Next 24 hours: Central Banks Catch Hawkish Fever
Today’s report: Did the Fed Just Say ‘No Mas?’
The market has been reacting to the latest Fed decision into Thursday, with risk markets looking a little more vulnerable, at least for now, after the Fed perhaps surprised many and kept with its forward guidance, despite a recent slowdown in US economic data. Plenty of data and risk ahead.
Wake-up call
Chart talk: Major markets technical overview video
- Euro reconsiders
- BOE decision
- Tough call
- SNB NIRP
- Aussie employment
- OIL declines
- soft GDP
- new message
- Global uncertainty
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Unheralded Chinese Bonds Offer, J. Kynge, Financial Times (June 15, 2017)
- Tell My Horse, B. Hunt, Epsilon Theory (June 12, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is showing signs of short-term exhaustion after extending its 2017 run. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported in favour of the next higher low and bullish continuation towards key resistance around 1.1365, which represents the August 2016 peak. Only a break back below 1.1110 would now take the immediate pressure off the topside.
EURUSD – fundamental overview
The Euro managed to push to a fresh 2017 high on Wednesday, just barely, before pulling back into the close. The initial surge came from a softer batch of first tier US data that included retail sales and inflation. Both releases got the market excited about a more dovish Fed decision. However, the Fed failed to deliver on this expectation and retained its forward guidance, setting itself on a different course where it may actually follow through this time round. Of course, the implication is not as Euro favourable given the fact that it pushes yield differentials back in the Buck’s favour. Still, with nothing confirmed as of yet, the trend of selling the US Dollar and buying the Euro remains intact and demand is expected to emerge into dips. As far as today goes, we get Eurozone trade, the Bank of England policy decision, US initial jobless claims, Empire manufacturing, the Philly Fed and US industrial production.
GBPUSD – technical overview
The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips ahead of 1.2500 in favour of a higher low and bullish continuation towards a measured move extension objective at 1.3500 in the weeks ahead. A breakout above critical resistance at 1.2775 back in April triggered a structural shift in the major pair warning of a longer-term base. Only a break back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
Wednesday’s economic data was a wash for this major pair, with softer UK earnings offset by disappointing US inflation and retail sales. This left the market trading on Fed event risk, which in the end, forced the market to reconsider bearish US Dollar bets after the Fed failed to backtrack on forward guidance, holding to its outlook for another rate hike in 2017. The Pound has however been getting some support on the political front, as the possibility for a softer Brexit makes the rounds in the aftermath of the surprise UK election result. The notion of ‘NO Brexit’ even  came up this week after German FinMin Schaeuble and French President Macron teased the door was open for a return to the EU bloc if the UK wished. Looking ahead, it should be another busy day with UK retail sales and the Bank of England policy decision on tap. The US docket is also not something that should be overlooked with initial jobless claims, Empire manufacturing, the Philly Fed and industrial production due.
USDJPY – technical overview
A recent recovery run off the 2017 low has stalled out, with the market sharply reversing course to the downside. This latest daily close back below 112.00 now exposes a possible retest of the yearly low at 108.13. In the interim, look for any rallies to be well capped ahead of 112.00, though only a break back above the recent high at 114.37 will negate the outlook and take the pressure off the downside.
USDJPY – fundamental overview
It’s going to be interesting to see what this major pair does in the days ahead when you consider a Fed decision that could be both USD bullish and Yen bullish at the same time. On the one side, the US Dollar could get a lift from the more hawkish decision after the Fed downplayed softer data and stuck with its forward guidance calling for another hike in 2017. On the other side, the potential risk off impact of higher US rates could open risk liquidation that benefits the traditionally correlated Japanese currency. Meanwhile, there’s been chatter of the need for a more official conversation on policy reversal over at the BOJ, which will make Friday’s BOJ decision even more interesting. Still, reports out from the Sankei this week have conflicted with this view, saying the BOJ won’t be making any tweaks to its economic assessment just yet. Looking at today’s docket, key standouts include US initial jobless claims, empire manufacturing, the Philly Fed and industrial production.
EURCHF – technical overview
A recent break above 1.0900 has taken the short-term pressure off the downside and could be warning of a more significant structural shift. Next key resistance comes in at 1.1000, with the psychological barrier coinciding with a high from August 2016. The establishment above 1.1000 would force a meaningful shift in the structure and open the door for longer-term upside. At the same time, while the market holds below 1.1000 the overall trend is still bearish and a break back below 1.0800 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities and rising geopolitical tension should be a worry for the SNB as any capitulation on the equity front is likely to invite massive safe haven Franc demand the central bank will be unable to offset, irrespective of the central bank’s commitment to negative rate policy as reflected in today’s decision. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will take on a more hawkish policy approach in the months ahead. But the key focus for this market going forward will unquestionably be on the performance in US equities given the influence on broader sentiment. Any signs of intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF. Certainly Wednesday’s message from the Fed in which it refused to back away from forward guidance will only make the SNB’s job that much tougher.
AUDUSD – technical overview
Despite the latest rally,the market continues to be very well capped into medium-term resistance around 0.7800. Ultimately, any moves to the topside are therefore classified as corrective with the market expected to stall out and roll over again. Look for a break back below 0.7500 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
Overall, the Australian Dollar has done a good job holding up on the back of broad based US Dollar weakness in 2017 and local developments that include a recently balanced RBA decision, better than expected Australia GDP, solid China data and this latest impressive Aussie employment report. However, there are plenty of offers from medium-term players into this rally, with these accounts still feeling quite skeptical about the outlook for China, elevated equities and choppy commodities prices. Moreover, the Fed has just delivered a decision that was more hawkish than expected, which could both push yields back in favour of the Buck, while also weighing on Aussie if risk comes off as a consequence. Looking at today’s docket, key standouts include US initial jobless claims, empire manufacturing, the Philly Fed and industrial production.
USDCAD – technical overview
The latest round of setbacks has taken the pressure off the topside for now, with the market trading back into the middle of a longer-term range. The recent break below 1.3200 opens the door for the possibility of a more pronounced decline in the days ahead towards 1.3000. Ultimately however, the longer-term uptrend remains intact and setbacks should be well supported around the 1.3000 psychological barrier. Look for a break back above 1.3325 to strengthen the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar is the strongest in the developed currency basket over the past week, helped along by last Friday’s solid Canada employment report, an upbeat assessment of the Canadian economy out from RBC and this week’s hawkish comments from Bank of Canada Wilkins and Poloz. The central bankers have been flagging a reconsideration of current policy stimulus and the prospect for a rate hike in the 2017 pipeline. Odds for a 2017 rate hike have jumped well above 50%, reflecting this shift in BoC sentiment, clearly benefiting the Loonie as a result. However, the Loonie could be at risk of rolling back over with the Fed sticking to its forward guidance on Wednesday despite a data slowdown in the US. Meanwhile, OIL remains under pressure and could easily shake things up if the downside persists. Looking at today’s docket, we get Canada manufacturing shipments. Key standouts on the US calendar include initial jobless claims, empire manufacturing, the Philly Fed and industrial production.
NZDUSD – technical overview
Despite the intense surge over the past several days, the overall pressure remains on the downside with the market expected to be very well capped around 0.7300. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high, with the outlook strengthened on the May breakdown to fresh 2017 lows. Only a clear break back above 0.7300 would compromise the outlook, while back below 0.7170 strengthens the bearish case.
NZDUSD – fundamental overview
Everything was looking great for the New Zealand Dollar ahead of the Fed decision, with the currency racing up to multi-day highs on the back of disappointing US retail sales and CPI. But it’s been a much tougher go since, with the Fed maintaining a more hawkish tone, Kiwi GDP coming in softer than expected and an RBNZ research paper postulating a continued decline in the neutral rate. Looking at today’s docket, key standouts include US initial jobless claims, empire manufacturing, the Philly Fed and industrial production.
US SPX 500 – technical overview
The market has been unable to break down below major support at 2320 thus far, leaving the pressure on the topside and the door open for that next big record push towards a measured move extension at 2480. However, if setbacks intensify and the market breaks down and closes below 2320, this will signal a shift in the structure and suggest a meaningful top is finally in place ahead of a more significant corrective decline.
US SPX 500 – fundamental overview
There has been a lot of talk about a potential top in the US equity market, with the rally pushing to record highs at an unnerving pace in the face of some disturbing fundamentals including exhausted (and reversing) Fed policy and rising geopolitical risk. And certainly this ongoing turmoil surrounding the US administration has made things even more tense. But overall, the US equity market has done a good job proving it can easily buy back into any dip and keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. This bet will be put to the test in an even bigger way going forward, after the Fed surprisingly held to its forward guidance, still calling for another rate hike in 2017 despite a slowdown in data, something that should unnerve investors.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016, putting in a series of higher lows and higher highs. This latest break to a fresh 2017 high confirms that next higher low in the 1215 area and opens an upside extension towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar back under pressure in 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, gold may continue to find bids on risk off macro implications.
Feature – technical overview
USDZAR has been under pressure in recent weeks, though setbacks have managed to stall ahead of the 2017 low thus far. Look for a break back above 13.21 to negate the bearish outlook and open the door for a bullish resumption.
Feature – fundamental overview
The South African Rand has done a good job holding up in the aftermath of last Friday’s Moody’s downgrade with a negative outlook. Moody’s cited a weakening South Africa institutional framework, reduced growth prospects and the erosion of fiscal strength as the primary drivers behind its decision. However, the market was readying for the possibility of a two notch downgrade and the ability for the country to escape this outcome, barely clinging on to investment grade status, has been helping to offset weakness in the aftermath. It would seem though that with all the political mess in the country and concern over the overall health of the economy, the greater risk from here is for Rand weakness. Remember, a lot of Rand strength in 2017 has come from broad US Dollar weakness and equity market strength. But with the Fed sending a message on Wednesday that it is keeping with forward guidance calling for another rate hike in 2017, this could open the door for a fresh wave of downside pressure on emerging market FX. It’s worth noting South Africa retail sales impressed on Wednesday but broader macro flows are more pressing right now.