And the day the financial world was waiting for has finally come. Today, the FOMC concludes its two-day monetary policy meeting, with investors fully pricing the first quarter-point cut since 2008. Given that a 25bps decrease is widely anticipated, if happens, investors may quickly turn attention to hints and signals on how officials intend to move forward.
The dollar traded higher or unchanged against most of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained versus SEK, NOK, NZD and AUD in that order, while it lost some ground only against CAD and EUR. The greenback was found virtually unchanged versus JPY, CHF and GBP.
The Swedish Krona was the main loser, coming under massive selling interest after the disappointment in Sweden’s GDP for Q2. The data showed that the economy contracted 0.1% qoq after growing 0.6% in Q1, missing market expectations of a slowdown to +0.3%. This drove the yoy rate down to +1.4% from +2.1%, well below the Riksbank’s projection for the year, which is at +1.8%. Judging by the market reaction, the release may have prompted investors to slash their bets with regards to a Riksbank hike towards the end of this year. Remember that at its latest meeting, the world’s oldest central bank reiterated the view that the repo rate “will be increased again towards the end of the year or at the beginning of next year".
The Aussie was also among the losers, but took the last place as it was helped by Australia’s better than expected inflation data. The headline CPI rate rose to +1.6% yoy from +1.3%, beating the +1.5% forecast, while the trimmed mean rate held steady at +1.6% yoy, instead sliding to +1.5% as the consensus suggested. Although the headline rate still stood below the RBA’s latest forecast, which was at +1.75%, the trimmed mean rate stayed a tick above its respective projection. In our view, the data barely alter investors’ expectations around the RBA’s future policy plans. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, the next rate cut remains almost fully priced in for October.
The fact that both the safe havens JPY and CHF stood relatively strong, with both USD/JPY and USD/CHF found virtually unchanged this morning, suggests that risk appetite may have been subdued yesterday. Indeed, major EU indices ended their sessions well in the red, with most of them losing more than 1.5%. Wall Street was also in negative territory, though losses were more modest there. The negative sentiment rolled over into the Asian trading today, with both Japan’s Nikkei 225 and China’s Shanghai Composite falling 0.86% and 0.67% respectively.
The catalyst may have been China-related remarks by US President Trump, in the midst of negotiations between the world’s two largest economies over trade. Using his twitter account, Trump said that if China prefers to wait for the 2020 US elections before finalizing a deal, the deal they get will be much tougher if he is reelected, or they may not get a deal at all. It still remains to be seen what the outcome and final remarks of this negotiating round will be, with anything suggesting willingness to hold more talks soon having the potential to revive somewhat investors’ appetite.
However, we expect the financial community to pay more attention to the FOMC decision, which is scheduled to be announced later in the afternoon. At their prior gathering, policymakers decided to drop their “patient” language and instead noted that they will “act as appropriate” to sustain economic expansion. What’s more, 7 out of the Committee’s 17 members voted in favor of two quarter-point cuts by the end of the year, which prompted investors to ramp up their already elevated bets with regards to lower US rates. According to the Fed funds futures, a quarter-point cut is fully priced in for this meeting, another one is expected in October, while a third one is factored in for March next year. There is also a 22% chance for a “double cut” of 50bps at this gathering. However, taking into account that St. Louis Fed President James Bullard, who was the only member voting for a cut at the prior gathering, does not believe that such a move is needed, we see the case for only a 25bps reduction.
If this is the case, a quarter-point cut by itself is unlikely to prove a major market mover. We believe that investors will turn their attention to clues and hints on how officials intend to move next. Anything suggesting that this was the first of a series of future cuts could hurt the greenback which has been on the front foot last week, and may help equities recover. On the other hand, in case the Fed signals that the potential cut was just an insurance move and that they will turn data dependent again, the greenback may strengthen and equities may slide further, as investors may scale back some of the basis points they anticipate being cut in the foreseeable future.
As for our view, given that domestic data have not been that bad, we give more chances to the latter case, namely, the one where the Fed turns data dependent after cutting today. However, even if they sound more dovish than we expect, we remain skeptical as to whether this could lead to a long-lasting dollar downtrend. The market is already overly pessimistic with regards to the Fed’s plans, and if upcoming data and developments come on the positive side, matching market expectations could be a hard task for the Fed.
After testing the 1.1100 zone last week, EUR/USD recovered some of its losses. Looking at our short-term momentum studies, we can see that both the RSI and the MACD started drifting back up and continue to point slightly higher. That said, the pair is still running below its short-term downside resistance line taken from the high of June 28th. Although there is a chance to see a bit more correction to the upside, still, if the rate remains below that downside resistance line, we will stay bearish in the short run.
A push above the 1.1160 hurdle, which is currently keeping the rate down, could send the pair for a larger correction towards the aforementioned downside line. This is when EUR/USD could test the 1.1188 hurdle, which acted as good resistance on July 25th. If this hurdle and the downside line manage to hold the rate from climbing higher, we may see the bears re-entering the field and driving the pair in the direction of the current trend. This is when we will target the 1.1160 zone, this time from above, a break of which could send EUR/USD to the current July low, near the 1.1100 level.
Alternatively, if the previously-mentioned downside line breaks and the pair moves above the 1.1200 barrier, this may attract attention from more bulls. This may give them hope that the rate could drift further north, aiming for the 1.1225 area, which is the high of July 22nd. Such a move would also place EUR/USD above its 200 EMA, which could be seen as a positive for the short-term outlook. If, eventually, the 1.1225 obstacle surrenders to the bulls, this might open the door to the next possible resistance level, at 1.1268, marked by the high of July 19th.
The German DAX took a strong hit yesterday, falling slightly more than 2% during the European market hours. The index managed to create a new low for July, breaking the previous one, at 12190, and testing the 12095 area, from which, as we can see, the cash index rebounded somewhat. Also, DAX established a new short-term tentative downside line taken from the high of July 25th. Even though we may see a bit of a correction back up, as long as that line stays intact, we will remain sceptical about further upside in the short run.
In order to get comfortable with further declines, ideally, we would like to see a drop below the 12095 support area, marked by yesterday’s low. This way, the index would confirm a forthcoming lower low and the price may slide to the 12050 obstacle, which may provide some initial support, as it held the index from falling on June 14th. But if the selling is too strong again, a break of that obstacle could keep DAX 30 moving in the direction of the current short-term trend, potentially aiming for the 11985 zone, marked by the low of June 18th.
For us to start examining the upside again, at least in the short run, we need to see a break of the previously-discussed downside line and a push above the 12300 barrier, marked near the low of July 25th. This way, the current downtrend would be reversed and the index could have more chances of moving higher. We will then target the 12375 obstacle, a break of which might send DAX 30 to the 12475 level, marked by the high of this week.
During the European morning, Eurozone’s preliminary CPIs for July and the 1st estimate of Q2 GDP are coming out. The headline CPI rate is anticipated to have slid to +1.1% yoy from +1.3%, while the core rate is anticipated to have ticked down to +1.0% yoy from +1.1%. With regards to the qoq GDP rate, it is expected to have declined to +0.2% from +0.4%.
At last week’s meeting, the ECB officially opened the door to lower rates and added that additional measures, such as a potential QE restart, may also be introduced. According to Eurozone money markets, investors are now almost fully pricing in a 10bps cut in the deposit rate for the upcoming meeting. Thus, slowing inflation and economic growth may prompt them to add more basis points and/or enhance the case for a cut to be accompanied by the introduction of a new round of asset purchases.
From the US, we have the ADP employment report for July. Expectations are for the private sector to have gained 150k jobs, more than June’s 102k, but we doubt that investors would pay any attention, as they would probably have their gaze locked on the FOMC decision later in the day. The Employment Costs Index for Q2 is also coming out and the qoq rate is expected to have remained unchanged at +0.7%.
In Canada, the monthly GDP for May is coming out, which is expected to have slowed to +0.1% mom from +0.3% in April. This would drive the yoy rate down to +1.3% from +1.5%.
As for tonight, during the Asian morning Thursday, China’s Caixin manufacturing PMI for July is expected to have risen to 49.6 from 49.4.
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