The dollar rebounded yesterday after Fed Chair Jerome Powell said that policymakers are “grappling” with the need of lower interest rates. Overnight, the RBNZ held interest rates unchanged, but signaled that more easing may be underway. The Kiwi slid somewhat at the time of the decision, but was quick to recover and trade even higher against its US counterpart, as this may have been the expected outcome.
The dollar rebounded yesterday, outperforming most of the other G10 currencies. It gained the most against NOK, CHF, GBP and EUR in that order, while it underperformed only slightly versus AUD, NZD and CAD.
The event that woke up some USD-bulls, or at least it encouraged some short-covering, was a speech by Fed Chair Jerome Powell at the Council of Foreign Relations in New York. The Fed Chief stressed the Committee’s independence, saying that it is “insulated” from short-term political pressures. He also added that policymakers are “grappling” with whether uncertainties around trade and tame inflation warrant lower interest rates.
Remember, yesterday we noted that any comments suggesting that a July cut is not a done deal may allow the dollar to rebound. Although investors remained convinced that the Fed will proceed with cutting rates at its upcoming gathering in July, expectations for an aggressive cut of 50bps were scaled back. According to the Fed funds futures, the probability for such a move slid to 25% from 43%. With regards to investors’ view beyond July, they continue to anticipate two more 25bps decreases by year end, one in September and another one in December.
Comments by St Louis Fed President James Bullard were also supportive for the wounded dollar. Bullard said that there is no need for the Fed to cut by 50bps when it meets next. Remember that Bullard was the only dissenter in last week’s FOMC decision, advocating for a cut. Thus, such a comment by apparently the most dovish member among the voting camp suggests that a July decrease by more than 25bps is highly unlikely.
Looking ahead, even if the dollar resumes its latest downtrend, we remain skeptical as to how much downside room is left. The market is already overly pessimistic with regards to the Fed’s future plans, anticipating 3 quarter-point cuts by year end, and thus, we see the risks surrounding the dollar’s forthcoming direction as asymmetrical. Any dovish comments by Fed officials and/or disappointing US data could just act as a confirmation to investors’ expectations and may bring the dollar under only some additional pressure. However, anything suggesting that the Fed may not cut as aggressively as the market currently implies, could prompt investors to reassess their view and thereby trigger a decent round of dollar buying. Headlines suggesting progress between the US and Chinese Presidents at the G20 summit could also help, as increasing chances for a truce between the world’s two largest economies could also imply less need for aggressive easing by the Fed.
Yesterday, after reaching a high near the 1.2783 area, GBP/USD took a deep dive and continues to drift in the southern direction today as well. Our oscillators are indicating negative price momentum, which means that the rate has a chance to move a bit lower, at least in the short run. This is why we will remain somewhat bearish for now.
A further push down could lead GBP/USD towards the 1.2640 hurdle, which held the rate from moving lower on Friday. The pair might stall around there, or even bounce back up a bit. But if the buyers still won’t have enough steam to push GBP/USD further up, we may see another leg of selling. If this time the 1.2640 obstacle fails to withhold, a break of it could drag the pair towards the 1.2605 area, marked by the high of June 17th.
In order to get comfortable with the upside again, a break above the 1.2783 barrier is required. That barrier marks the high of this week and if it gets broken, the pair would confirm a higher high on the 4-hour chart and could travel further north. We will then target the 1.2815 zone, marked by the high of May 21st. If the bears are not able to take control of GBP/USD at that level, the bulls might give the rate another boost and bring it to the 1.2865 mark, which is the low of April 25th.
Flying from the US to New Zealand, during the Asian session today, the RBNZ decided to keep interest rates steady at +1.50% but signaled that more easing may be underway. Specifically, in the statement accompanying the decision, it was noted that “Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives”. Officials also recognized downside risks around employment and inflation, while in the minutes accompanying the decision, it was revealed that they have even discussed the merits of lowering interest rates at this gathering. Another point of interest is that the forward guidance appeared twice in the statement, which may have been done to emphasize and clearly communicate the need for lowering further the OCR.
The Kiwi fell around 40 pips against its US counterpart at the time of the release, but it was quick to recover and trade even higher within the next few minutes. Yesterday we noted that a statement paving the way towards an August cut could result in some NZD-selling, but bearing in mind the elevated expectations on that front, we did not expect a big slide. According to New Zealand’s OIS (Overnight Index Swaps), investors now assign a 65% chance for a rate decrease at the Bank’s upcoming gathering, scheduled for the 7th of August. Thus, if the percentage remains decent or even increases as we head into the meeting, we doubt that an August rate cut could prove a major market mover. We believe that investors will be eager to find out whether the Bank would stay willing to continue with even more cuts.
For now, given New Zealand’s export-oriented economy, as well as its close trading ties with China, we see the case for the Kiwi to stay sensitive to headlines surrounding, as well as the outcome, of the Trump-Xi meeting at the G20 summit. Anything suggesting that the two leaders could take steps toward finding common ground, for example signaling a restart of negotiations, would likely allow Kiwi to gain a bit more. The opposite may be true if everything falls apart and the situation escalates further.
During the RBNZ interest rate announcement overnight, NZD took a hit against all of its major counterparts, but minutes later, speculators started buying the New Zealand currency again. This brought EUR/NZD back down, forcing it to break below the lower side of the falling channel where it was trading in from around mid-June. That said, the pair got held near its short-term tentative upside line taken from the low of April 1st. Our oscillators show negative momentum, which suggests that there might be more downside to come. But before we examine lower areas, we need to get a confirmation break of one of our key support zones first.
A break of the aforementioned upside support line and a rate-drop below the 1.7042 hurdle could invite more bears into the field, who may lead EUR/NZD further down. This is when we will target the 1.6975 obstacle, marked by the low of June 7th. We may see the rate getting a hold-up around there, or even retracing slightly to the upside again. But if the pair remains below both, the lower side of the falling channel and the previously-mentioned upside line, we will continue aiming south. If, eventually, the 1.6975 zone fails to withstand the bear pressure and breaks, this could open the door for another slide to the next potential support area at 1.6927, marked near the low of June 6th.
On the upside, in order to consider slightly higher levels again, we would like to see the rate climbing back into the falling channel formation and pushing above the 1.7110 barrier, marked by the low of June 20th. This way, EUR/NZD-bulls could take this opportunity to drive the pair further up, potentially bypassing the 1.7178 hurdle and testing the 1.7206 area, which is today’s high. Slightly above that we have the upper side of the aforementioned falling channel, which might get tested as well.
The only noteworthy economic indicators on today’s agenda are the US durable goods orders for May and the EIA weekly report on crude oil inventories. As far as the durable goods are concerned, headline orders are expected to have stagnated after falling 2.1% mom in April, while the core rate is expected to have ticked up to +0.1% mom from 0.0%. With regards to the EIA report, expectations are for a 2.54mn barrels slide following a decline of 3.11mn. That said, bearing in mind that the API report revealed a 7.55mn decrease, we see the risks surrounding the EIA forecast as tilted to the downside.
Tonight, during the Asian morning Thursday, we have Japan’s retail sales for May and the forecast is for an acceleration to +1.2% yoy from +0.5% in April. New Zealand’s ANZ Business Confidence index for June is also coming out, but no forecast is currently available.
As for the speakers, during the European morning, BoE Governor Carney and several other MPC members will testify on the latest Inflation Report before the UK Treasury Committee. Later in the day, we will get to hear from San Francisco Fed President Mary Daly.
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