The dollar gained against all the other G10 currencies, perhaps as investors scaled back bets with regards to a 50bps rate cut by the Fed at its upcoming meeting. That said, most major global bourses closed in positive territory. This may have been due to expectations of a dovish ECB on Thursday. As for today, attention is likely to fall on the UK and the final outcome of the Conservatives leadership contest, with Boris Johnson being the clear favorite for replacing Theresa May.
The dollar traded higher against all the other G10 currencies yesterday and during the Asian morning Tuesday. It gained the most against NZD, which slid after the RBNZ noted that they are looking at refreshing their unconventional policy strategy. Although this was a responce to an official information request, the idea that the RBNZ could consider QE has weighed on the currency. The dollar strengthened the least against CHF and JPY.
At first glance, the fact that the dollar gained the least against the safe havens suggests a risk-off trading environment. However, taking a look at the stock market performance, that was not the case. Most major EU and US indices closed their session in the green, while today, Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.95% and 0.45% respectively.
In our view, the dollar may have come back under buying interest on reduced bets over a 50bps cut by the Fed at its meeting next week. On Thursday, New York Fed President John Williams said that the Fed should “take swift action when faced with adverse economic conditions”, something which prompted market participants to push up the “double cut” probability. However, a New York Fed spokesperson later said that Williams’s comments were only “academic”, and not aimed at hinting what action the Fed may take next week. On top of that, St. Louis President James Bullard, which was the only member voting for a quarter-point rate decrease at the latest FOMC meeting, reiterated that a 50bps cut is not need and that he would like to go with 25bps at the upcoming meeting. This led investors to scale back their bets over a “double cut” and encouraged them to buy some dollars.
But wouldn’t this be slightly negative for the stocks? So why did major global bourses closed in positive territory if the financial community has reduced bets with regards to an aggressive action by the Fed next week? It could be due to expectations of a dovish ECB on Thursday. According to Eurozone money markets, investors are more-than-fully pricing in a 10bps cut in the deposit rate for September, while there is a 43% chance for such an action to take place this week. That said, taking into account a recent report saying that ECB officials are unlikely to rush into action in July, we believe that they may use the meeting to lay the groundwork for a potential action in September, perhaps by altering their forward guidance.
EUR/USD is finally breaking through the lower side of the range that was in play from around July 5th, roughly between the 1.1200 and 1.1285 levels. This morning, the pair broke below the 1.1200 hurdle and shows willingness to push further down. Because of that, we will take a more bearish stance for now and aim for slightly lower areas.
We can see that EUR/USD is moving now in the direction of its next potential support area, at 1.1180, marked by the low of June 18th, a break of which could clear the path to the 1.1160 hurdle. That hurdle acted as good support on June 3rd. The rate might stall around there for a bit, or even correct back up a bit. But if it continues trading below the 1.1180 barrier, this could attract the sellers again, who may lead EUR/USD back to the downside. The pair might slide to the 1.1160 zone again, but if it is not able to hold the bear pressure, a break of it could send the rate to the 1.1141 area, marked near the high of May 30th.
On the upside, if EUR/USD moves back inside the aforementioned range and climbs above the 1.1225 mark, which is yesterday’s high, might attract some more attention from the buyers, though the outlook would turn back to neutral. The rate could then accelerate further within the range, aiming for the 1.1244 hurdle, a break of which could send the pair to the 1.1268 zone, which is the intraday swing high of July 19th. This is where EUR/USD could stall for a bit, or even correct back down. But if the buying does not stop there, the pair may bypass the 1.1268 obstacle and target the 1.1285 level, which is the upper side of the range.
As for today, attention is likely to fall on the UK and the final outcome of the Conservatives leadership contest. The voting closed at 16:00 GMT yesterday and the winner will be announced today. He will officially take office as PM tomorrow afternoon. The front runner for replacing Thresa May has been Boris Johnson, who has repeatedly pledged to leave the EU by October 31st, with or without a deal, and also considered plans to suspend Parliament if he decides pursue a no-deal Brexit. MPs have backed a bid last week to stop him, but it is yet to turn into law, and the measures do not amount to an outright block.
Two junior ministers have already resigned over Johnson’s position to keep the door wide open for a disorderly Brexit, while several others, including finance minister Philip Hammond and justice minister David Gauke, said they could follow suit if he is indeed elected. The uncertainty surrounding the UK political landscape weighed on the pound yesterday, pushing it lower against the majority of the other G10s. Now the question is how the currency could react on today’s outcome.
In our view, if Boris Johnson is confirmed, not much. He is well expected to win, and his victory appears to be largely factored into the battered pound. Taking into account yesterday’s slide, we could even get a small “buy the fact” market response. The pound could rebound more if Jeremy Hunt is elected, with the only reasoning being that he has not considered suspending Parliament. However, he has not rule out a no-accord exit either and thus, we would stay reluctant to trust a long-lasting pound recovery. We believe that the risk of a no-deal Brexit combined with expectations over a dovish shift by the BoE could keep the pound in a downtrend, especially against currencies the central banks of which have not turned their eyes to the rate-cut button yet, like the Canadian dollar.
After finding good support near the 1.6175 hurdle, GBP/CAD reversed back to the upside and is now trying to make its way a bit higher. The pair formed a higher low on a shorter timeframe and could once again move in the northern direction. That said, given that the rate is still balancing below a short-term downside resistance line drawn from the high of June 3rd, the upmove might be considered as a temporary correction. If that line continues to hold GBP/CAD down, this may cause another leg selling, potentially leading to a test of the current lows of July.
A push a bit higher and a break above the 1.6410 barrier, marked near the highs of July 10th, 11th and 19th, could lift the rate to the aforementioned downside line for a quick test. But if that line stays intact, the bears could take control again and drive GBP/CAD back down below the 1.6410 obstacle, aiming for the 1.6255 area. That area was yesterday’s low and a good bouncing ground for the pair, which may again act as a good support zone.
Alternatively, if the above-discussed downside line fails to keep the bulls under it and breaks, this may open the door to some higher areas, especially if GBP/CAD climbs above the 1.6550 hurdle, marked by the low of July 1st. This way, the pair might also move above the 200 EMA, which could add another positive spin on the short-term outlook. The rate may accelerate to the 1.6640 obstacle, a break of which could allow GBP/CAD to move a bit higher and test the 1.6700 level, marked by the high of June 27th.
Apart from the results of the Tory leadership contest, there is not much on today’s agenda. The only releases worth mentioning are the UK’s CBI Industrial Trends Orders index for July and the US existing home sales for June. The UK CBI index is expected to have remained unchanged at -15, while the US existing home sales are expected to have slid 0.4% mom after rising 2.5% in May.
With regards to the energy market, the API (American Petroleum Institute) weekly report on crude oil inventories is coming out, but as it is always the case, no forecast is available.
As for tonight, New Zealand’s trade data for June are due to come out. On a yoy basis, the nation’s deficit is forecast to have narrowed to NZD 5.105bn from NZD 5.490bn in May.
As for the speakers, BoE Chief Economist Andy Haldane will step up to the rostrum.
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