation items, is anticipated to have risen to +0.3% mom from +0.1%.
As for tonight, during the Asian morning Thursday, we get China’s manufacturing and non-manufacturing PMIs for February. No forecast is currently available for the non-manufacturing index, but the manufacturing one is expected to have stayed within contraction territory for the third month in a row. Specifically, it is expected to have ticked up to 49.6 from 49.5. Another month of shrinking manufacturing activity is likely to add to concerns with regards to an economic slowdown in the world’s second largest economy. From Japan, we have the preliminary industrial production and retail sales, both for January. IP is expected to have declined 2.5% mom after sliding just 0.1% in December, while retail sales are anticipated to have slowed to +1.1% yoy from +1.3%.
On the political frond, apart from UK Parliament’s voting process on proposed amendments, US President Donald Trump and North Korea’s Leader Kim Jong Un will hold a second summit in Vietnam in an attempt to break the impasse over North Korea’s nuclear weapons.
As for the speakers, besides Fed Chair Powell, we have ECB Executive Board member Benoit Coeure and ECB Governing Council member Jens Weidmann.
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