Next 24 hours: Repricing the Fed and Selling US Dollars
Today’s report: Central Bank to the World – Impact and Implications
The US Dollar has been sold in the aftermath of the more dovish leaning FOMC decision in which the Fed dropped its language of gradual tightening and a roughly balanced outlook, while highlighting a flexible approach to reducing the balance sheet, in light of the current backdrop. What does it all mean?
Wake-up call
- Eurozone growth
- Brexit deal
- Risk assets
- policy strategy
- China PMIs
- USDCAD Canada GDP data in focus
- US-China trade
- Fed model
- Hard asset
- Bitcoin outlook
- Demand expected
Peformance chart: 5-Day Performance v. US dollar
Suggested reading
- Jeremy Corbyn Is Worse Than a ‘No-Deal’ Brexit M. Ashworth, Bloomberg (January 30, 2019)
- Theresa May’s Dangerous Game of Political Chicken, R. Shrimsley, Financial Times (January 30, 2019)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Despite the latest round of setbacks, the market looks to be in the process of carving out a meaningful base off the multi-year low from 2017, with a higher low sought out ahead of the next major upside extension back towards and through the +3 year high from 2018 around 1.2550. Look for the major pair to continue to be well supported on dips into the 1.1300 area, with only a break back below the 2018 low around 1.1215 to compromise the outlook. A push above 1.1570 will strengthen the outlook.
EURUSD – fundamental overview
The Euro has rallied up in the aftermath of the more dovish leaning Fed decision. The Fed removed its pledge of ‘further gradual increases’ and reiterated it would be ‘patient’ before making any further moves. On the data front, German retail sales has come out roughly in line with expectation. The market will now digest German unemployment, Eurozone GDP, US core PCE, initial jobless claims and Chicago PMIs.
EURUSD – Technical charts in detail
GBPUSD – technical overview
We view the pullback in 2018 as a correction within a developing uptrend off the 2016 low and will be looking for a higher low to carve out well ahead of 1.1840, in favour of a push back to the topside. For this to play out, the market will ideally need to hold above some meaningful support in the 1.2300s and recover back through the September 2018 peak at 1.3300. The recent break back above 1.3000 helps to strengthen the bullish prospect. Next short-term resistance is up at 1.3175.
GBPUSD – fundamental overview
The market is waiting for more clarity on next steps with Brexit. Theresa May is trying to get a deal pushed through, looking for further reassurances on the Irish backstop and other ways to sweeten the package, but continues to face headwinds. The March exit deadline is approaching, though it will be hard to see a scenario where the UK leaves without a deal. It seems the more likely possibility is an extension of the trigger date to allow more time to figure things out. Overall, the Pound has been well supported as worst case fears of no-deal Brexit are priced out and as the US Dollar comes under broad pressure in the aftermath of the more dovish leaning FOMC decision. Looking ahead, we get a batch of US data that includes core PCE, initial jobless claims and Chicago PMIs.
GBPUSD – Technical charts in detail
USDJPY – technical overview
The major pair is in the process of consolidating the latest round of declines within a bigger picture downtrend. Look for any recovery rallies to be well capped ahead of 111.00 in favour of the next major downside extension below the 104.63, 2018 low. This would expose a very important psychological barrier at 100.00 further down.
USDJPY – fundamental overview
The major pair will continue to track along with risk sentiment. After benefiting from a healthy rebound in stocks this month, the market could be getting ready to roll back over again. We don’t see equities holding up in a world where risk assets are exposed to the realities of exhausted monetary policy and government stimulus post 2008 financial markets crisis. The major pair is also vulnerable to broad based US Dollar selling in the aftermath of the more dovish leaning FOMC decision. Looking ahead, we get a batch of US data that includes core PCE, initial jobless claims and Chicago PMIs.
EURCHF – technical overview
The market has been in the process of consolidating off the 2018 low, which coincided with critical support in the 1.1200 area. However, at this stage, there is no clear directional bias, with the price action deferring to a neutral state. Back above 1.1500 would get some bullish momentum going for a push to 1.2000, while back below 1.1185 would be quite bearish.
EURCHF – fundamental overview
The SNB remains uncomfortable with Franc appreciation and continues to remind the market it will need to be careful about any attempts at trying to force an appreciation in the currency. But the SNB will also need to be careful right now, as its strategy to weaken the Franc is facing headwinds from a less certain global outlook. Any signs of sustained risk liquidation in 2019, will likely invite a very large wave of demand for the Franc that will put the SNB in the more challenging position of needing to back up its talk with action, that ultimately, may not prove to be as effective as it once was, given where we’re at in the monetary policy cycle.
AUDUSD – technical overview
Despite the recent breakdown below the 2016 low, inability to establish below that low (around 0.6825), will keep the market from wanting to get overly bearish and could even warn of some form of a longer-term base. However, a drop back below the 2016 low again, would expose deeper setbacks towards the 2008 low around 0.6000. As far as the topside goes,the market would need to break back above 0.7400 to force a bullish shift in the structure.
AUDUSD – fundamental overview
The Australian Dollar has been a standout performer over the past week, with the currency benefitting from a combination of factors that include this latest dovish leaning FOMC decision, upbeat China PMIs, hawkish RBA Harper comments and this week’s hotter than expected Aussie inflation readings. Still, we continue to see risk assets vulnerable on account of US trade policy and exhausted central bank and government stimulus efforts post 2008 crisis, which could keep Aussie from really taking off in 2019. Thursday’s Aussie data came in mixed and hasn’t factored all that much into flow. Looking ahead, we get a batch of US data that includes core PCE, initial jobless claims and Chicago PMIs. The market will also update developments on the US-China trade talk front.
USDCAD – technical overview
A period of intense correction has kicked in after a run to its highest levels since May 2017. Overall, the structure remains constructive, with dips expected to be well supported ahead of 1.3000 for renewed upside. Only back below the psychological barrier would compromise this view.
USDCAD – fundamental overview
The Loonie has put in an impressive recovery run off the 2018 low against the Buck, getting a big boost from a jump in the price of OIL, a more balanced Bank of Canada outlook, renewed selling of the US Dollar on the back of a repricing of Fed expectations and soft Dollar US administration trade policy. At the same time, these same drivers have the ability to offset Loonie demand, if accompanied by a selloff in global equities. Looking at today’s calendar, we get Canada GDP data along with US readings that include core PCE, initial jobless claims and Chicago PMIs.
NZDUSD – technical overview
While the bigger picture outlook still shows the market in a downtrend, as per the weekly chart, there’s a case to be made for a meaningful low in place at 0.6425. As such, look for the latest setbacks to be well supported ahead of 0.6500 in anticipation of additional upside, with only a break back below 0.6500 to put the focus back on the multi-month low from October at 0.6425. A break back above 0.6970 will strengthen the constructive outlook.
NZDUSD – fundamental overview
The New Zealand Dollar is enjoying the benefits of some risk on price action in January, along with renewed selling of the US Dollar in the aftermath of a more dovish leaning Fed decision. Another source of shorter term Kiwi demand comes from the news of S&P reaffirming New Zealand’s FX debt rating at AA, while raising it’s outlook from stable to positive. Cross related demand for Aussie has prevented the New Zealand Dollar from a bigger rally on Wednesday, though Kiwi has managed to trade higher against the Buck. The source of the cross Still, Kiwi faces headwinds in an environment where risk assets vulnerable to the realities of exhausted monetary policy accommodation and government stimulus post 2008 crisis, and risk assets will be a lot more vulnerable if trade talks between the US and China deteriorate. Looking ahead, the market will be focused on the headlines out from the US-China trade talk front, while also taing in US data that includes core PCE, initial jobless claims and Chicago PMIs.
US SPX 500 – technical overview
There have been legitimate signs of a major longer term top, with deeper setbacks projected in the months ahead. Any rallies should now continue to be very well capped ahead of 2800, in favour of renewed weakness that targets an eventual retest of strong longer-term resistance turned support in the form of the 2015 high at 2140. The projection is based off a measured move extension derived from the previous 2018 low from February to the record high move.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not as strong into 2019. The lag effect of Fed policy normalisation, US protectionism, ongoing White House drama and geopolitical tension are all warning of deeper setbacks ahead. The Fed has also finally acknowledged inflation no longer running below target, something that could very well result in even less attractive equity market valuations this year, given the implication on rates. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as the movement here is something that will continue to stress the market in 2019.
GOLD (SPOT) – technical overview
There are signs that we could be seeing the formation of a more significant medium to longer-term structural shift that would be confirmed if this latest recovery can extend back through big resistance in the form of the 2016 high at 1375. Look for setbacks to be well supported ahead of 1200, with only a close back below 1200 to compromise the constructive outlook. The latest push through 1300 strengthens the outlook.
GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and trade war threats. All of this should 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.
BTCUSD – technical overview
At this stage, any upside moves are classified as corrective ahead of what could be the next downside extension and bearish continuation. It would take a break back above previous support in the 6,000 area to take the pressure off the downside. Next critical support comes in the form of the July and September 2017 lows, around 2,000 and 2,975 respectively.
BTCUSD – fundamental overview
Bitcoin has just gone through a tough 2018, with the cryptocurrency suffering on a number of fronts. Still, overall, the cryptocurrency and the technology it rests on continue to show a lot of potential looking out and we expect the market will regain composure over the medium to longer term.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
The latest recovery rally has stalled out into a meaningful previous support zone, to keep the pressure on the downside, with risk for a bearish continuation to next critical support in the 50-75 area. At this point, it would take a sustained break back above 167 to take the immediate pressure off the downside.
ETHUSD – fundamental overview
We’re coming off a year of dramatic weakness in the price of Ether in 2018 and the cryptocurrency continues to face headwinds into 2019. Ongoing regulatory challenges and a global economic downturn are some of those headwinds that need to be considered. At the same time, longer term prospects are looking quite bright and valuations are increasingly attractive. There is a lot of demand for Ether that has been reported between $50 and $100.