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by Charalambos Pissouros

Virus Fears Return, FOMC Stands Pat, BoE Takes its Turn

Equity indices turned south again during the Asian session today, after China’s National Health Committee announced that the number of deaths due to the coronavirus has increased to 170, while the cases of infected people surged to 7711. Yesterday, we also had an FOMC decision, with officials standing pat and Powell noting that they will not tolerate low inflation. As for today, the central bank torch will be passed to the BoE, with the big question being whether to cut or not.

Equities Turn South Again, Fed Will Not Tolerate Low Inflation

The dollar traded higher against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained versus NOK, AUD, NZD, CAD and SEK in that order while it underperformed only against CHF and JPY. The greenback was found virtually unchanged against EUR and GBP.

US performance G10 currencies

Following the calmer risk environment on Tuesday and during the Asian morning yesterday, it seems that at some point things took a 180-degree spin again, something suggested by the strengthening of the safe-havens franc and yen, but also by the weakening of the risked-linked AUD and NZD. Turning our gaze to the equity world, we see that major EU indices continued to recover somewhat aided by banks and luxury goods, while the US ones ended their session virtually unchanged with rallies in Apple, Boeing an General Electric, which reported better-than-expected results, offsetting fears over the coronavirus. The turnaround came during the Asian morning today, with Japan’s Nikkei and Hong Kong’s Hang Seng tumbling 1.72% and 2.33% respectively. Remember that Chinese markets are closed due to the Lunar Year Holiday.

Major global stock indices performance

What have heightened investors' concerns may have been new reports by China’s National Health Commission, saying that the number of deaths due to the virus has increased to 170, while the cases of infected people surged to 7711. Just to give you an idea of how fast the virus is spreading, a couple of weeks ago the cases were only 41. Now they are thousands, with cases reported in more than 15 countries outside China. For example, Thailand has reported 14 cases, Singapore 10, Japan 7, and Germany 4.

Yesterday we noted that despite Tuesday’s recovery in market sentiment, it was too early to say that everything is priced in, and the overnight turnaround proves just that. We repeat that it’s hard to predict when all this will end, and how much it will affect economic activity. Today, the WHO (World Health Organization) Emergency Committee will gather again to decide whether the fast-spreading virus has become a global emergency. Last time, they said that it was too early to say something like that, but the chances of ringing alarm bells worldwide this time is much higher in our view. If this is the case, investors may continue diverting flows from risk assets to safe havens.

Apart from updates surrounding the coronavirus, we also had an FOMC meeting yesterday, with the Committee keeping interest rates unchanged, and literally changing only 4 worlds in the accompanying statement. The first was the month, from October to December. Then, officials noted household spending has been rising at a “moderate” pace, instead of “strong”, which was the case in October. The next change was in their forward guidance. They repeated that the current policy remains appropriate to support economic activity, but in the inflation wording they noted that policy is appropriate to support inflation “returning to” their symmetric 2% target. Last time, they had “near” instead of “returning to”.

At the press conference, Chair Powell said that they made the change in order to avoid misinterpretation and highlight that they are not comfortable with inflation persistently under 2%. In our view, this was somewhat dovish. With their favorite inflation gauge, the core PCE rate, staying below target since December 2018, policymakers may start thinking about rate cuts again if this continues for more. What enhances our view is that Powell reminded us that policy is not in a preset course. With regards to the coronavirus, the Fed Chief said that it is likely to disrupt activity in China, maybe worldwide, but it is very uncertain how far this will go. He also added that the Fed is monitoring the situation carefully.

US CPIs vs core PCE inflation

The dollar traded somewhat lower after the statement and during the conference, but was quick to claw back those losses, perhaps due to the fact that despite Powell’s comments on inflation, the Committee still sees the current stance of policy as appropriate. It could also be that the greenback wore its safe-haven suit and rose due to the virus concerns. In any case, according to the Fed funds futures, expectations around the Fed’s future actions have not changed. Investors still expect a rate cut to be delivered in September.

Fed funds futures market vs FOMC interest rate expectations

As for our view, the dollar could continue being benefited from a risk-averse environment, especially against the commodity linked currencies AUD, NZD and CAD. Australia and New Zealand are close trading partners with China and that’s why their currencies may be affected more. Having said that, Canada is a major oil exporting nation, and with fears over oil demand pushing prices down, the Loonie is also likely to stay pressured, albeit not as much as its other two peers.

NZD/USD – Technical Outlook

From around the beginning of January, NZD/USD continues to drift lower, while trading below a short-term tentative downside resistance line taken from the high of December 31st. But, recently, the pair found strong support near the 0.6505 hurdle, which is also marked near the low of December 4th. In order to aim lower, we need a break below that hurdle, but let’s not forget that there is a possibility to see a small correction to the upside. If the downside line continues to hold, we will stay bearish, at least in the near term.

As mentioned above, if the rate rebounds from that support area, at 0.6505, it may travel slightly higher. But if the pair continues to trade below the aforementioned downside line, this move higher could be classed as a temporary correction before another leg of selling. If so, NZD/USD may get pushed to the 0.6505 obstacle again, which if broken would confirm a forthcoming lower low and the rate could travel to the 0.6465 level, marked by the high of November 4th. Slightly below that lies another potential support area, at 0.6438, which might get tested if the rate keeps on sliding. That area marks the highs of November 21st and 29th.

In order to aim higher again, at least in the near term, we would first like to see a break of the previously-mentioned downside line and a rate-rise above the 0.6630 barrier, marked by the high of January 24th. This way, more buyers could join in and drive the pair to the 0.6666 obstacle, a break of which may send NZD/USD to the next possible resistance zone, at 0.6720, marked by the inside swing low of December 31st.

NZD/USD 4-hour chart technical analysis

BoE Policy Decision: To Cut? Or Not to Cut?

As for today, the central bank torch will be passed from the FOMC to the BoE. With market participants assigning a 45% chance for a cut today (according to the CME MPC futures), it appears that it would be a much more interesting gathering. This would also be one of the “bigger” meetings, where apart from the decision, the statement and the minutes, we will also get the quarterly Inflation Report and a press conference by Governor Mark Carney.

BoE interest rate probabilities

Two weeks ago, economic data disappointed largely, which combined with dovish remarks by several BoE officials, including Governor Carney, raised strong speculation over a rate cut at this gathering. However, last week, employment data for November, and most importantly, preliminary PMIs for January came in better than expected, leaving investors scratching their heads on how the Bank may act. As we already noted, whether the Bank will cut rates or not appears to be more or less a coin toss decision. In other words, it will be a close call.

UK PMIs

However, bearing in mind that the PMIs were a first sign on how the economy has been performing after the elections, revealing some improvement, we believe that policymakers may refrain from acting this time and perhaps wait for a bit longer to see whether this improvement will be sustained or not. If not, they will probably not hesitate to push the cut button at one of the next meetings.

GBP/AUD – Technical Outlook

GBP/AUD continues to trade above a short-term tentative upside support line drawn from the low of January 20th. At the same time, the rate is still below its key resistance barrier, at 1.9352, which is the current high of this week. In order to get comfortable with further upside, we need a clear break above that barrier first, hence why we will stay somewhat bullish for now.

Eventually, if we do see a strong move above the 1.9352 area, this would confirm a forthcoming higher high and more buyers may see it as an opportunity to join in. The pair could then travel to the 1.9386 hurdle, a break of which might send it to the 1.9471 zone, marked by an intraday swing high of December 16th. GBP/AUD may stall around there for a bit, or even correct back down slightly. That said, if the rate remains above the aforementioned upside line, we will continue examining the upside. Another push from the bulls could bring the pair back to the 1.9471 area, a break of which may set the stage for a further push north, potentially targeting the 1.9522 level, which is the highest point of December.

Alternatively, in order to start looking south, at least in the short run, we would like to wait for a break of the above-discussed upside line and for a rate-fall below the 1.9207 hurdle, which is the current low of this week. Such a move may increase GBP/AUD’s chances of a further move down, possibly aiming for the 1.9095 obstacle, a break of which could set the stage for a push to the 1.9002 level, marked near the high of January 17th.

GBP/AUD 4-hour chart technical analysis

As for the rest of Today’s Events

During the European session, apart from the BoE decision, we also get Germany’s preliminary CPIs for January. Both the CPI and HICP rates are expected to have risen to +1.7% yoy from +1.5%, which may raise speculation that the Eurozone headline CPI, due out tomorrow, may also accelerate. The nation’s unemployment rate for January is also coming out, alongside with that of the Eurozone as a whole, but for the month of December.

German vs Eurozone CPIs inflation

From the US, we get the 1st estimate of Q4 GDP. Expectations are for the economy to have grown 2.1% qoq SAAR, the same pace as in Q3. Nonetheless, bearing in mind that the Atlanta fed GDPNow and the New York Fed Nowcast models point to growth rates of +1.8% and 1.2% respectively, we see the risks surrounding the official print as tilted to the downside. Thus, a slowdown, combined with the somewhat dovish Fed, may prompt market participants to bring forth their cut bets. However, we repeat that we don’t expect any dollar weakness to last for long. In a risk-off environment, it could attract flows, especially against risk linked currencies. We also have initial jobless claims for last week, with the forecast suggesting a small increase to 215k from 211k.

US GDP qoq SAAR rate

As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. The unemployment rate is forecast to have ticked up to 2.3% in December from 2.2%, while the jobs-to-applications ratio is expected to have ticked down to 1.56 from 1.57. No forecast is available for the headline Tokyo CPI for January, but the core rate is anticipated to have held steady at +0.8% yoy. The preliminary industrial production is expected to have rebounded 0.7% mom in December, after sliding -1.0% in November, while retail sales are forecast to have fallen 1.8% yoy, following a 2.1% decrease. China’s official PMIs for January are also due to be released, with investors on the edge of their seats in anticipation on whether the coronavirus has already started affecting the world’s second largest economy.

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