The US mid-term elections are now behind us. As was widely expected, Democrats took control of the House, while Republicans retained majority in the Senate. As a result, the dollar weakened, but not much. The Kiwi surged on New Zealand’s robust employment data, with its traders now fixing their gaze to the RBNZ policy decision tonight.
The dollar traded lower against all but two of the other G10 currencies. It traded virtually unchanged only versus CAD and JPY. The main winner, and by a large margin, was NZD, which rallied overnight after New Zealand’s better-than-expected employment data (see below). GBP took the second place, staying supported by Brexit optimism. On his way out of yesterday’s cabinet meeting, Brexit Secretary Dominic Raab gave reporters a “thumps up”, boosting further expectations of a Brexit deal breakthrough.
Yesterday’s big event was the US mid-term elections, with the results out today during the European morning. As was widely expected, Democrats took control of the House, while Republicans retained majority in the Senate. Yesterday, we noted that US equities and the dollar could slide in such a case, but not much. Although the US indices ended their session in the green, equity futures retreated somewhat overnight as the vote counting started. The dollar has been on the back foot as well. It rebounded after FiveThirtyEight said that the probability for Democrats winning the House has fallen to 50% from 90%, but as the counting continued, the currency slid again, erasing all the aforementioned gains.
Moving forward, even if the dollar continues to slide for a while more, we don’t expect its weakness to last for long. Yes, with a split Congress, Trump may find it difficult to proceed further with his political agenda, which may include more tax reforms, but at the same, his already-implemented policies are unlikely to be rolled back. Therefore, we expect the US economic expansion to continue, something that would probably keep the Fed on track for raising interest rates. The Committee’s upcoming decision is tomorrow, and we expect officials to keep the door wide open for a hike in December. With regards to any impeachment attempts, we repeat that the House could easily vote to impeach Trump by a simple majority, but for him to be removed, it would require a two-third majority in the Senate. Therefore, we see Trump’s removal as a highly unlikely scenario.
Overall, EUR/USD continues to trade below the medium-term downside resistance line drawn from the high of the 17th of April. That said, on the shorter-term picture, we can see that the pair has formed a falling wedge, from which it managed to break out of during the Asian morning today. Even though we can see that pair is now retracing back down slightly, this could still be seen as a setback, after which EUR/USD could resume the move higher. From the short-term perspective, we will aim towards higher levels, last seen in mid-October.
If EUR/USD returns back above the 1.1455 level, marked by the high of last week, and also goes above the 200 EMA, this could invite more bulls to push the pair higher. The next potential area of resistance to watch is at 1.1530, a break of which could lift EUR/USD a bit higher to test the 1.1550 hurdle, which was the high of the 22nd of October. If neither of those two levels is able to withhold the bull-pressure, the pair could make its way higher towards the next potential area of resistance at 1.1620, marked by the high of the 16th of October. This is the place where EUR/USD could meet the aforementioned medium-term downside resistance line, which could limit the upside.
Even though the RSI is above 50, at the time of this analysis it is pointing to the downside. This could come in line with the idea of a small setback, discussed in the first paragraph, but there is still a good chance for the indicator to shift back up, in order to make it into the 80 area. The MACD looks more positive, as it is above zero and its trigger line.
On the downside, a drop below the very short-term upside support line, taken from the low of the 31st of October, and also a break of the 1.1395 obstacle, could be seen as a sign of weakness. The bulls could flee the battlefield, letting the bears to take control. This is where the 1.1355 support zone could come into play, which held the rate from moving lower on Monday. If the bears remain strong, a break below the 1.1355 level could open the way towards the 1.1300 key support area, which is still heavily monitored, as the pair is still struggling to overcome it.
The Kiwi jumped overnight, following New Zealand’s stellar employment data for Q3. Digging into the details, the unemployment rate unexpectedly dropped to 3.9% from 4.5%, which is the lowest since Q2 2008, while the employment growth accelerated to +1.1% qoq from +0.5%. Wages slowed on an annual basis, to +1.9% yoy from +2.1%, but this was in line with expectations.
Now, NZD-traders are likely to turn their attention to the RBNZ monetary policy decision, scheduled for tonight, during the early Asian morning. At their latest meeting, policymakers kept interest rates unchanged at +1.75% as was widely anticipated, while the statement contained little new information. The Bank repeated that interest rates are likely to remain at this level through 2019 and into 2020, and that the next direction could be up or down. With regards to the economy, officials acknowledged that growth was stronger than anticipated in Q2, but they noted that downside risks remain and that their projection for the economy has little changed.
Latest CPI data showed that inflation accelerated to +0.9% qoq in Q3 from 0.4% in Q2, something that pushed the yoy rate up to +1.9% from +1.5%. This is well above the Bank’s own projections of +1.4%yoy, according to the latest quarterly Monetary Policy Statement, and near the midpoint of the Bank’s 1-3% target range. The Bank is not expected to proceed with any policy changes at this meeting, and in our view, it could reiterate that the next move in rates could be either up or down. However, it would be interesting to see whether it will revise up its inflation projections in its new quarterly report, and whether officials will decide to bring forth the timing of when they expect interest rates to start rising. According to the August forecasts, interest rates are expected to start rising in the last quarter of 2020.
The New Zealand dollar has picked up the pace against all of its major counterparts during the early Asian morning, and the British pound was no exception. GBP/NZD continues to travel south since its reversal on the 10th of October. Even though, last week, it looked like the pair was trying to push back up again, still, it failed to deliver a good result. This Monday and Tuesday, we saw the upside momentum slowing down and eventually GBP/NZD sold off heavily overnight after New Zealand delivered a much better than expected employment figures. There is a good chance to see a follow-through effect here, where the pair could continue moving lower.
A break below the key support of 1.9340, marked by the low of the 31st of October, could be that tipping point, when more bears could start joining in and driving GBP/NZD lower. The next potential area of support to keep an eye on is the 1.9280 obstacle. On the 28th of August it was as a good resistance, now it could switch the role and act as a support level. If that level doesn’t hold, the GBP/NZD could easily make its way towards the next potential support zone at 1.9150, which held the rate from moving lower on the 29th of August.
Once again, the RSI has dropped below 50 and is pointing to the downside, which doesn’t provide much confidence for the bulls. The MACD is also in the same boat, as it has now moved back below both the zero and its trigger lines. Both indicators support the above-mentioned idea, for now.
For us to start examining the upside scenario for GBP/NZD again, we would need to see the pair moving back up and breaking above the key resistance area at 1.9650, marked near the highs of yesterday and the 1st of November. This might act as a gateway for GBP/NZD to push towards the 1.9720 hurdle, a break of which could lead to a further rate-rise and a test of the 1.9825 barrier. The last held the pair from moving higher on the 26th of October.
During the European morning, Eurozone’s retail sales for September are expected to have rebounded 0.1% mom after sliding 0.2% in August. This is likely to bring the yoy rate down to +0.8% from +1.8%. Germany’s industrial production is also due to be released.
Later in the day, we get Canada’s Ivey PMI for October. The index is anticipated to have risen somewhat, to 50.9 from 50.4.
With regards to the energy market, we get the weekly Energy Information Administration (EIA) crude oil inventories for last week. Expectations are for a 2.4mn barrels increase, compared with a 3.2mn built the week before. That said, yesterday’s API report showed crude stocks rose more than they did the previous week. Thus, we would consider the risks to the EIA forecast as tilted to the upside.
As for tonight, during the Asian morning Thursday, besides the RBNZ policy decision, we also get the BoJ’s summary of opinions from the Bank’s latest gathering. However, given that the meeting resulted in no fireworks, we don’t expect the summary to do so either. In China, the nation’s trade surplus is forecast to have increased to USD 35.0bn in October, from 31.7bn in September.
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