Today, investors will be sitting on the edge of their seats in anticipation of Fed Chair Powell’s testimony before the House Financial Services Committee, as they try to figure out by how much the Fed is willing to cut rates. Apart from Powell’s testimony, we also have a BoC meeting. We believe that this Bank will hold rates steady and reiterate its data dependency, staying among the few major central banks that have not turned their eyes to the cut button yet.
The dollar continued traveling north against all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday. That said, its gains were more modest, with most of the other currencies losing less than 0.20%. The exceptions were AUD, NZD and GBP. The currency against which the dollar lost some ground was CHF.
The weakening of the commodity-linked currencies Aussie and Kiwi, combined with the strengthening of the Swiss franc, suggests that investors may have stayed on the defensive. That said, although most EU bourses ended another session in negative territory, the US ones painted a different picture. Dow Jones slid only 0.08%, while both the S&P 500 and Nasdaq rose 0.12% and 0.54% respectively. Today, Asian markets were mixed, with Japan’s Nikkei225 and China’s Shanghai sliding 0.15% and 0.44% respectively.
The mixed picture with regards to market sentiment suggests that investors may be scratching their heads, trying to figure out what Fed Chair Powell could say in his testimony later today. The Fed Chief will appear before House Financial Services Committee today, while tomorrow, we will present his testimony before the Senate Banking Committee. As we noted yesterday, in the aftermath of the latest FOMC gathering, investors have ramped up their expectations with regards to lower US interest rates, fully pricing in a 25bps cut in July, and another 2 by the end of the year. They also assigned a decent probability for a 50bps decrease at the Fed's upcoming gathering.
However, the chance for a “double cut” started to ease a couple of weeks ago, after Powell said that policymakers are “grappling” with whether uncertainties around trade and tame inflation warrant lower interest rates. The trade ceasefire between the US and China also helped on that front but the icing on the cake was Friday’s strong NFP gains. Although a quarter-point cut is still priced in for when Fed members meet next, the probability for something beyond that has dropped to 2%. The number of cuts throughout this year was also pushed back. Instead of 3, now the market sees only 2 by December, with a third one pushed back to May 2020.
So, having all these in mind, it would be interesting to listen to what Powell has to say at this point in time with regards to the Fed’s future plans. After opening the door towards lower rates, we believe that he is unlikely to close it, especially with the market fully pricing in a quarter-point cut at the Fed’s upcoming meeting. That said, we think that investors will be eager to find out what could happen after that. Will more cuts follow, or will a July cut be a “insurance” move, before officials turn data dependent again? Given that recent US data failed to support the case for aggressive cuts, and also taking into account the Trump-Xi agreement to postpone fresh tariffs and return to the negotiating table, we believe that the latter may be the case.
Now as for how the dollar may respond, we see the risks surrounding its reaction as asymmetrical. It could continue gaining if Powell pours more cold water to expectations over aggressive easing. However, bearing in mind that the currency has already been in a recovery mode, as investors have been pushing back their cut bets, we believe that any USD-rally is unlikely to be massive. On the other hand, dovish remarks suggesting that more cuts are needed in the months to come could disappoint dollar-holders and thereby, the greenback could fall off the cliff.
After Friday’s successful run to the upside, USD/JPY continues to slowly grind higher, trading above a newly-established upside support line taken from the low of June 25th. Another positive aspect is that the pair is now trading above its 200 EMA on the 4-hour chart, which may support the upside for a while. For now, we will remain somewhat bullish about the short-term outlook and aim a bit higher.
Given that yesterday, USD/JPY climbed above its key resistance zone, at 108.72, marked by the high of June 17th, we see the case for the rate to continue moving slightly higher, where the next potential resistance area could be seen near the 109.15 mark. That area acted as good support on May 15th and 29th, but if this time it takes the role of a strong resistance barrier and holds the rate down, this might even force USD/JPY to correct slightly to the downside. As long as the pair stays above, either the 200 EMA or the aforementioned upside line, we will remain optimistic about the short-term outlook. If the rate starts picking up the pace again and the 109.15 obstacle fails to hold it down, a break of it may clear the path to the 109.64 level, marked by the high of May 28th and the intraday swing high of May 30th.
On the other hand, if the correction lower eventually leads the pair to a break of the previously-mentioned upside support line and a drop below the 108.28 hurdle, marked by Monday’s low, this may spook the bulls from the field for a while. The rate could then slide further and hit the 107.90 zone, which is the inside swing high of July 3rd. If the depreciation doesn’t end there, USD/JPY could easily move to the 107.54 area for a quick test. That area could stall the pair for a while and act as a good support zone, like it did on June 28th and July 2nd.
Apart from Powell’s testimony, we also have a BoC interest rate decision. This will be one of the “bigger” meetings and thus, if rates are left untouched as it is widely expected, the focus will turn to the meeting statement, the updated economic projections and the press conference by Governor Poloz. At their prior gathering, officials said that data were in line with their projections, and kept their forward guidance largely unchanged. They noted that the degree of accommodation provided by the current rate remains appropriate and that they will stay data dependent in taking future decisions.
Latest data showed that inflation accelerated strongly in May, with the headline rate rising to +2.4% yoy from +2.0%, and the core one to +2.1% yoy from +1.5%. The monthly GDP for April slowed to +0.3% mom from +0.5%, while the forecast was for a slowdown to 0.1% mom. Yes, Friday’s employment data for June were on the weak side, with the unemployment rate ticking up to 5.5% from 5.4%, and the employment change revealing a 2.2k jobs loss. However, following the decline from 5.7% to 5.4% in May, a tick up to 5.5% in June for the unemployment rate is not that bad in our view, neither a minor decline in jobs, if we consider that May’s 27.7k followed April’s record print of 106.5k. Thus, we expect the BoC to stay among the few major central banks that have not turned their eyes to the cut button yet, with officials reiterating that they stay data dependent with regards to their future decisions.
If this is the case, the Loonie is likely to strengthen, but bearing in mind that the US dollar could gain as well on Powell’s remarks, we prefer to avoid exploiting any CAD-gains against its US counterpart. We believe that a good proxy for further CAD gains may be GBP/CAD. The reason is that following the latest cautious remarks by BoE Governor Carney, investors may have started to speculate that the BoE could soon decide to abandon plans for higher rates. Given that they may have not fully digested the idea yet, we believe that GBP has still ample room to move lower.
Today, GBP-traders may be tempted to add to their bets with regards to a potential BoE dovish shift, as the monthly GBP for May is coming out, alongside the industrial and manufacturing production data for the month. The UK economy is expected to have grown 0.3% in May after contracting 0.4% in April, but this would drive the 3-month rolling rate down to +0.1% from +0.3%. Both IP and MP are expected to have rebounded 1.2% yoy and 1.1% yoy, after sliding 1.0% and 0.8% respectively, but bearing in mind that the manufacturing PMI for the month slid to 49.4 from 53.1, we see the risks surrounding those forecast as tilted to the downside. Following the poor PMIs for June, another set of disappointing data would confirm further that the Brexit uncertainty is leaving its marks on the UK economy and could thereby push the pound lower.
From around the beginning of May, GBP/CAD continues to drift lower, trading below its short-term tentative downside resistance line taken from the high of June 3rd. At the time of this analysis, the rate is resting on its important support area, at 1.6350, which is the lowest point of October 2017. Given that the pound is still weak and the Canadian dollar seems to be holding onto its strength, for now, we will remain cautiously-bearish and aim for lower areas.
A strong move below the 1.6350 hurdle would confirm a lower low on both the 4-hour and the daily charts. This is when we will aim for the 1.6210 mark, which is the high of September 6th, 2017. If that zone holds, we may see a small rebound from there, but if the rate remains below the 1.6350 barrier, we will continue targeting lower areas. A drop below the 1.6210 zone would confirm another lower low and could open the door for a slide to the 1.6055 level, which is near the high of September 11th and near the low of September 14th, 2017.
Alternatively, we will start aiming slightly higher again if we see a break above the 1.6460 barrier, marked by the high of July 4th. This way the break could open the door for a slightly bigger correction to the upside, targeting the 1.6550 hurdle, which is the low of July 1st. If the buying stays strong, a push above that hurdle could allow GBP/CAD to test the 1.6640 level, together with the previously-mentioned downside line.
We already got Norway’s inflation data for June. The headline rate fell to +1.9% yoy from +2.5%, missing expectations of a slide to +2.1%, but the core rate held steady at +2.3% yoy.
Later in the US, apart from Powell’s testimony, we also get the minutes of the latest FOMC gathering. Nevertheless, bearing in mind that we will get an updated view on monetary policy through Powell’s testimony, we expect them to pass unnoticed and be treated as outdated.
With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude inventories for the week ended on July 5th is coming out. Expectations are for a 3.08mn barrels slide following a decline of 1.09mn. That said, bearing in mind that the API report revealed a 8.13mn decrease, we see the risks surrounding the EIA forecast as tilted to the downside.
As for the speakers, besides Fed Chair Powell and BoC Governor Poloz, we have two more on today’s agenda: BoE MPC member Silvana Tenreyro and St. Louis Fed President James Bullard.
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