Fed is Widely Anticipated to Hike Rates; Focus Falls on the “Dots”
The US dollar traded higher or unchanged against all but one of the other G10 currencies. It gained the most against AUD, NZD, and JPY in that order, while it ended the day virtually unchanged versus GBP, CHF and NOK. The sole winner was SEK.
Today, investors will be sitting on the edge of their seats in anticipation of the FOMC monetary policy decision. This is one of the “bigger” meetings where besides the rate decision, we get updated economic projections and a press conference by Fed Chair Jerome Powell.
According to the Fed funds futures, market participants are almost certain that the Committee will increase interest rates by 25bps, with the implied probability for such an action currently standing at around 95%. Thus, a rate hike by itself is unlikely to trigger market volatility. If indeed the Committee decides to hike, then all eyes are likely to turn to the accompanying statement, the updated economic projections, especially the new “dot plot”, as well as Powell’s press conference.
The main message we got from the minutes of the latest Fed meeting is that officials are on track for raising interest rates at this meeting, but they may not be in a rush to increase the pace thereafter, even if inflation overshoots their 2% inflation goal over the next few months. That said, the CPI data yesterday showed that the headline rate rose to +2.8% yoy in May from +2.5% in April, while the core rate ticked up to +2.2% yoy from +2.1%. Although the Fed drives the monetary policy wheel mostly based on the PCE inflation metrics, further acceleration of the CPIs above 2% increases the likelihood for the PCEs to follow suit in the coming months and raises questions over how long policymakers will tolerate above-target inflation.
Therefore, having all these in mind, we believe that investors will be eager to see whether the Committee will continue to signal one more (today’s and another one) hike by the end of the year, or whether there will be an upside revision in the 2018 dots, pointing to an extra one. In our view, the risk for an upside revision is high, as it would need only one policymaker who previously supported for a total of three hikes this year to change his mind and call for four.
That said, although the dollar could get an instant boost in such a case, we will not necessarily interpret that as a strong hawkish signal, and we would expect any USD gains to remain limited. We would like to see more members joining the 4-hike camp before we assume that any USD strength will be sustained.
As for the statement accompanying the decision, as interest rates move closer to the Fed’s long-run estimate, there is an increasing chance for changing the observation that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run”. With some Fed officials supporting that interest rates are nearing their neutral level, this could happen as early as today, accompanied by an upgrade to the description of policy as “accommodative”. For example, officials could note that policy is now slightly or modestly accommodative.
Although something like that could be interpreted as hawkish, as it could mean policy is now tighter, combined with an unchanged dot plot, it could be taken by the market as dovish. Investors may translate this as less need for faster hikes, given that we are now closer to the longer run estimate. In such a case, the dollar is likely to fall alongside the 4-hike probability, which currently stands near 41%.
USD/CHF – Technical Outlook
USD/CHF has been held by a short-term downwards moving trendline since the 10th of May, but for the last couple of weeks the pair managed to flatten itself out and currently is showing us some sideways activity. The bulls continue to fight back against the bears and thus, we will remain neutral and wait for a break out through one of the key levels discussed below.
During the early European morning, the pair emerged above the 0.9870 line and a good move higher, towards the first good area of resistance at 0.9895 level, could bring back some hope for the bulls. A move above that level could open the path to the 0.9910 area or could even lead to a test of the aforementioned trendline. If the bulls remain in the driver’s seat, then a break of that trendline could become a reality. This could be seen as a positive development and more bulls could start joining in the action.
On the other hand, a strong move below the 0.9870 mark could open the doors for a test of the 0.9830 level, a break of which could be seen as a real feast for the bears. If the last-mentioned level is not able to withhold the downside pressure, then we could start targeting the next potential strong area of support at 0.9790, marked near the lowest point of last week.
GBP Gains on May’s Win in Parliament; UK CPIs Under Pound-traders’ Microscope
Given that GBP/USD ended the day virtually unchanged, the pound performed in a similar fashion as its US counterpart against the other G10 currencies. The British currency gained the most against AUD, while it underperformed only against SEK.
Sterling came under buying interest after UK Prime Minister Theresa May won a vote in the House of Commons over amendments to the EU withdrawal bill, including the meaningful vote, which would had given MPs the decisive say over what happens if no Brexit deal is reached. However, May won the vote with a compromise on plans to give lawmakers “input” into what the government would do in a no-deal scenario. The Prime Minister will face fresh challenges in the House of Commons today, as MPs will vote on whether to overturn a proposal by the House of Lords over the UK’s future customs relations with the EU.
Earlier in the day, UK employment data showed that the unemployment rate held steady at 4.2%, while average weekly earnings, both including and excluding bonuses slowed somewhat, to 2.5% yoy and +2.8% yoy from +2.6% and +2.9% respectively. The pound shrugged off the slowdown in wages, perhaps due to the higher employment change, or perhaps pound traders were reluctant to heavily position themselves ahead of the Brexit bill vote.
Although slowing wages may have weighed on expectations of a near-term BoE rate increase, perhaps as early as August, we prefer to wait for the May UK CPIs, due out today, before we start assessing how likely the August-hike case is. The forecasts have changed and now suggest that both the headline and core rates remained unchanged at +2.4% yoy and +2.1% respectively. That said, taking into account the UK services PMI for the month, we view the risks surrounding the forecasts as somewhat tilted to the downside. In the PMI report, it was noted that the rate of charge inflation eased for the second month running, to its weakest since June 2017.
Thus, another slowdown in the CPIs, especially following the slowdown in wages, could prompt investors to take more August-hike bets off the table, and thereby hurt the pound. We believe that a decent upside surprise is needed to make investors confident again on that front.
GBP/AUD – Technical Outlook
GBP/AUD is starting to show some signs of recovery by creating higher peaks and higher lows on the 4-hour chart. The pair is currently above the downwards moving trendline, taken from the highs of the 27th of April. Also, GBP/AUD has completed a 23.6% Fibonacci retracement and now is just slightly above that level. Thus, in our view, this makes the short-term picture somewhat positive.
Yesterday’s burst to the upside brought some hope for the bulls that there could be a good chance for a continuation to the upside. GBP/AUD found strong resistance at the 1.7670 level and retreated somewhat, but if the pair reverses back up and breaks that level, then we could see a move towards the 1.7735, which was the highest point last week. Certainly, if that level is not able to withhold the rate from rising, then this could open the path towards the next key area of resistance at the 1.7800 mark, which coincides with the 38.2% Fibonacci retracement.
Alternatively, a strong move down to the 1.7600 level and eventually a break of it, could indicate upcoming weakness in GBP/AUD. The next potential area for a test could be the 1.7530 mark, a break of which could open the path towards the 1.7470 area, or even slightly lower to the 1.7390 zone, which up until now, it has been the June’s lowest point.
As for the rest of Today’s Events
From the Eurozone, we get industrial production data for April, while from the US, we have PPIs for May. Euro area industrial production is anticipated to have declined 0.5%, after rising 0.5% in March. As for the US PPIs, the headline rate is anticipated to have risen to +2.8% yoy from +2.6%, while the core one is forecast to have remained unchanged at +2.3% yoy.
The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. JFD Brokers, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD Brokers analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyzes and must therefore be viewed by the reader as marketing information. JFD Brokers prohibits the duplication or publication without explicit approval.
FX and CFDs are leveraged products. They are not suitable for every investor, as they carry high risk of losing your capital. You should be aware of all the risks associated with trading on margin. Please read the full Risk Disclosure.