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by Charalambos Pissouros

USD Gains as Fed Dots Point to No More Cuts, JPY Rallies as BoJ Stands Pat

The dollar gained against all but one of its major counterparts after the Fed cut rates by 25bps as was expected, but appeared divided with regards to its future course of action. The only currency which managed to outperform the greenback was the yen, which coming under strong buying interest after the BoJ kept its ultra-loose policy and its forward guidance unchanged, disappointing those who have been expecting a more dovish stance.

Fed Cuts Rates, but Stays Divided on Future Action

The dollar traded higher against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most versus AUD, SEK and NZD in that order, while the currency against which it lost some ground was JPY.

USD performance G10 currencies

Yesterday, the main event for USD-traders was the FOMC monetary policy decision. The Committee decided to lower interest rates by 25bps as it was mainly anticipated, with three voters dissenting the decision. Once again, Cleveland President Esther George and Boston President Eric Rosengren voted for no cuts, while the third one was St. Luis President James Bullard, who voted in favor of a 50bps cut.

Having said that though, all the action came from the new “dot plot”, where the median dots pointed to no more cuts this year and the next, one hike in 2021 and another one in 2022. Remember that according to the Fed funds futures, ahead of the meeting, market participants have been pricing in another 25bps cut by the end of this year. Thus, the dots’ signals, that the Committee may have already done easing, disappointed those expectations and thereby prompted some dollar buying.

The dollar did not skyrocket though as, despite the dot plot pointing to no more cuts, the door was not totally closed. In the statement accompanying the decision, the Committee repeated that it will act “as appropriate” to sustain economic expansion, while at the press conference thereafter, Chair Powell said that if the economy turns down, more cuts would be appropriate. What’s more, if we take a closer look on the details of the “dot plot”, we can see a largely divided Committee, which means nothing is off the table yet. Despite the 2019 median dot pointing to no more cuts, only 5 members were in support of that view. Seven still believe that another quarter-point reduction may be appropriate, while the remaining 5 believe that yesterday’s cut was not needed. All this allowed market participants to continue expecting more cuts by the Fed. They just pushed somewhat back the timing. Instead of December, they now expect the next one to be delivered in January.

Fed fund futures Market vs FOMC interest rate expectations

Looking forward, we prefer to take things slowly and step by step. After all, Powell himself noted that they are not on a pre-set course and that they will be taking decisions meeting by meeting, staying highly dependent on data. For now, given that yesterday’s decision has casted doubts over further stimulus, we would expect the dollar to continue performing relatively well, especially against currencies the central bank of which have acted more aggressively and/or clearly signaled that further easing is coming.

EUR/USD -Technical Outlook

EUR/USD continues to balance below its short-term downside resistance line taken from the high of June 25th. After an attempt to move higher in the beginning of this week, yesterday the pair took another small dive. There is a chance we could see another drift lower, especially if the pair stays below the above-mentioned downside line. But in order to get comfortable with lower areas, we need to wait for a clear drop below the 1.0990 zone first. This is why for now, we will remain cautiously-bearish with the short-term outlook.

A rate-drop below 1.0990 could open the door for a further decline, possibly aiming for the 1.0957 hurdle, marked by the low of September 2nd. We may see a small rebound from around there, but if EUR/USD stays below the 1.0990 barrier, this could result in another round of selling, which could lead the pair below the 1.0957 obstacle and target the 1.0927 area, marked by the current lowest point of September.

On the other hand, in order to abandon the bearish-case scenario, a break of the aforementioned downside line is required. But in order to get comfortable with higher areas, we need a push above the 1.1110 barrier, which is the high of last week. This way, the pair would confirm a forthcoming higher high and we could see the rate accelerating to the 1.1164 hurdle, which is the high of August 25th. Slightly above it lies another potential resistance level, which might get tested and that’s the 1.1190, marked near the high of August 14th.

EUR/USD 4-hour chart technical analysis

BoJ Keeps Policy and Guidance Untouched

A few hours after the Fed, it was the turn of the BoJ to announce its policy decision. This Bank refrained from acting, keeping short-term rates at -0.1%, the 10-year JGB yield target at 0%, and the asset purchase amounts untouched. Officials also maintained the forward guidance that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”.

Despite officials reiterating that they will not hesitate to take additional easing measures if momentum towards achieving the inflation target is lost, the yen surged following the decision. But why is that? After all, all the above is just a repetition of the prior decision. Maybe it was because the market has been already positioned for something more dovish. Remember, yesterday we noted that there was a 17% chance for additional stimulus by the Bank. So, a few participants may have been disappointed by the Bank’s decision to stand pat.  Nevertheless, the decision may have been a disappointment to those expecting no action as well. Following recent reports that the Bank was more open to discuss the possibility of further easing at this gathering, many may have been awaiting a more dovish language, perhaps a change in the forward guidance.

The only noteworthy addition was that given the increasing downside risks in overseas economy, the Bank would now pay closer attention to the possibility of losing its momentum towards hitting its inflation aim, and that they will reexamine developments at its next meeting. Although this keeps the door for easing at the next gathering open, it is far from suggesting that this is a highly likely case.

Apart from the BoJ, we also had some important data on the overnight agenda. New Zealand released its GDP data for Q2, with the qoq rate ticking down to +0.5% qoq from +0.6%, beating estimates of +0.4%. That said, a +0.5% growth rate is in line with the RBNZ’s latest projection and barely changes officials’ view on monetary policy, in our view. At their latest gathering, they decided to cut rates by 50bps, with Governor Orr saying that this does not rule out further action.

From Australia, we got employment data for August. The unemployment rate ticked up to 5.3% from 5.2% as expected, while the net change in employment showed that the economy added 34.7k jobs, more than the 10.0k forecast. That said, the Aussie slid at the time of the release. This may have been due to the unemployment rate keep moving away from the 4.5% mark which the RBA expects to start generating inflationary pressures, or because the change in full employment actually recorded losses. Either way, the data prompted investors to bring forth their expectations with regards to the next RBA cut. While the probability for an October cut was at 32% on Tuesday, today it is found at 78%.

NZD/JPY – Technical Outlook

During the Asian morning today, the Japanese yen strengthened against all of its major counterparts. NZD was no exception, as NZD/JPY moved lower and continues to run below a short-term tentative downside resistance line drawn from the high of September 12th. The slide was halted near the 68.00 level, which now will be carefully monitored as a potential breakout zone for possible further declines. For now, we will remain somewhat bearish and aim slightly lower.

If the pair falls below the 68.00 hurdle, marked by an intraday swing low of September 5th, this may attract more sellers into the game and the rate could slide further south, potentially aiming for the 67.56 zone. That zone was seen acting as a good support area on August 7th and 13th, and also played its role of an intraday swing low on September 4th. NZD/JPY might get a hold up around there, or it could even bounce back up a bit. That said, if it stays below the aforementioned downside resistance line, we will continue aiming south. If the pair moves lower again and bypasses the 67.56 obstacle, the next area of support could be seen around the 67.16 level, marked by the inside swing high of September 2nd.

Alternatively, if the pair reverses back up, breaks the downside line and pushes above the 68.79 barrier, marked by yesterday’s high, this would also place the rate above its 200 EMA on the 4-hour chart and we could see a rise to the 69.10 zone. That zone is marked by the low of September 12th and an intraday swing high of September 13th. If the buyers are still feeling confident, a further move up could lead to a test of another potential strong resistance level, at 69.70, which is currently the highest point of September.

NZD/JPY 4-hour chart technical analysis

As for Today’s Events

There are three more central banks deciding on policy today: The SNB, the Norges Bank and the Bank of England.

Kicking off with the SNB, the big question here is whether this Bank will follow the footsteps of the ECB and cut interest rates further into the negative territory, or whether they would prefer to wait and see whether tensions between US and China would ease further, and thereby reduce demand for the safe-haven franc.

Flying from Switzerland to Norway, the Norges Bank is the only Bank on the agenda which is expected to hike rates. Latest inflation data showed that the headline CPI slowed to +1.6% yoy from +1.9%, while the core rate ticked down to +2.2% from +2.3%. This may have raised some doubts as to whether policymakers would indeed push the hike button at this meeting, but we don’t expect them to hesitate. We still see the case for a hike this week. We base our view on the fact that despite the slowdown, headline inflation is in-line with the Bank’s latest projections. Yes, the core rate is below its respective estimate of +2.3%, but it is still above the Bank’s aim of 2.0%. We will also pay extra attention to the Bank’s rate-path projections.

Norges Bank interest rates

Finally, we have the BoE, but we don’t expect any changes from this Bank. At its latest meeting, the Bank decided to keep monetary policy unchanged and maintained the view that conditional upon a smooth Brexit, increases in interest rates at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target. Bearing in mind that UK MPs have managed to pass a law that requires the government to ask for a new Brexit delay, as well as the latest GDP which eased fears over a recession in the UK economy, we don’t expect the Bank to abandon its hiking bias at this meeting, despite the slowdown in inflation yesterday. We expect a reiteration of the forward guidance, and given that there is no press conference to accompany the decision, we don’t expect any major market reaction.

As for the data, both the headline and core UK retail sales for August are expected to have declined 0.2% mom after rising by the same percentage in July. In the US, initial jobless claims for the week ended on Friday 13th, and existing home sales for August are coming out. Tonight, during the Asian morning Friday, Japan’s National CPIs for August are scheduled to be released.

 

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