Yesterday, the Fed minutes from the latest FOMC gathering revealed that policymakers are considering how, when, and at what speed they should begin reducing the Fed’s gigantic balance sheet, which was inflated while the Bank was purchasing assets under its prior QE operations. The Committee would like to see this process begin later this year, with a clearly communicated plan in order to avoid any financial instability.
These signals should have normally been seen as somewhat optimistic by the market, as they imply further reduction in accommodation. However, the reaction in USD was volatile, with the currency unable to assume a clear direction after the release. EUR/USD continued to oscillate between 1.0640 (S1) and 1.0700 (R1) and therefore, we keep the view that the short-term outlook of the pair is neutral for now.
The focus for USD traders now turns to the Trump – Xi Jinping meeting today (see below), as well as tomorrow’s employment data. In our opinion, EUR/USD is likely to continue trading within the range between 1.0640 (S1) and 1.0700 (R1), waiting for Friday’s jobs data to assume a short-term direction. Bearing in mind that the ADP print exceeded its forecast by far, there is the possibility for the NFP number to also beat its forecast of 180k. Something like that could encourage EUR/USD bears to drive the battle below 1.0640 (S1) and perhaps target initially the crossroad between the 1.0600 (S2) territory and the upside support line taken from the low of the 3rd of January.
Trump and Xi Jinping will meet to discuss trade
With regards to the meeting between US President Trump and the Chinese President Xi Jinping, we believe that it will be closely watched by investors, as the two are expected to discuss trade. Considering that the issue of unfair trade practices by other nations and specifically China was a monumental theme of Trump’s campaign, this meeting may be seen as a risk to continued free trade.
In our view, any talks of increased protectionism between the world’s two biggest economies could heighten concerns regarding protectionism on a global scale and thereby, weigh on the currencies of heavily trade-oriented nations, such as Australia and New Zealand. AUD/USD slid yesterday after finding resistance near the 0.7585 (R2) barrier, to break below the support (now turned into resistance) of 0.7545 (R1). Given that the pair continues to trade within the downward sloping channel that has been containing the price action since the 17th of March, we believe that the short-term outlook remains negative. Nevertheless, given our proximity to the lower bound of that channel, we would be careful of a corrective rebound before sellers decide to take control again.
As for the rest of today’s highlights:
During the European day, the economic calendar is very light. The only release that could attract some attention are the minutes from the ECB’s March policy meeting. Even though these are usually not a major market mover, given the relatively hawkish signals we got at that meeting and the subsequent Reuters article that investors over-interpreted those signals, the minutes could attract some attention.
As for the economic data, from the US we get initial jobless claims for the week ended on the 31st of March, while in Canada, building permits for February are due out.
We have four ECB speakers on the agenda: President Mario Draghi, Vice President Vitor Constancio, as well as Executive Board members Peter Praet and Jens Weidmann.
EUR/USD
Support: 1.0640 (S1), 1.0600 (S2), 1.0570 (S3)
Resistance: 1.0700 (R1), 1.0725 (R2), 1.0770 (R3)
AUD/USD
Support: 0.7525 (S1), 0.7500 (S2), 0.7460 (S3)
Resistance: 0.7545 (R1), 0.7585 (R2), 0.7600 (R3)
