The dollar continued to gain yesterday, a day after the Fed decided to hike rates and remained willing to continue with more increases. The euro felt the heat of the Italian politics, with the government saying that it agreed on a 2.4% budget target, while the Loonie gained after Canada’s PM Trudeau sounded optimistic over NAFTA.
The dollar overperformed all but one of the other G10 currencies on Wednesday. It gained the most against CHF, EUR and NOK in that order, while the only currency that managed to resist the dollar’s strength was CAD, with USD/CAD ending the day virtually unchanged.
The greenback remained well supported on Thursday, following Wednesday’s FOMC decision, and specifically Fed Chair Powell’s remarks at the press conference. The key takeaway from Powell’s comments was that Fed officials remain willing to continue raising rates, but guided mainly by economic data, instead of estimates on how close to their neutral level interest rates are.
In our view, this means that, even though the new dot plot continues to point to another hike in December and three more in 2019, if data support so, the Committee could well deliver four hikes next year as well. We believe that the market will start paying more attention to incoming data, with the dollar becoming even more sensitive to economic releases.
In that sense, the yearly core PCE rate for August, due out today, may attract more attention than usual. Expectations are for the Fed’s favorite inflation metric to have remained unchanged at +2.0% yoy. Bearing in mind that the core CPI rate for the month declined, we see the risks surrounding the PCE rate as skewed somewhat to the downside. That said, even if the PCE rate ticks down, it would still be close to the Fed’s objective and thus, we don’t expect something like that to alter market expectations around the Fed’s future plans. We believe that a notable slide is needed before market participants start doubting whether a December hike is appropriate.
Once again, the bears took control of EUR/USD and forced it to break below the short-term upside support line, taken from the low of the 15th of August. The break happened near the 1.1690 zone, with the pair extending its slide. Certainly, all this puts a question mark on the upside perspective for EUR/USD in the near term, hence we will aim lower for now.
Currently, the rate is testing the 1.1615 support barrier, the break of which could mean that the bears are feeling quite comfortably in the driver’s seat. Such a dip may pave the way towards the 1.1570 area, marked by the low of the 12th of September. Certainly, at some point, we could see a bit of retracement happening back to the upside. The small upside correction could be viewed as a good opportunity for the bears to take advantage of the higher rate and bring EUR/USD back down again. A break of the 1.1570 level could lead the pair to a test of the 1.1530 hurdle, which acted as strong support on the 10th of September. That hurdle was also at the lowest point of September.
The RSI continues to drift lower and now looks to be heading towards 20, while the MACD remains well below both its zero and trigger lines. These momentum signs support the notion for EUR/USD to continue drifting south for a while more.
On the upside, a break back above 1.1650 could make us abandon the bearish case for a while, as it could signal the beginning of a decent upside correction. Such a move could initially aim for our next resistance of 1.1690, the break of which may see scope for extensions towards the 1.1720 obstacle, marked by the yesterday’s intraday swing high.
The euro was among the main losers against its US counterpart yesterday. The common currency came under selling interest during the early European morning following headlines that the Italian cabinet meeting over the 2019 budget would be postponed due to complications in reaching an accord. That said, last night, the government said they agreed to a budget deficit target of 2.4% of GDP, which is well above the 2.0% consensus, marking a clear victory for the two governing parties over Finance Minister Tria.
Although the deficit/GDP ratio is still below 3%, and thus in line with the EU rules, the euro remained under selling interest as a 2.4% budget rate still raises concerns over the sustainability of the nation’s finances. Now the big question is whether rating agencies will downgrade the nation’s debt and whether the European Commission will accept this budget.
As for today, euro traders are likely to pay some attention to the economic calendar and Eurozone’s preliminary inflation data for September. Expectations are for both the headline and core CPI rates to have ticked up to +2.1% yoy and +1.1% yoy, from 2.0% and 1.0% respectively. Yesterday, Germany’s CPI rate for the month accelerated to +2.3% yoy from 2.0%, suggesting that, at least, the bloc’s headline rate may exceed its forecast.
If the core rate beats estimates as well, this will be inline with ECB President Draghi’s recent view of a “relatively vigorous” pickup in underlying inflation and the euro could recover a fraction of the losses it posted yesterday. That said, with the ECB insisting that interest rates will stay at current levels “at least through the summer of 2019”, which, in our view, means that interest rates can start rising in September 2019 the earliest, we stick to our guns that there is little room left for hike expectations to come forth further.
The Canadian dollar was the only currency that managed to resist to the strength of the greenback. The Loonie reversed some of its latest losses after Canada’s PM Justin Trudeau said that a good and fair NAFTA deal is still very possible. The currency remained supported after BoC Governor Poloz noted that the BoC will continue to raise rates gradually, and that being uncertain about the future does not mean keeping interest rates on hold until inflation momentum starts to build.
As for today, Canada’s monthly GDP for July is coming out. No forecast is currently available, but anything suggesting that the economy expanded during the month is likely to be welcomed news as the prior monthly print, for June, was 0.0%. Last Friday, Canada’s CPI data showed that the headline rate slowed to +2.8% yoy from 3.0%, matching expectations, while the core rate ticked up to +1.7% yoy from +1.6%. Headline retail sales rebounded less than anticipated, but core sales accelerated by more than the forecast suggested.
All these data, combined with BoC Governor’s remarks, keep the door wide open for a rate increase at the Bank’s upcoming gathering, scheduled for the 24th of October, and a decent GDP print could further increase that likelihood. That said, given that an October hike is widely expected, we believe that the main driver in town for the Loonie remains NAFTA.
Since yesterday’s morning, EUR/CAD has been hit with heavy selling, where the pair dropped around 160 pips in a day. The rate has now broken its key support level at 1.5150, which could lead to further declines. For now, we remain somewhat bearish over the short-term outlook.
As mentioned before, EUR/CAD could keep traveling to the downside if the selling pressure remains. This is where we could start targeting the 20-pip support area, between the 1.5080 and 1.5060 levels. Since the 22nd of August, that area continues to play a key role in EUR/CAD’s life by not allowing it to drop further. If, eventually, the break happens, this could invite more bears to the table and open the path for more declines. A test of the psychological 1.5000, or even the 1.4990 could be inevitable.
Alternatively, in order to start examining whether the bears have abandoned the battlefield, we would like to see a clear move back above 1.5200. Something like that could see scope for bullish extensions towards the 1.5265 area, the break of which could open the path for the 1.5320 zone, defined by yesterday’s peak.
During the European morning, we get the final UK GDP for Q2. Expectations are for the final print to confirm its second estimate and show that the UK economy expanded 0.4% qoq. Given that we already have numbers suggesting how the economy performed after that quarter, we would treat the release as outdated. The official monthly GDP data showed that the economy accelerated to +0.3% mom in July from +0.1% in June, which led to a +0.6% expansion for the three months to July, the fastest pace in almost a year.
In the US, alongside the core PCE rate for August, we get personal income and spending data for the month. Income is expected to have accelerated to +0.4% mom from +0.3%. Spending is anticipated to have risen 0.4% mom as well, the same pace as in July. The income forecast is supported by a similar acceleration in the monthly earnings rate for the month, while the slowdown in retail sales suggests that the risks surrounding the spending forecast may be tilted to the downside.
We also have three speakers on today’s schedule: ECB Chief Economist Peter Praet, BoE MPC member David Ramsden, and New York Fed President John Williams.
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