Sterling shines ahead of FOMC minutes
FX Consultant / IFXA Ltd
- Dissension in the ranks helps GBPUSD bulls
- USDX warns of onset of new USD uptrend
- USDCAD sentiment bullish but gains will be difficult
By Michael O’Neill
Cable traders were gobsmacked again today after the release of the Bank of England minutes this morning noted that two Monetary Policy Committee members had voted to increase rates. GBPUSD reluctantly bounced as traders were confused by the mixed signals. Last week, GBPUSD got whacked following the Quarterly Interest Rate report when Bank of England governor, Mark Carney, voiced concerns about "remarkably weak" pay growth. This comment was interpreted to be backing away from his June position that UK rates would be rising sooner rather than later. Yesterday’s soft UK CPI and PPI data fuelled fears that rate hike concerns were fading fast, and GBPUSD plunged through the key 200-day moving average support at 1.6675. There are really only two conclusions to derive from the BoE rate hike debate:
1. UK rates are extremely low and will be rising.
2. The BoE doesn’t have any idea when the economic conditions will merit a rate hike.
What do FX traders know that bond traders don’t? The US dollar has been on a tear over the past 24 hours despite a lack of a clear catalyst for the demand. EURUSD has broken through the August base of 1.3340 with some technical studies forecasting further losses to 1.3200. USDJPY is on the verge of a breakout above 103.20 that targets 105.00, and GBPUSD has broken support at 1.6700. The rationale for the renewed US dollar demand appears to be on anticipation of a hawkish tone to the Federal Open Market Committee (FOMC) meeting minutes and the conviction that US Federal Reserve chairman Janet Yellen’s Jackson Hole speech will be a game-changer. Meanwhile, the 10-year US government bond yields are well off their August 1 peak. It was only a few weeks ago that the US dollar rose and fell with the ups and downs of the 10-year yields. If the FOMC minutes and Yellen’s speech were going to be as hawkish as what the FX market seems to be implying, it stands to reason that 10-year yields would be a lot higher than they are now.
USDX supports USD bulls
The US dollar index (USDX) is showing signs that a new leg of the highly anticipated US dollar rally is starting to take hold. The USDX had been consolidating gains in the 81.30-80 area for the whole of August while maintaining the uptrend, which began at the end of June. The consolidation period may have ended if yesterday’s break above 81.80 can be sustained. The short-term technicals are bullish above 81.70 targeting 82.75. A move below 81.70 would suggest more 81.30-80 consolidation.
Source: Saxo Bank
The prevailing sentiment towards the Canadian dollar is negative, mainly due to the perception that Canadian economic growth will lag behind that of the US, and because of bullish USDCAD technicals. Both rationales are dubious, at best. On the economic front, today’s Canadian Wholesale trade year-over-year measure of 8.7% was the best print since 2011. That result is in keeping with the better-than-expected results for the past month’s worth of data. Granted, the employment data is sketchy but it doesn’t warrant selling Canadian dollars from the current level. Today’s FOMC meeting and the Jackson Hole speeches have given USDCAD a bid even though Friday’s Canadian CPI and Retail Sales data risk surprising to the upside and creating renewed Canadian dollar demand.
USDCAD technical outlook
The short-term USDCAD technicals are bullish while trading above both 1.0930 and 1.0890. However, there is strong resistance in the 1.0960-90 area and again at 1.1010, which may contain additional USD strength. A move below 1.0930 will see another probe of 1.0890 and more 1.0890-1.0940 consolidation.
Source: Saxo Bank