Next 24 hours: Fed’s Hawkish Leanings Forgotten
Today’s report: A Hawkish Tone as Yellen Exits
The market said goodbye to Janet Yellen on Wednesday in a Fed decision that was mostly uneventful. We do say ‘mostly’ however, because there was a hawkish slant, with the central bank taking a more upbeat view of the inflation outlook.
Wake-up call
Chart talk: Major markets technical overview video
- ECB Praet
- Brexit bumps
- Hawkish Fed
- Unwelcome inflow
- building approvals
- Solid GDP
- sentiment shift
- inflation outlook
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Is Mnuchin Right About the US Dollar?, B. Rosser, Econospeak (January 29, 2018)
- Bitcoin is the New Gold, N. Smith, Bloomberg View (January 31, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has entered a period of consolidation off the recent 2018 high, though overall, the uptrend remains firmly intact and there is still room to run. The break of the 2017 high set up a bullish continuation and the next major measured move upside extension into the 1.2700 area, which coincides with monumental resistance in the form of a falling trend-line off the record high from 2008. In the interim, any setbacks should be very well supported ahead of 1.1900.
EURUSD – fundamental overview
The Euro has pulled back a bit following the slightly hawkish read of Janet Yellen’s final meeting. There were no changes to policy as widely expected, though the outlook towards inflation was more upbeat. Manufacturing data ahead out of Germany, the Eurozone and US, while the market will start thinking about tomorrow’s US jobs report. On the official circuit, ECB Praet is slated to speak.
GBPUSD – technical overview
Daily studies are in the process of unwinding from overbought levels. This in conjunction with the market reaching the measured move extension objective following the breakout above 1.3660, warns of either a period of consolidation with limited upside, or deeper setbacks over the coming sessions. But any setbacks are viewed as corrective, with the market now seen well supported into that previous resistance turned support in the form of the 2017 high at 1.3660.
GBPUSD – fundamental overview
There have been more bumps out of the UK relating to Brexit, with UK international trade secretary Fox casting doubt on whether the UK will agree to a transition phase to help smooth Brexit for businesses. Meanwhile, the FT has reported the EU is threatening sanctions on the UK, in an effort to dissuade the UK from undercutting the EU after Brexit. All of this has offset the hawkishness from Carney earlier this week, while a more hawkish tone from the unchanged Fed meeting, has also weighed on the Pound. Looking ahead, manufacturing reads out of the UK and US stand out. We also get a speech from BOE’s Brazie.
USDJPY – technical overview
The major pair has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The latest topside failure off the range high encourages this outlook, with the break back below 110.85 opening the door for an acceleration towards the 107.00-108.00 area range base in the sessions ahead. Look for any bounces to now be well capped ahead of 111.00.
USDJPY – fundamental overview
The major pair has been in recovery mode in recent sessions, perhaps getting some help from the technical side as it trades into major multi-month range support. Of course, the more hawkish read of the mostly uneventful Fed decision has also inspired renewed Yen weakness, after the Fed was more optimistic about inflation pushing back up to target. But overall, the Yen has been well bid in early 2018 despite rocketing US equities, and with stocks melting up, there are signs of capitulation on that front. This warns of even more Yen strength (USDJPY weakness) over the coming days, with a liquidation in risk correlated assets to inspire a flight back into the funding currency that is the Japanese Yen. The primary drivers of Yen demand thus far in 2018 have been broad based US Dollar weakness on soft US Dollar policy and some tweaking of BOJ policy that has the central bank moving a little further from its current super accommodative policy. Looking ahead,US manufacturing data stands out, while the market will also be very interested to see what happens in the world of equities.
EURCHF – technical overview
The market continues to trend higher, extending gains to a fresh multi-month high. The bullish price action has the market thinking about a retest of that major barrier at 1.2000 further up. In the interim, look for the current round setbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now, as its strategy to weaken the Franc could face headwinds from the US equity market in 2018. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities. But any signs of capitulation on that front into this new year, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead. Last week’s outperformance in the Swiss Franc despite flows which should have otherwise been supportive of a higher EURCHF, could already be offering up a red flag.
AUDUSD – technical overview
An impressive recovery out from the December low is showing signs of exhaustion, with the market rolling over after clearing the 2017 high and stalling out. A daily close back below 0.7957 will strengthen this outlook and open the door for a renewed wave of declines, while at this point, only a daily close back above the 2017 high at 0.8136 would suggest the market wants to look to keep pushing higher.
AUDUSD – fundamental overview
Wednesday’s softer Aussie inflation readings were followed up on Thursday with a round of discouraging build approvals. This has added to the downside pressure in a currency that was already looking vulnerable at elevated levels, with US equities extended and the US Dollar having been hit so badly. We’ve since seen the US Dollar recover on the back of the more hawkish Fed tone, and we’ve since seen some weakness in the US equity market. All of this could invite deeper setbacks ahead. Looking ahead,US manufacturing data stands out, while the market will also be very interested to see what happens in the world of equities.
USDCAD – technical overview
Despite the latest round of setbacks, there are signs of basing in this pair, after the recovery from plus two year lows back in September extended through an important resistance point in the form of the August peak. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported above a critical 78.6% fib retrace at 1.2240 on a daily close basis. Back above 1.2509 will strengthen the outlook.
USDCAD – fundamental overview
The Canadian Dollar couldn’t do much with the better than expected Canada growth data, with USDCAD dropping in the aftermath but recovering nicely off the lows. Certainly the more hawkish read of the otherwise as expected FOMC decision, was also a contributor to the Loonie selling. Overall, Canada’s recovery is still somewhat fragile, and this coupled with an unstable macro picture and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar from wanting to run much higher, especially after the Bank of Canada opted to go ahead with another rate hike last month, which will only add to the strain if the global sentiment picture deteriorates. Looking ahead, we get manufacturing data out of Canada and the US.
NZDUSD – technical overview
The market has done a good job recovering off the 2017 low from November, though additional upside could now be limited after overshooting a measured move objective in the 0.7200 area off an inverse head and shoulders formation. Overall, there is still medium term risk tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another reversal. Look for a daily close back below 0.7200 to strengthen this outlook.
NZDUSD – fundamental overview
Most of the Kiwi strength over the past several weeks has been driven off broad based US Dollar weakness, record stocks and recovering commodities prices. But with US equities showing signs of rolling over, sentiment at risk of deteriorating, and the US Dollar recovering in the aftermath of this more hawkish Fed read, it all could be warning of the start to renewed weakness. Looking ahead,US manufacturing data stands out, while the market will also be very interested to see what happens in the world of equities.
US SPX 500 – technical overview
The market continues to shrug off severely overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, medium and longer-term technical readings are tracking well overbought and are in desperate need for a period of healthy corrective action. Ultimately however, it will take a break back below 2772 at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX starts to rise from unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reduction coming into play and the Fed finally following through with forward guidance. Certainly, the more hawkish tone from an otherwise uneventful Fed meeting, albeit the last meeting for Yellen, was something that could weigh more heavily on sentiment in the sessions ahead, with the Fed’s more upbeat take on the inflation outlook, to worry investors about a more aggressive path to policy normalisation. At this point, it will take a breakdown in this market back below 2772 to turn heads.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs. Look for the current run to break through and establish above massive resistance in the form of the 2016 high at 1375, with the push to suggest a major bottom has formed, opening the door for a much larger recovery in the months ahead. Any setbacks should now be well supported ahead of 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity well supported, 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 under pressure has added 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 for an extended period, GOLD will hold up on risk off macro implications. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
Feature – technical overview
Bitcoin has come under intense pressure since topping out at a record high just shy of 20,000 in December. The market had been in a period of consolidation in the aftermath of the record run, with most of that consolidation playing out between 12,000 and 17,000. The recent break below the consolidation low opens the door for an accelerated decline towards the next measured move extension target around November levels, in the 7,000 area.
Feature – fundamental overview
The crypto asset has come under intense pressure in early 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market has also been on a euphoric ride, with the run gaining too much momentum as latecomers look to get in on the action, often a sign of a bubbling asset. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network is expected to ramp up transaction speed as it is integrated, which could be a big help to Bitcoin, though it seems the combination of a massive bubble, more regulatory oversight and a market that is still trying to convince of its proof of concept, could be at risk for deeper setbacks. Throw in an extended global equities market at risk for its own capitulation and the picture looks even gloomier.