Dollar and Loonie Soft as Markets Tread Water

The forex markets are, generally speaking, rather quiet today. Dollar remains generally soft but no follow through selling is seen against it. Indeed, the greenback is trading mildly higher in the last few hours as consolidative trading extends. Canadian Dollar is the weakest one as weighed down by uncertainties over NAFTA renegotiations. Sterling takes over from Aussie and Kiwi as the strongest one for today but it’s also bounded in recent range. The markets may continue to tread water until the batch of economic data and Fed Chair Jerome Powell’s testimony tomorrow.

Merkel named cabinet ministers before coalition vote

German Chancellor Angela Merkel’s Christian Democrats are set to meet to approve the coalition with the Social Democrats today. Ahead of the party conference, Merkel also announced her choice of six cabinet ministers. Merkel said that "it was my task to present a tableau of people that is future-oriented and that offers a good mix of experience and new faces." One particular member is Jens Spahn as health minister. The 37 year old Spahn is seen as an open critic who is viewed as Merkel’s answer to the rise of the far right Alternative for Germany. Meanwhile, the SPD members are voting for the grand coalition too and results will be know on March 4.

UK Labour leader Corbyn backs customs union after Brexit

UK Prime Minister Theresa May is set to have a high profile speech this Friday regarding post Brexit relationship with EU. Her rival Labour leader Jeremy Corbyn expressed his backing of customs union member during the two year transition period. Corbyn said that "labour would seek a final deal that gives full access to European markets and maintains the benefits of the single market and the customs union… with no new impediments to trade and no reduction in rights, standards and protections."

He added that "we have long argued that a customs union is a viable option for the final deal. So Labour would seek to negotiate a new comprehensive UK-EU customs union to ensure that there are no tariffs with Europe and to help avoid any need for a hard border in Northern Ireland."

BoJ Kuroda dismissed review on policy framework

BoJ Governor Haruhiko Kuroda, recently reappointed for another five year term, dismissed the request by an opposition lawmaker to review the policy framework. Kuroda told the parliament that "it’s unfortunate that achievement of our price target has been delayed. But thanks to the effect of our powerful monetary easing, Japan’s economy is no longer in a state that can be described as deflation." He also pointed to recovery in the economy and said "things are proceeding smoothly". And therefore, "I don’t have any plan at this stage to conduct another comprehensive review."

Fed Powell’s testimony unlikely to deviate from the monetary policy report

New Fed chair Jerome Powell’s testimony will be a major focus in the week ahead. As a prelude, Fed released its semi annual Monetary Policy Report last Friday. The report noted that "with inflation having persistently run below the 2% longer-run objective the Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal". It appears that similar reference had not been revealed in previous FOMC statement or minutes.

The Fed also warned of the elevated valuation of asset prices. As suggested in the report, "valuation pressures continue to be elevated across a range of asset classes even after taking into account the current level of Treasury yields and the expectation that the reduction in corporate tax rates should generate an increase in after-tax earnings. Leverage in the nonfinancial business sector has remained high, and net issuance of risky debt has climbed in recent months".

Powell’s message in the testimony will likely not deviate much from the report regarding monetary policy. He’s expected to reiterate the gradual path of monetary policy normalization. Yet, his comments about the growth outlook in light of the tax reform plan would be closely watched.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3912; (P) 1.3958; (R1) 1.4014; More….

GBP/USD rebounds today but upside is limited below 1.4144 minor resistance. Intraday bias neutral first. On the upside, break of 1.4144 will extend the rise from 1.3764 and target a test on 1.4345 resistance. Break there will resume larger up trend and target long term trend line resistance (now at 1.5056). On the downside, below 1.3764 will extend the correction from 1.4345 to 1.3651 resistance turned support instead.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4279) so far. Break of 1.3038 support, will suggests that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Economic Indicators Update