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by Charalambos Pissouros

USD Rallies as Fed Rules Out Long Series of Cuts, BoE Enters the Spotlight

Yesterday, the Fed decided to cut interest rates by 25bps, the first decrease in more than a decade, but the dollar surged and equities slid as officials ruled out a prolonged easing cycle. As for today, the central bank torch will be passed to the BoE, with investors eager to find out whether British policymakers will abandon their hiking bias.

Fed Cuts Rates, but Sounds Less Dovish than Expected

The dollar traded higher against all the other G10 currencies yesterday and during the Asian morning Thursday. It gained the most against NOK, SEK and EUR in that order, while the currency against which the greenback eked out the least gains was GBP.

USD performance G10 currencies

What have encouraged USD-bulls to take charge (or disappointed USD-bears) was the outcome of yesterday’s FOMC decision. The Committee decided to cut rates by 25bps as it was largely factored in, but the decision was not unanimous. Two members, Boston President Eric Rosengren and Kansas City President Esther George, argued for keeping rates untouched. In the accompanying statement it was reiterated that policymakers “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain expansion”, while at the press conference thereafter, Chair Powell said that this is not the beginning of a long series of rate cuts, rather a mid-cycle adjustment to policy. However, he also added “I didn’t say it’s just one rate cut”.

Judging by the dollar’s rally, it seems that market participants may have been positioned for a more dovish outcome. Equity investors were also disappointed. Most major EU indices closed in positive territory, perhaps due to headlines that the US-China talks were constructive and that more will follow in September, but all three US indices slid by more than 1%. According to the Fed funds futures, market participants have scaled back their expectations with regards to the Fed’s future course of action. The next cut is now fully priced in for December – although there is still a decent 57% chance for September –, while a third one was pushed back from March to June.

Fed funds futures Market interest rate expectations

Moving ahead, we still see the path of least resistance for the dollar as being to the upside. Even though Powell did not rule out more cuts, he clearly stated that we are not entering an easing cycle. As mentioned in the statement, the Committee stayed data dependent. If incoming information and data are decent, this may be the only cut delivered this year. With the market still expecting another 25bps decrease by December, we expect positive releases to prompt investors to scale further back those expectations, which in turn could support the greenback. On the other hand, data softness would only confirm what the market already expects (another cut), and thus, any USD setbacks are unlikely to lead to a long-lasting downtrend.

USD/CHF – Technical Outlook

Yesterday, after the FOMC delivered its statement, the USD gained all its major counterparts, including CHF. USD/CHF accelerated and hit its key resistance at 0.9950, which is near the high of July 9th, but it got broken this morning, as the pair continued to climb further. Our oscillators are showing an increase in the buying momentum, which suggest there might still be some more upside left, at least in short run. The rate is also trading above a short-term tentative upside support line taken from the low of June 25th, hence why we will take a bullish approach for now.

USD/CHF had broken above some of its key resistance barriers, like the above-mentioned 0.9950 area and the 0.9965 hurdle, marked by the lows of June 17th and 18th. But given that the pair is struggling to push further north right now, some might say that it is slightly overbought on the shorter timeframe. That said, even if USD/CHF corrects a bit lower, as long as it remains above the 0.9950 zone, we will stay positive and target the upside. The bulls could then drive the pair higher again, bypass the 0.9965 barrier and target the 0.9990 area, or even the 1.0015 level, marked by the high of June 19th.

On the downside, a rate-drop below the 0.9950 hurdle could make the bulls worry, as it may increase the pairs chances of drifting a bit lower. But in order to get comfortable with a deeper correction, a break of 0.9914 area is required, which is the intraday swing high of July 31st. This way, we could aim for the 0.9883 zone, a break of which could send the rate for a quick test of the previously-discussed upside line, which may provide some additional support.

USD/CHF 4-hour chart technical analysis

Will the BoE Abandon its Hiking Plans?

The pound was the second-best performing currency among the G10s. Actually, ahead of the FOMC decision, it was the main winner. In our view, this was the result of short covering after the massive tumble on Monday and Tuesday due to increasing fears of a no-deal Brexit.

As for today, GBP traders are likely to turn attention to the BoE monetary policy decision. This would be a “Super Thursday” for the Bank as besides the interest rate decision and the meeting minutes, we will get the quarterly Inflation Report and a press conference by Governor Mark Carney. The Bank is widely expected to keep interest rates unchanged at +0.75%, so if this is the case, focus will quickly turn to signals with regards to the Bank’s future plans.

At their latest meeting, officials decided to maintain the view that an ongoing tightening, at a gradual pace and to a limited extent, would be appropriate. However, last week, MPC member Michael Saunders said that Brexit vulnerabilities may stop the BoE from raising rates, even if its forecasts imply the need to do so. Saunders is known as one of the Bank’s most hawkish members, and thus his dovish remarks make us believe that other policymakers may be even less optimistic over their future policy plans. Coming on top of the cautious remarks by Governor Carney at the beginning of the month, as well as the disappointing PMIs for June, Saunders’s comments may have added to expectations that the BoE may soon abandon its hiking bias. Thus, investors may be eager to find out whether this would happen at this meeting. According to BoE’s latest data for the UK OIS (Overnight Index Swaps) forward curve, they are nearly pricing in a rate cut for March 2020.

UK Overnight Index Swaps Market BoE rate expectations

As for the pound’s reaction, it could come under selling interest if policymakers decide to abandon plans for raising interest rates, while it could strengthen if they decide to keep their forward guidance unchanged. That said, even if officials maintain the view for an ongoing tightening, we don’t expect any potential recovery to lead to a healthy longer-term uptrend. The main driver for the currency remains Brexit and thus, PM Johnson’s position to exit the EU by October 31st with or without a deal, combined with the EU’s stance that the deal agreed with Theresa May is not negotiable, is likely to keep any such gains short-lived and the overall downtrend intact.

GBP/USD – Technical Outlook

Yesterday, in the first half of the day, GBP/USD showed some signs of hope for the bulls, as the pair managed to correct back to the 1.2250 level, where the up-move eventually got held. But then the rate started declining again and after the FOMC statement, it was hit with another round of selling, which continued this morning. The move took the rate slightly below the 1.2117 area, marked by the low of July 30th, but as we can see now, the bulls managed to push GBP/USD back above that level. Given that the pair is still within a downtrend, trading below its medium-term tentative downside resistance line taken from the high of May 5th, we will remain somewhat bearish and aim for slightly lower levels. Any retracement back up could be seen as a temporary correction.

A drop below the above-mentioned 1.2117 hurdle and a push below today’s low, at 1.2100, may clear the path to some lower levels, as the pair would confirm a forthcoming lower low and we may see a slide to the 1.2037 zone, which is the low of January 11th, 2017. The rate might get a hold-up around there, or even retrace back up a bit. But as long as GBP/USD stays below the 1.2100 area, we will remain sceptical about any larger corrections. The bears could take advantage of the higher rate, step in and send it to the psychological 1.2000 hurdle, or even slightly below it, to the 1.1990 level, which is the lowest point of 2017.

In order to examine slightly higher areas, we would need to see GBP/USD climbing back above the 1.2250 barrier, marked by yesterday’s high. This way the rate may accelerate a bit further up, targeting the 1.2310 obstacle, a break of which could lead the pair to a larger correction, aiming for the 1.2380 area, marked by the low of July 17th. This is where GBP/USD may stall initially, but if the bulls are still feeling comfortable in driving the pair higher, a break above that area may take the rate to the 1.2425 level, which is the low of July 23rd

GBP/USD 4-hour chart technical analysis

As for the Rest of Today’s Events

Besides the BoE decision, we also get July manufacturing PMIs, with the final Euro-area ones anticipated to confirm their preliminary estimates, and the UK index expected to have slid further into contractionary territory. Specifically, it is forecast to have declined to 47.7 from 48.0. In the US, the final manufacturing PMI is anticipated to confirm the first estimate of 50.0, while the ISM index is expected to have risen to 52.0 from 51.7. Initial jobless claims for the week ended on July 26th are also coming out.

As for tonight, during the Asian morning Friday, Australia’s retail sales for June are expected to have accelerated to +0.3% mom from +0.1%, which will drive the qoq rate for Q2 up to +0.3% from -0.1%.

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