Heavy Calendar for FX Traders
Big day for the US today. First markets will get the first release of GDP then a few hours later the Federal Reserve’s rate decision. But let’s not forget ADP private employment (expectations 110k). US 3Q real GDP is expected to rise 1.5% q/q, decelerating from 2.0% in Q2. The US has to look inward for growth as recent quarters have been led by personal consumption expenditures. As for the Fed, we expect the FOMC to lower their policy rates by 25bp. There will be no updated economic forecasts, therefore the focus will be the post-meeting statement and Chair Powell’s press conference. There is a significant risk that the committee will signal that a pause is now more likely following three straight 25bp cuts. However, with the focus on growth risk over inflation concerns the perception of prolonged trade tensions could keep the dovish members in easing mode.
Thursday will bring the highly anticipated Bank of Japan meeting. While the BoJ peer group and EM counterparts have been easing, Japan has provided only dovish messaging. The headline narrative is a weakness due to the global economic backdrop; the reality has been Japan data has held up relatively well. Tankan is sable, manufacturing weakens has not spread to other parts of the economy and economic surprise indexed is now skewed to the upside. Inflation outlook remains dim but challenging the trend does not seem to be a priority. With the central bank having already throw everything including the kitchen sink to simulate price pressure pulling more levers with the limited effect is not an inspiring choice. In our view, the policy stance will remain unchanged. JPY has unperformed over the last month due to overstretching positioning and reduction of policy risks. The risk is balanced of USDJPY as strong Japanese equities (Nikkei hit 52-week high) will drive inflows (despite re-hedging exposures) yet rate spread will help retail position back into USD. USDJPY upside will be limited by 200d MA resistance at 109.40.
GBP set to close the month in style
The approval by EU leaders of a longer three-month extension until 31 January 2020 finally provided British MPs with good reasons to support early parliamentary elections on 12 December, although Prime Minister Johnson had to find a way around the two-thirds Fixed-term Parliaments Act in order to get support for the bill after a third failure on Monday. Despite being largely overshadowed by Brexit, the race for December elections is expected to stay turbulent, with differing goals among main political forces. Yet even if PM Johnson’s Conservative party were to win the support of voters and eventually ratify the Withdrawal Agreement, a post transition period deadline should remain, as a definitive EU – UK relationship will then have to be negotiated. Sterling optimism should stay high in the coming days as it currently trades at 5-month high.
With a backing of 438 MPs in favor of an early Christmas election and polls favoring the Tories with a tight 13% advance against Labor, it seems that a divided electorate should redistribute the cards from historically leading political parties. In this context, coalitions are likely to play a major role in the vote, with Liberal Democrats, Scottish National Party and Labor parties likely to challenge Brexit intentions while a Scotland independence referendum could also be put on the table. In addition, after the entry into force of a transitional period no later than the day after 31 January 2020, the UK will have to respect its financial commitment to the EU. Contributions are estimated at $42 billion and are expected to be made by 31 December 2020, the official year-end date, which will most likely be subject to further extensions of up to one or two years. Accordingly, Sterling confidence should stay firm for the time being, even if further headwinds are expected after the divorce date.
GBP/USD is currently trading at 1.2886, rising by +4.85% in October, a 21-month high hike. Major resistance at 1.2984 (18/10/2019 high) still remains.
