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by Charalambos Pissouros

FOMC Signals Patience, Spotlight Turns to US-China Talks

The dollar tumbled and equity indices surged yesterday after Fed officials said they will be patient with regards to future adjustments on interest rates, also noting that they would be prepared to alter the size and composition of their balance sheet if needed. As for today, investors are likely to turn their attention to the US-China trade negotiations. Although we may once again get headlines suggesting progress, we doubt a final accord could be sealed today.

USD Tumbles as Fed Officials Signal Patience on Rates

The dollar traded lower against all the other G10 currencies on Wednesday. It underperformed the most against CAD, AUD, NOK and NZD in that order, while the currencies which gained the least against the greenback were CHF, GBP and SEK.

USD performance G10 currencies

Yesterday, it was all about the FOMC decision. The Committee kept interest rates unchanged as was broadly anticipated, but in the statement accompanying the decision, officials decided to remove the part suggesting that “some further gradual increases” are warranted and instead noted that they will be “patient” in determining what future adjustments to interest rates may be appropriate.

What’s more, the Committee issued a separate statement, in which they announced that they would be prepared to use their full range of tools, including altering the size and composition of their balance sheet, if needed. At the press conference following the decision, Fed Chair Jerome Powell said that the case for rate increases has “weakened” in recent weeks and that they decided to adopt a “patient, wait-and-see approach”.

Although we expected Powell reiterate its “patience” view, we did not expect the Committee to alter its interest-rate guidance within the statement. We also expected Powell to keep the door open for a pause in the balance-sheet reduction, but we didn’t expect him to do it through an official statement. The market reaction suggests that the Fed appeared more dovish than expected to many others as well, not only us. The dollar tumbled, while equities surged.

According to the Fed funds futures, the market now sees only a 7% chance for the Committee to push the hiking button this year. In the past we’ve noted that positive US data may encourage participants to bring somewhat forth their bets, as there is ample room for them to drive their expectations closer to the Fed’s, which, according to the December “dot plot”, is for two hikes this year. However, the outcome of this meeting suggests that unless we see a stellar performance in the data, and also a more balanced global outlook, the Fed may decide to revise further down its 2019 rate projections at the March gathering.

Fed funds futures market vs Fed expectations

Seen in isolation, expectations that the Committee may choose to keep its fingers off the hiking button for the whole year could weigh on the dollar for a while more and keep equities under buying interest. Remember that in the past we pointed out that higher interest rates mean higher borrowing costs for companies, something that could erode their profitability. Thus, with the Fed signaling patience for now, and even a chance for halting its balance-sheet reduction sooner than expected, equity investors could keep cheering. Having said all that though, market sentiment could well be affected today by the outcome of the US-China trade talks (see below).

USD/JPY – Technical Outlook

USD/JPY sold off yesterday after the FOMC decision, dropping below its key support, at 109.10, which acted as the lower bound of the range that the pair was trading in from around mid-January. Now the rate is testing a new area of support, at 108.70, which may be seen as temporary pit-stop for the sellers, as the weakness in USD/JPY could stay for a bit more.

A drop below the above-mentioned 108.70 hurdle could be taken as another sign of weakness and the rate may fall to its next possible area of support at 108.35, marked by the low of January 16th. We may see a small rebound, as the pair might correct slightly back to the upside, but if USD/JPY struggles to get back above the 108.70 obstacle, we may see another leg of selling, which could push USD/JPY even lower. The next strong support zone could be seen near the 107.75 level, marked by the low of January 10th.

Alternatively, if USD/JPY travels back into the previously-discussed range, we would to take a more neutral stand for a while. In order to consider the upside in the near-term, we would first like to see a break above the upper side of the range, at 109.90, and only then we will target higher areas, like the 110.50 obstacle, which is the high of December 31st. If the rate-acceleration doesn’t stop there, USD/JPY could easily get lifted towards the 111.40 barrier, marked by the high of December 26th.

USDJPY 4-hour chart technical analysis

Investors Put US-China Talks on Their Radar

As for today, the focus is likely to shift to the second and last day of the US-China trade negotiations in Washington. That’s the first highest-level talks since US President Trump and his Chinese counterpart Xi Jinping met in Buenos Aires and agreed to a 90-day deadline for reaching common ground and end their conflict.

As we noted yesterday, although we may once again get headlines suggesting progress, we doubt a final accord could be sealed today. Last week, Commerce Secretary Wilbur Ross said, “We’re miles and miles from getting a resolution,” adding that there are still lots of issues unresolved, which suggests that, indeed, this round may not be enough for a final deal.

That said, the White House has said they will release an official statement with regards to the progress made, which if keeps the door open for more talks, it could increase hopes with regards to a final deal before March 1st, when the 90-day deadline expires. Equities and risk-linked currencies, like the Aussie and the Kiwi, are likely extend their gains, while safe havens, like the dollar and the yen, could slide.

On the other hand, in case headlines and the official statement itself suggest that the two nations are nowhere close to an accord, investors may start abandoning riskier assets and seek shelter to safe havens. Remember that US President Trump has threatened to increase the tariff rate on USD 200bn worth of Chinese imports to 25% from 10% if no deal is reached by the 1st of March.

Nasdaq 100 – Technical Outlook

Since around mid-January, Nasdaq 100 had been trading within approximately a 200-pip range, until yesterday, when it got out of it through the upper bound, at 6800. Looking at the 4-hour chart, there is a good chance of seeing a further climb higher, at least for a short while, as the index has formed a higher high.

Looking at our Nasdaq 100 cash index, we can see that the price got held near the 6868 hurdle, marked by the high of December 12th. Another push higher could lead to a test of the 6962 support zone, which is the high of November 30th. After that, we may see a bit of correction back down, but as long as the index continues to trade above the upper bound of the aforementioned range, we will remain positive over the near-term outlook. If the bulls continue dictating the rules, the index could continue its path north, where a break of the 6962 area could clear the way towards the 7030 obstacle. This area was last time tested on December 4th.

On the other hand, a strong reversal back into the previously-mentioned range would place Nasdaq 100 into a more neutral position. In order to start examining the downside, we would need to see a break below the lower side of the range, at the 6610 hurdle. This way the index could clear the path for itself towards the 6511 obstacle, a break of which may lead to a test of the 6452 support area, marked by the low of January 8th.

Nasdaq 100 cash index 4-hour chart technical analysis

As for the Rest of Today’s Events

During the European session, we get Germany’s retail sales for December and the nation’s unemployment rate for January. Retail sales are expected to have declined 0.4% mom after rising 1.4% in November, while the unemployment rate is expected to have held steady at 5.0%.

From the Eurozone as a whole, we get the first estimate of GDP for Q4. Expectations are for the Euro area economy to have grown +0.2% qoq, the same pace as in Q3, something that will drive the yoy rate down to +1.2% yoy from 1.6% yoy. That said, with the bloc’s composite PMI sliding to 51.1 in December, 3 points below September’s print, and the lowest since November 2014, we see the risks of this release as tilted to the downside. Eurozone’s unemployment rate for December is also coming out and is expected to have remained unchanged at 7.9%.

Eurozone GDP vs PMIs

In the US, personal income and spending for December, alongside the core PCE index for the month were scheduled to be released, but as was the case with the GDP data, they will be delayed due to the effects of the US government shutdown. However, initial jobless claims for the week ended on January 25th will be coming out and expectations are for a rise to 215k from 199k the week before, which was the lowest level since 1969.

In Canada, the monthly GDP for November is coming out, but no forecast is currently available. When they last met, BoC policymakers kept the door open for further rate increases and noted that growth has been running close to its potential rate. Thus, an acceleration, or even an unchanged rate may keep officials on course for more rate hikes in the months to come.

As for tonight, during the Asian morning Friday, Japan’s employment data for December are due to be released. The unemployment rate is forecast to have ticked back down to 2.4% from 2.5% in November, while the jobs/applications ratio is anticipated to have held steady at 1.63. China’s Caixin manufacturing PMI for January is also coming out.

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