Not so great expectations for next week’s FOMC meeting
FX Trade Strategist / http://www.Loonieviews.net
· US data supports continuing caution by FED
· Weekend worries include Trump’s response to North Korea missile threats
· EURUSD may be ripe for a correction ahead of FOMC meeting
This week’s data gave no reason to believe the Fed is preparing
to shift from its cautious outlook. Photo: Shutterstock
By Michael O’Neill
The Friday dump of US data was disappointing for those looking for economic reports to improve the Fed’s cautious outlook for the economy. They didn’t get, it although Hurricane Harvey likely had a negative impact.
Is EURUSD ripe for a correction?
FX markets have low expectations going into next week’s Federal Open Market Committee meeting. One of the reasons is because the supposedly “data-dependent” Fed hasn’t seen a lot of data to shift it out of its cautious stance.
A month ago, New York Fed president William Dudley said he supports another interest rate hike. Last week, he didn’t sound so sure. He said “gradually increasing rates was still appropriate. Another FOMC member, Lael Brainard, expressed concern about recent low reading for inflation and argued for a more gradual pace of rate increases.
That doesn’t bode well for rate hawks or US dollar bulls.
The FOMC is widely expected to announce that balance sheet tapering will begin in December. Quantitative easing was always described as “unconventional monetary policy.” That’s because it had never been done before with the scope of the US action. Flooding the market with cheap money appears to have fulfilled its objective of bolstering the economy. Conversely, draining the economy of cheap money can’t be viewed as being good for the economy.
In Europe, the European Central Bank stimulus programme is still going strong. Mario Draghi even warns that it could be extended. ECB rates haven’t gone anywhere. The deposit facility rate is minus 0.40%.
US rates have risen four times since December 2015. The last increase was June 2017. Since the June rate hike, EURUSD has rallied 8.5%.
Something is out of whack and in my opinion its EURUSD. The 16.5% rally since the beginning of the year is overdone and leaves the currency ripe for a correction.
EURUSD daily with Fibonacci retracement levels:
Source: Saxo Bank
The week ahead
It is FOMC decision week. Often, that means markets stay close to home before the announcement on Wednesday afternoon. That may not be the case this week, though – it depends on how President Trump responds to North Korea’s latest missile launch. The Friday morning missile launched proved that North Korea could hit Guam.
Monday, Eurozone inflation data will be released. Headline CPI is forecast unchanged, at 1.5% year-over-year while Core CPI will dip to 1.2% from 1.3% y/y.
Tuesday, the Reserve Bank of Australia minutes are released which will be of interest to AUDUSD traders. In Europe, German ZEW and minor Eurozone data are due. US economic reports include Housing Starts, Building Permits Import/Export prices, and Current Account. The tone of this data may set the tone for the FOMC meeting.
Wednesday will be quiet in Asia and Europe. In the UK, sterling traders will focus on UK Retail Sales for additional confirmation of a Bank of England rate hike in November. The FOMC is expected to leave rates unchanged but announce the start of the tapering programme. They will use the twin hurricanes as an excuse for caution on rates.
On Thursday Asia will react to the FOMC results. The Bank of Japan policy meeting and press conference are on tap. After that, there isn’t much top-tier data anywhere to inspire FX trading
Friday, New Zealand traders will be sidelined awaiting the results of the following day’s election. The National Party and Labour Party are virtually tied in polls. The Eurozone releases PMI data as do France and Germany. Canada CPI and Retail Sales reports will reopen the discussion for an October rate hike.
The week that was
Change in US dollar from September 8 EOD to September 15 (1415 GM):
Source: IFXA/Saxo Bank
On Monday, a collective sigh of relief lifted the so-called risk assets around the globe. North Korea did not detonate any H-bombs or launch any missiles, and Hurricane Irma lacked a knock-out punch.
USDCHF and USDJPY rallied at the Asia open and continued non-stop until the end of the New York session. Gold prices gapped lower, falling from $1,346.55 to $1,326.41 by the US close.
China PPI and CPI data were better than expected. The rest of the global data calendar was light. Oil prices bounced erratically in a $47.03-$48.24/barrel range. The US dollar finished with gains across the board except against the Canadian dollar, which was unchanged.
Tuesday in Asia, risk aversion worries faded. USDJPY forged ahead. AUDUSD suffered briefly after weak Business Confidence data. NZDUSD rallied with the improved risk tone. Sterling soared on better-than expected data, including CPI. It got an assist from relief that the government’s Brexit bill passed.
The New York session was busy, and the dollar was in demand (except against sterling) US treasury yields climbed and so did USDJPY. Opec’s monthly oil report predicted increased crude demand and lower production. Oil prices rallied and continued to do so for the rest of the week. The day ended with Wall Street posting record closes for the three main indices.
Source: Saxo Bank
Wednesday, the Asia and European FX sessions were noisy but the US dollar opened in New York almost unchanged from Tuesday’s close. The USDJPY rally paused when President Trump suggested that North Korea needs more than sanctions. European Commission president Juncker gave an upbeat outlook for the EU. Sterling got spanked when wage inflation data was weak. Republican House Speaker Paul Ryan’s announcement that an outline of a proposed tax plan would be released during the last week of September led to broad US dollar gains. WTI oil prices gained 2.2% when the International Energy Agency said that the global oil surplus was starting to shrink. Wall Street closed at record highs, again.
Thursday, Australia employment surged and with it, the AUDUSD. China IP and Retail Sales data were weaker than forecast. NZDUSD was undermined by election polls showing a tight race between the National Party and Labour. In Europe, the Swiss National Bank left interest rates unchanged, as expected but complained about the overvalued Swiss franc. The Bank of England also maintained policy rates but warned that some stimulus would need to be removed soon. Sterling soared, rising from 1.3155 to 1.3367. It traded steadily higher the rest of the day and closed in New York at 1.3402.
The US dollar surged when headline and core inflation data beat expectations. US August CPI rose 1.9% y/y (forecast 1.8%), and CPI-ex-food and energy rose 1.7% (forecast 1.6%, July 1.7%, y/y). FX prices churned and burned around the data and the US dollar closed mixed. The USDJPY rally stalled on a rumour (which proved true) of another North Korea missile test.
Friday, North Korea launched another missile and terrorists struck London, again. Sterling rallied when a dovish MPC member sounded hawkish. EURUSD traded firmer on broad US dollar weakness with a soft US Retail Sales report not helping.
— Edited by Michael O’Neill