The greenback was found on the back foot against all the other G10 currencies this morning, as the FOMC reiterated its “sidelines” wording, but Chair Powell said that a persistent and significant rise in inflation is needed before they start considering hikes. As for today, all lights will fall on the UK elections, with opinion polls suggesting that Conservatives may win Parliamentary majority. We also have two central banks deciding on monetary policy on today’s agenda: the ECB and the SNB.
The dollar traded lower against all the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed the most versus SEK, AUD and NOK.
The main event yesterday was the FOMC decision. The Committee decided to keep interest rates within the 1.5-1.75% target range and reiterated that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective”. However, they removed the part saying that “uncertainties about this outlook remain”, which was included in the October statement. With regards to the new “dot plot”, it pointed to no action in 2020, one hike in 2021 and another one in 2022.
With market participants factoring in a cut for September next year ahead of the decision, logically, this would have been positive for the dollar. However, that was not the case. The greenback came under strong selling interest after Chair Powell said that “In order to move rates up, I would want to see inflation that’s persistent and that’s significant”.
The key message we got was more or less the same as the one we got from the previous gathering. Namely, that the Fed is planning to stay sidelined, unless things fall out of orbit. However, investors were still unconvinced that the Fed is done cutting rates. According to the Fed funds futures, they still price in a quarter-point reduction to be delivered in September.
With the Committee reiterating that it will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, investors may keep close attention to incoming data as well as developments surrounding the global trade front. Upbeat data and easing of trade tensions may eventually convince them to take their 2020-cut bets off the table.
EUR/USD surged yesterday, exiting once again the sideways range between the 1.0990 zone and the 1.1090 barrier. That said, the rally was stopped near the 1.1145 level. The rate also looks to be trading above a short-term upside support line drawn from the low of November 29th, and thus, we would consider the short-term outlook to be positive for now.
If the bulls are strong enough to overcome the 1.1145 barrier, we may then see them pushing towards the 1.1175 zone, which provided strong resistance on October 21st, 31st and November 4th. However, before that happens, given the overstretched rally, we see a decent chance for a downside correction, perhaps for the rate to test as a support the 1.1115 zone, or even the aforementioned upside line.
Taking a look at our short-term oscillators, we see that the RSI lies flat near its 70 line. The MACD, although above both its zero and trigger lines, shows signs that it could start topping as well. Both indicators detect positive momentum, but their topping signs add to our view that a corrective retreat may be in the works before the next positive leg.
On the downside, we would like to see a clear dip back below 1.1090 before we abandon the bullish case. This will not only bring the rate below the pre-mentioned upside line, but also within the sideways range. The slide may then continue within the range, towards the 1.1070 barrier, the break of which could carry extensions towards the 1.1055 zone, marked by the low of December 9th.
Today, all eyes will be on the UK general election, with the results expected during the Asian morning Friday. That said, pound traders may decide to join the action ahead of the final outcome, perhaps as soon as we start getting exit polls. According to opinion polls, Conservatives lead the race, which sparked hopes that a Tory majority in Parliament could open the door for ratifying the Brexit deal agreed between UK PM Boris Johnson and the EU, thereby ending more than three years of political uncertainty. That said, we repeat for the umpteenth time that we find it hard trusting the polls. After all, they were proven wrong in estimating the support for Brexit back in 2016, as well as the results of the 2017 election.
As for the pound, we see the risks surrounding its reaction as asymmetrical. Yes, it could gain more in case of an actual Tory victory, but bearing in mind that it already rallied on such hopes, we don’t expect it to skyrocket. On the other hand, results pointing to another hung parliament could be a huge disappointment, as they would revive the risk of a disorderly exit. This could thereby push the British currency off the cliff. After all, we already got a taste of how GBP-traders feel about such a scenario. On Tuesday, a poll pointed to a narrowing Tory lead, something that hurt the British currency.
GBP/USD edged north yesterday, after it hit support near the 1.3115 zone. Today, the rate hit resistance near 1.3230 and then, it retreated somewhat. Overall, Cable is trading above the upside support line drawn from the low of November 27th, which keeps the short-term outlook positive. That said, a lot of today’s movement is likely to depend on the election exit polls. Thus, we prefer to stay sidelined for now as the election polls and the outcome could well alter the current technical outlook.
Just from the technical perspective, the current retreat may continue for a while more, but the bulls may have the chance to reenter the game from near the aforementioned upside line. They may decide to push for another test near 1.3230, the break of which may allow extensions towards 1.3270, a resistance marked by the high of March 27th.
The RSI lies above 50, but it shows signs of topping, while the MACD lies above both its zero and trigger lines. Both indicators point to upside speed, but the fact that the RSI has started to top enhances our view for a corrective retreat before, and if, the bulls decide to take the reins again.
In order to start examining whether the bears have gained the upper hand, we would like to see a decisive dip below 1.3080. This may open the way towards the psychological round figure of 1.3000, which if also gets broken, may extend the slide towards the 1.2950 territory.
Apart from the UK elections, we also have two central banks deciding on interest rates: The ECB and the SNB. Getting the ball rolling with the ECB, its latest meeting was also the last with Mario Draghi at its helm. Back then, officials decided to keep their policy and guidance unchanged, reiterating that interest rates are expected to remain at their present or lower levels until the inflation outlook robustly converges towards their aim.
Although policy action is not expected at this meeting either, it may attract special attention as this would be the first one headed by Christine Lagarde. Investors may be on the lookout for her view on monetary policy, looking for signals over how she intends to drive the monetary policy wheel. However, our view is that she will refrain from making bold comments at this meeting. We believe that she may prefer to wait for some time in order to coordinate with her colleagues and find a common line. For now, she may echo Draghi’s remarks, calling for more fiscal support by the Euro-area nations.
Passing the ball to the SNB, at its previous meeting, this Bank kept its policy untouched, reiterating that it remains willing to intervene in the FX market as necessary and that the franc remains highly valued. Since then, Switzerland has fallen into deflation and thus, it would be interesting to see whether officials will consider cutting rates. However, with rates already deep into the negative territory, cutting them further may be a difficult decision to make. Officials may show readiness to do so if needed, but they are unlikely to act at this meeting. According to Switzerland’s OIS (Overnight Index Swaps), there is only a 20% chance for a quarter-point cut to be delivered at this gathering.
As for Thursday’s data, Eurozone’s industrial production is forecast to have slid 0.4% mom in October after rising only fractionally (+0.1% mom) in September.
Tonight, during the Asian session, we get Japan’s Tankan survey for Q4. The Large Manufacturers index is expected to have declined to 2 from 5, while the Large Non-manufacturers one is anticipated to have ticked up to 16 from 15.
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