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by Charalambos Pissouros

“Risk on” is Back, US CPIs Accelerate; EUR Unfazed After ECB Meeting Minutes


Market 08

Market Sentiment Shifts Back to “Risk on”; US CPIs Support Two More Fed Hikes by Year-End

The dollar traded mixed against the other G10 currencies on Thursday. It gained the most against SEK, CHF and JPY, while it underperformed versus AUD, CAD and NZD. The greenback traded virtually unchanged against EUR and NOK.

USD perf 130718

In the absence of any further escalation in the US-China trade dispute, risk sentiment improved, with safe havens coming under selling interest and riskier assets (like commodity currencies and equities) under demand. On Wednesday, we noted that the latest news with regards to tariffs on USD 200bn of Chinese goods were actually old news and that there was little of them left to be discounted. The quick turnaround in investors’ morale supports our view and thus, we will stick to our guns that for fear and anxiety to surge again we may need to get something new, something to catch the market off guard.

The biggest loser agaist USD was SEK, which tumbled after Sweden’s inflation data were out. Although both the CPI and CPIF accelerated, the CPIF rate rose by less than expected. What’s more important though is that the excluding energy CPIF decelerated, which may have come as a disappointment to those expecting the Riksbank to bring forward the timing of when it expects to start raising rates. SEK traders bought the currency following the latest Riksbank meeting as Deputy Governor Martin Floden advocated for a repo rate path with an initial increase of interest rates by 25bps in September or October.

Yesterday, we got inflation numbers from the US as well. Both the headline and core CPI rates rose to +2.9% yoy and +2.3% yoy in June from +2.8% and 2.2% respectively. However, the greenback came under some selling interest at the time of the release. Perhaps investors were anticipating the rates to beat estimates given that on Wednesday, the PPIs accelerated more than forecast. Or, maybe it was the modest slowdown of the headline monthly rate, to +0.1% mom from +0.2% in May.

US CPIs 130718

In any case, the main point is that CPI inflation accelerated in both headline and core terms, something that supports the case for both the PCE rates for the month to move in a similar fashion. Let’s not forget that the Fed drives the monetary policy wheel based on the PCE inflation metrics. The headline PCE deflator stands at +2.3% yoy, above the Fed’s inflation goal of 2%, while the core PCE rate is exactly at +2.0% yoy. Although not as market movers as the CPIs, the PCE data for June may prove much more important with regards to Fed policy. Accelerating PCEs could strengthen further the case for the Committee to hike two more times by the end of the year. According to the Fed funds futures, the probability for the Fed to end 2018 with a total of 4 hikes stands at around 55%.

USD/JPY – Technical Outlook

This is one of the best weeks that USD/JPY had so far. A strong spike that broke the key area of resistance at 111.40, marked by May’s high, opened the path towards levels last seen in January. The pair keeps holding on to its upwards moving trendline drawn from the 25th of March and thus, we remain bullish for the near term.

As long as the aforementioned trendline remains intact, we will stick to the upside and aim for higher levels again. We can see that USD/JPY found its resistance around the 112.80 zone. Another push to that zone and eventually a break of it, could lead to further acceleration and the pair could then start aiming for the 113.40 level, marked by the high of the 8th of January.

Because USD/JPY has already made a good move to the upside, there is a likelihood that we could see a bit of retracement back down before the next positive leg. The recently broken levels of resistance could now become strong areas of support. If the pair decides to move lower, then this could open the path towards the 112.17 level, where USD/JPY found its resistance at on Wednesday. Certainly, a break below could trigger some more selling and the rate could drop to the important 111.40 area. If that area is not able to withhold the pair from moving lower, then this could open the door all the way back to the previously mentioned upside trendline, where the bulls could try and jump back into the driver’s seat.

For us to become bearish, we would need to see a break and a close below that trendline. Another good confirmation of weakness could be a close on the day below the 110.25 hurdle, which could open the way for a test of the 109.35 zone, marked by the lows of 25th and 26th of June.

2018.07.13 USDJPY 240 Logo

ECB Minutes Pass the Same Message as the Meeting

Yesterday, the ECB minutes were proven a non-event, with the common currency staying unfazed at the time of the release. The message we got from the minutes was the same we got from the meeting. In the minutes, it was noted that officials considered prudent to leave the end of net asset purchases still conditional on incoming data, something that adds to our view that a December QE-end should not be interpreted as a done deal. As for interest rates, there was no further clarification. It was noted that they will remain untouched “at least through the summer of 2019 and in any case for as long as necessary”. It was also noted that the open-ended character of the guidance should be emphasized. Finally, the minutes revealed that policymakers were unanimous to support the policy proposals.

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Remember that on Wednesday, a report cited sources saying that ECB policymakers are split over when they may hike rates, with some saying that July 2019 should not be ruled out, and other suggesting that they should wait until autumn. The fact that there was no reference to July in the minutes and that the proposals were supported by all members comes in contrast with Wednesday’s report. That said, we will closely monitor upcoming speeches from ECB officials to see whether some have changed their mind after the meeting (or not). Just for the record, the market continues to see a 10bps increase in the deposit facility rate in October 2019.

EUR/CHF – Technical Outlook

Yesterday, EUR/CHF traded north yesterday as the market shifted back to “risk on”. The pair managed to take out a strong area of resistance at 1.1660 and then made its way towards levels last seen in May. Overall, the pair continues to trade above the short-term upside support line, drawn from the low of the 29th of May. All these put a positive spin on the near-term outlook and thus, we would expect to see EUR/CHF traveling higher again.

Because of the reasons mentioned above, we are sticking to the upside for now, until we see a break of the aforementioned support line. We can see that EUR/CHF is currently stuck between the 1.1685 and the 1.1710 levels. The last proved itself as good resistance yesterday. If the pair makes another attempt to test the 1.1710 barrier, a break of it could lead towards the 1.1770 area, marked by the high of the 22nd of May.

That said, we cannot exclude the possibility of EUR/CHF moving towards the 1.1660 hurdle, which acted as resistance just a few days ago. The rate could bounce back up from that level. As mentioned before, we will class any move lower, which stays limited above the upwards moving trendline, as a correction.

Alternatively, if we do see a break of the short-term upside support line, then we could start examining the case of a trend reversal. Below that trendline lies a key area of support at 1.1550, a break of which could open the path to the 1.1505 level, marked by the low of the 27th of June.

2018.07.13 EURCHF 240 Logo


As for Today’s Events

Today, the economic calendar appears very light. The only data set worth mentioning is the preliminary UoM consumer sentiment index for July, which is accompanied by the UoM 1- and 5-year UoM inflation expectations. The index is anticipated to have ticked down to 98.1 from 98.2.

We also have two speakers on the agenda: BoE MPC member Jon Cunliffe and Atlanta Fed President Raphael Bostic.



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