The dollar continued trading lower against most of its major counterparts, but the slide slowed, perhaps due to mixed signals on the Fed’s policy plans. Although Fed Chair Powell reiterated that some accommodation may be appropriate, Atlanta President Bostic and Richmond President Barkin saw no clear need for the Fed to ease. The core CPI rate ticked up to +2.1% yoy from +2.0%, also tempering expectations with regards to aggressive cuts.
The dollar continued trading lower against most of the other G10 currencies yesterday. It gained only against the safe-havens JPY and CHF, while it traded virtually unchanged versus EUR. The greenback underperformed the most against SEK, NOK and AUD.
The weakening of the safe havens suggests that risk appetite may have remained supported yesterday. However, the picture painted by the performance in the equity world is more confusing. Major EU bourses ended their Thursday session mixed, while in the US, Nasdaq slid 0.08%, but the S&P and Dow gained 0.23% and 0.85% respectively, both hitting fresh record highs and aided by gains in health insurers after the Trump administration decided to drop a plan on drug-price rebates. Today, Asian indices were also mixed, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.20% and 0.44% respectively.
The mixed picture with regards to investors’ morale is supported by the mixed signals we got yesterday with regards to the Fed’s future course of action. Although when testifying before the Senate Banking Committee, Fed Chief Powell reiterated that trade concerns weigh on the US economic outlook and said that a somewhat more accommodative policy may be appropriate, Atlanta Fed President Bostic and Richmond President Barkin saw no clear need for the Fed to ease policy. On top of that, CPI data came in somewhat better than expected, pushing the probability for a “double cut” at the Fed’s upcoming gathering down to 20% from 30%. The headline CPI rate for June slid to +1.6% yoy from +1.8% in May, but the core rate ticked up to +2.1% yoy instead of staying unchanged at +2.0% as the forecast suggested. In our view, this means that the core PCE rate, the Fed’s favorite inflation gauge, may eventually pick up some steam in the months to come. New York President John Williams and Board Governor Lael Brainard also spoke and appeared to be on the same camp with their Chief, namely supporting the case for lower rates.
Having said all that, our view remains the same. Bostic and Barkin are not voting members this year and thus, we still expect a 25bps rate decrease to take place in July. However, we don’t see the case for a “double cut”. Even James Bullard, who appears to be the most dovish member among the voting Committee does not support such an action. The big question is still whether this will be just an “insurance cut”, or whether the Committee will pursue more in the months to come. According to the Fed funds futures, market participants are now more-than-fully pricing in two quarter point cuts for this year, but a third one was pushed back to May next year. Yesterday, a third cut was brought forth to March.
Moving ahead, even if the dollar stays on the back foot for a while more, we remain skeptical as to how much room for weakness there is. Despite pricing out a third cut for this year, taking into account the picture painted by the US data, investors still appear overly pessimistic with regards to the Fed’s future plans. If data continues to come in on the bright side, matching market expectations would be a hard task for the Fed. On the contrary, investors are those who may start adjusting their bets, pricing out more basis points of those expected to be cut by the end of this year. Something like that could keep any USD-losses in check and may help the currency rebound at some point.
That said, we are reluctant to trust any potential rebound in the USD against currencies the central banks of which have not considered a dovish shift yet. One of those is the Canadian dollar. On Wednesday, the BoC kept rates unchanged and noted that the degree of accommodation provided by the current rate remains appropriate. Combined with a Fed willing to hit the cut button when it meets next, this could allow USD/CAD to trade lower for a while more. We believe that it would be easier for USD-bulls to buy the greenback against the British pound. Data in the UK have not been bright recently, which alongside Carney’s recent cautious remarks, may have prompted market participants to start speculating that the BoE may drop its hiking bias soon. GBP-traders have just started to digest a potential dovish shift by the BoE, and remember they still have to deal with the uncertainty surrounding the UK’s departure from the EU. All this makes us believe that there is ample room for the pound to move lower, in contrast with the dollar, where expectations with regards to Fed easing are already elevated.
Apart from data and comments related to expectations around the Fed’s future policy moves, we also got Sweden’s inflation data for June, and the minutes from the latest ECB meeting. Sweden’s CPI and CPIF rates slid more than expected but matched the Riksbank’s projections, while the core CPIF rate rose to +1.9% yoy from +1.7% in May. In our view, the data still allows Swedish policymakers to keep the door open for a hike towards the end of the year. After all, the Swedish Krona was among the main gainers yesterday, adding more credence to our view.
With regards to the ECB minutes, they revealed that there was a broad agreement on the need to change stance and to demonstrate determination to act. Members noted that potential measures include further extending and strengthening their forward guidance, resuming QE and decreasing policy rates. The minutes confirmed further officials’ willingness to ease policy soon, but they did not give any clue as to when this could happen. Taking into account a recent report noting that ECB officials may not rush into additional easing in July, we believe that they could use the upcoming meeting to lay the groundwork for a potential action in September.
For the whole week, USD/CAD could not establish a clear direction of where it wants to go next. We can see that, up until this morning, the pair was stuck inside a small range, roughly between 1.3037 and 1.3145 levels. Given that the rate has already fallen below 1.3037, this puts more pressure on the pair, which may continue drifting lower for a while. This is why we will take a more bearish stance for now.
The break below the 1.3037 zone has opened the path to slightly lower areas and the first potential support zone could be at 1.3015. That zone marks the low of October 25th, 2018, a break of which could send the pair further south, as it would confirm another lower low. This move could force USD/CAD to bypass the psychological 1.3000 zone and target the 1.2970, which is the low of October 24th.
In order to shift our attention a bit to the upside and aim for a correction, we will wait for a push above the 1.3090 barrier, marked by yesterday’s high. This way, there could be more buyer joining in and driving USD/CAD towards the upper side previously-discussed range, which is at 1.3145. The pair might initially stall around there, but if the bulls are still feeling slightly more comfortable than the bears, a break of the 1.3145 hurdle could clear the way to the 1.3195 level, marked by the high of June 26th. This is where USD/CAD could also test the aforementioned tentative downside line, which could help hold the rate down.
Overall, GBP/USD still remains within a downtrend and continues to drift lower from its reversal on March 14th. In addition to that, the pair is trading below its short-term tentative downside resistance line taken from the high of May 3rd. But after testing the lowest point of this year, near 1.2440, the pair reversed back up and is now moving higher, aiming for a touch of the above-mentioned downside line. However, if that line holds the rate down once again, this could send GBP/USD sliding again and aiming for lower levels, hence why we will stay cautiously-bearish for now.
Another push higher and a break above the 1.2570 zone, marked near yesterday’s high, could lift the rate to the aforementioned downside line, which may provide additional resistance. If the pair struggles to shift above it, this could be the cue for the bears to jump in again and take control of the steering wheel. GBP/USD could then slide back down to the 1.2570 hurdle, a break of which could send the rate towards yesterday’s low at 1.2508.
Alternatively, if the previously-discussed downside line is not able to withstand the bull pressure, a break of it and a rate-rise above the 1.2659 barrier, marked near the lows of June 26th and 27th, could open the door to some higher areas. We will then examine the possibility of seeing a move to the 1.2733 hurdle, which was a good resistance for GBP/USD on June 28th. But if this time that hurdle surrenders to the bulls and breaks, this could clear the path to the highest point of June, at 1.2783.
The calendar appears light in terms of economic indicators. Only Eurozone’s industrial production for May and the US PPIs for June are worth mentioning. Eurozone’s IP is expected to have rebounded 0.2% mom after sliding 0.5%, while both the headline and core PPI rates are forecast to have slid somewhat.
As for the speakers, BoE MPC member Gertjan Vlieghe and Chicago Fed President Charles Evans will step up to the rostrum.
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