Risk sentiment remained largely supported yesterday, perhaps due to optimism surrounding the signing of a “Phase One” trade deal between the US and China, especially after the US Treasury removed China from its currency manipulators’ list. As for today, participants may pay attention to the US CPIs for December, as they try to figure out the Fed’s next steps. The pound was among yesterday’s loser, feeling the heat of disappointing data, which raised the chances of a BoE rate cut.
The dollar traded higher against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most against JPY, NZD, GBP and AUD, while it underperformed versus SEK, CHF, and slightly against EUR.
In the equity world, major EU indices traded in negative territory, but the US ones gained, with both the S&P 500 and Nasdaq hitting new record highs. The positive sentiment rolled somewhat over the Asian session today. Although China’s Shanghai Composite slid 0.28%, Japan’s Nikkei 225 rose 0.73%.
Following the easing tensions in Middle East last week, as well as the prospect of the US and China signing a “Phase One” agreement tomorrow, investors may have remained largely optimistic, with the US Treasury’s decision to remove China from its list of currency manipulators, adding to the upbeat morale. It seems that the signing of the first phase of an accord between the world’s two largest economies appears to be largely priced in and thus, although the signing may support sentiment somewhat further, investors may pay more attention on any signals with regards to how the two nations plan to move forward. US President Trump has recently said that he will travel to Beijing for talks over the second phase of the deal, and anything suggesting that this may be the case could help risk assets more.
As for today though, participants may pay some attention to the US CPIs for December, as they try to figure out how the Fed will proceed with monetary policy. The headline CPI rate is forecast to have increased to +2.3% yoy from +2.1%, while the core rate is anticipated to have remained unchanged at +2.3% yoy.
At its last meeting for 2019, the FOMC decided to keep interest rates unchanged, reiterating that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity.” With regards to the “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022. At the press conference, Chair Powell said that “In order to move rates up, I would want to see inflation that’s persistent and that’s significant”.
Overall, investors remained unconvinced that officials are done cutting rates, and according to the Fed funds futures, they are still pricing in another cut to be delivered in November. In our view, accelerating inflation is unlikely to vanish cut expectations, let alone spark hike bets. It could just prompt investors to push the cut timing back, perhaps into next year.
Yesterday, USD/JPY managed to successfully break and stay above its key resistance barrier, at 109.70, which kept holding the pair down from the beginning of June 2019. Although our oscillators, the RSI and the MACD, are at their tops, there still might be some more upside in the near term, given the risk-on environment in the market. However, we do not exclude the possibility of a small setback, before another round of buying, hence why we will stay cautiously bullish, at least for now.
A small push higher might test the 110.36 barrier, marked by the high of May 23rd. The rate could receive a hold-up around there, or even retrace back down a bit. That said, if the pair stays above the previously mentioned 109.70 zone, this could attract the buyers back into the game and help USD/JPY rise again. If the 110.36 hurdle fails to withstand the bullish pressure and breaks, this would confirm a higher high and the next target could be the 110.67 level, marked by the high of May 21st.
In order to get comfortable with examining the downside, we would like to see the rate sliding back below the aforementioned 109.70 area and falling below the 109.43 hurdle, which is the low of January 10th. This way, the bulls might totally get spooked from the field, which could allow the bears to step in and take control for some time. We will then aim for the 108.86 obstacle, a break of which could send USD/JPY to the 108.63 level, marked by the high of January 7th and an intraday swing low of January 8th.
Flying from the US to the UK, the pound was among the losers, coming under selling interest after yesterday’s data largely disappointed. The monthly 3-month rolling GDP rate came in at +0.1%, beating estimates of -0.1%, but the mom rate for November revealed a 0.3% contraction, something that pushed the yoy rate down to +0.6% from +1.0%, the weakest annual pace in more than seven years. What’s more, both industrial and manufacturing production tumbled 1.2% mom and 1.7% mom, well below their respective forecasts of -0.1% and -0.3%.
Last week, BoE Governor Mark Carney hinted that a rate cut could be delivered if weakness in the economy persists, with MPC member Silvana Tenreyro saying on Friday that the economy is more likely to undershoot than overshoot the Bank’s latest projections. What’s more, on Sunday, MPC member Gertjan Vlieghe said that he will vote for a rate cut if upcoming data continue to show sluggish economic performance. With Michael Saunders and Jonathan Haskel already at the dissenting camp, hints that others could join in, combined with the aforementioned disappointing data, may have increased notably the chances for a rate cut soon, perhaps even as early as at the upcoming gathering.
Since reversing to the downside in mid-December, GBP/NZD drifted south, but managed to recover somewhat in the end of December. The rate came back under selling interest after hitting the 200-EMA, this way forming a short-term tentative downside resistance line taken from the high of December 13th. Recently, the pair found some support near the 1.9542 hurdle, from which it rebounded slightly. But as long as the rate continues to balance below the aforementioned downside line, we will remain bearish, at least with the short-term outlook.
GBP/NZD might go for a bit of more correction to the upside, but if it struggles move above that downside line, we may get another round of selling, which could bring the rate back to the 1.9542 zone, marked by yesterday’s low. If this time that area fails to provide decent support, its break might push the pair further down, where the next potential support hurdle could be near 1.9461, marked by the low of December 31st. Slightly below that lies another potential level, at 1.9415, which may get tested as well, as this is the lowest point of December.
Alternatively, for us to consider some upside, we need to see a break of the aforementioned downside line and a move above the 1.9692 barrier, which is an intraday high of January 10th. This way, more bulls could join in and the pair might clear the path for itself to move towards the 1.9790 zone, marked by the high of January 10th. The rate could temporarily stall around there, as it would also meet the 200 EMA on the 4-hour chart. GBP/NZD might correct a bit lower, but if it remains above the previously-discussed downside line, this may still give hope for the buyers. If they decide to jump in again, the rate could get lifted to the 1.9790 zone again, a break of which might set the stage for a test of the 1.9839 level, marked by the highest point of January.
Apart from the US CPIs, we also get the NFIB Small Business Optimism Index for December, which is expected to have risen somewhat, to 104.9 from 104.7, as well as the API (American Petroleum Institute) weekly report on crude oil inventories. That said, as it is always the case, there is no forecast for the API report.
We also have two speakers on today’s agenda: ECB Executive Board member Yves Mersch and New York Fed President John Williams.
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