Dollar Stays Weak as FOMC Minutes Awaited, Euro Extending Rebound

Dollar stays generally weak today as markets await September FOMC minutes. The key takeaway of that FOMC meeting was that policymakers stick to the plan to raise interest rate one more time this year. And they projected to hike three more times next year. Markets pricing for December hike jumped sharply since then. Fed fund futures are implying 93.1% odds for that. Core inflation projection for 2017 and 2018 were revised slightly lower. But core inflation forecasts for 2019 and 2020 were kept unchanged. The accompanying statement and economic projections suggested that Fed was not too concerned with recent slowdown in core inflation. And that was being reflected in the overall tone of comments of Fed officials so far. Markets will look into more details on how comfortable the policy makers are on inflation outlook. But overall, we’re not expecting anything revealing from the minutes.

With no key economic data to be featured from US, focus will stay on news regarding US President Donald Trump’s tax plan. It’s clear that Republicans only get 52-seat majority in the Senate. Trump’s feud with lawmakers of his own party is making the case even more shaky. On the one hand, he is openly in verbal exchanges with Senator Bob Corker. There are also ideological demands from Senator Rand Paul and procedural demands from Senator John McCain. It’s reported that Trump could also face difficulty to get the votes from Susan Collins and Lisa Murkoski. The major concern is that based on the way Trump handles the difference between him and Republicans, the split between the White House and Republicans is more likely to widen than narrow.

North Korea is seen as another key risks for Dollar. Late yesterday, the US military flew two Air Forex B-1B Lancer bombers over the Korean Peninsula. It’s seen as a show off of the military force at time of mutual provocations. An editorial in China’s People’s Daily warned that "war on the Korean Peninsula would be catastrophic, and dialogue remains the best option." And the paper criticized that Trump’s threats seem to be part of a larger strategy, coherent or not, to instill fear in Pyongyang, so that it will agree to U.S. demands to abandon all nuclear weapons and existing nuclear programs." However, such strategy "could backfire bigly."

Spanish PM Rajoy cornering Catalan separationists

In Spain, Prime Minister Mariano Rajoy responded to Catalan leader Carles Puigdemont but pushing him to the corner. Puigdemont proclaimed independence in his address to the regional parliament yesterday. But at the same time, he suspended form declaration immediately to allow for talks with the Spanish government. Rajoy said today that "the cabinet has agreed this morning to formally request the Catalan government to confirm whether it has declared the independence of Catalonia, regardless of the deliberate confusion created over its implementation." And Rajoy warned that "the answer from the Catalan president will determine future events, in the next few days."

IMF Raised Global growth forecast

IMF projected global economy to growth 3.6% in 2017 and 3.7% in 2018, up from April projection of 3.5% and 3.6% respectively. But IMF chief economist Maurice Obstfeld warned that "a closer look suggests that the global recovery may not be sustainable — not all countries are participating, inflation often remains below target with weak wage growth, and the medium-term outlook still disappoints in many parts of the world."

Meanwhile, IMF lowered US growth forecast to 2.2% in 2017 and 2.3% in 2017, down from April’s projection of 2.3% and 2.5% respectively. IMF noted that "the downward revision relative to April forecasts reflects a major correction in U.S. fiscal policy assumptions." And it noted that due to "significant policy uncertainty", the passing of tax reform shouldn’t be counted on.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1754; (P) 1.1790 (R1) 1.1843; More…

Break of 1.1832 resistance suggests that the corrective pull back from 1.2091 has completed at 1.1669 already, ahead of 1.1661 support, on bullish convergence condition in hour MACD. Intraday bias is turned back to the upside for further rise for retesting 1.2091 high. We’ll be cautious on strong resistance from there to bring another fall to extend the consolidation. On the downside, below 1.1755 will turn bias back to the downside and could extend the correction from 1.2091 through 1.1669.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It’s expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we’d be cautious on strong resistance from 1.2516 to limit upside.

Economic Indicators Update