Today the main event will be in the US, where the Fed releases the minutes from its February policy meeting. Considering this was one of the meetings that was not accompanied by a press conference or updated forecasts, we think that the market may look through the minutes for extra details on the Fed’s forward guidance and on the timing of the next rate increase. Last week, in her semi-annual testimony before Congress, Chair Yellen was quite optimistic with regards to a near-term hike, indicating that such action will likely be appropriate at one of the upcoming meetings if employment and inflation evolve in line with the Fed’s expectations. Following her appearances, the probability for a March hike rose somewhat, though it has since reverted back to its prior levels. We believe that in case we get another set of optimistic signals from the minutes, that probability could increase once again. Considering that the data the Committee had access to at that time were solid, since the disappointing wage growth print for January had yet to be released, we could indeed get some hawkish signals, something that may bring the dollar under renewed buying interest.
Our favorite proxy for exploiting further USD gains has now changed from USD/JPY to EUR/USD, which we expect to test once again the 1.0500 (S1) territory soon. If the bears prove strong enough to overcome that key support hurdle, then we may experience extensions towards our next support of 1.0450 (S2). The reason behind the change is the increased market attention Eurozone’s politics have gained in the last couple of weeks.
Overall, we maintain our view that the FOMC is unlikely to rush into a March hike amid lackluster wage growth and heightened uncertainty around fiscal policy. Our model which is based on the yields of the Fed funds futures shows a 28% probability for a March hike, but we see even that number as somewhat optimistic if we take into account that the Committee has turned more dovish this year through the rotation of voting rights. Therefore, we still expect the next rate hike to come in June. We would like to see some clarity around fiscal reform, some acceleration in wage growth, as well as an uptick in the core PCE price index rate, before we reconsider this view.
RBA Governor confirms the bar for further easing is high
In a speech overnight, RBA Governor Philip Lowe suggested that the Bank is unlikely to ease its policy any further in the foreseeable future, as it is concerned with the already-high levels of household debt. He said that although the Bank would like to achieve its double mandate sooner than currently projected, if that is done by reducing rates further, it would encourage even more borrowing and thereby amplify financial stability risks. These comments confirm our view that the RBA is likely to remain on hold in the foreseeable future. Combined with the surge in iron ore prices over the past months, we believe that these factors could keep the Aussie supported moving forward. However, given the uncertainty surrounding fiscal policy in the US, we would avoid AUD/USD. We prefer EUR/AUD as a proxy for any future Aussie gains, considering that the political risks in Eurozone could keep the common currency on the back foot in coming months. EUR/AUD has been trading in a downtrend since the 30th of December and since the beginning of February, it appears to be trading within a downside channel. At the time of writing, the pair looks to be headed towards the 1.3675 (S1) support zone, marked by the lows of the 28th and 29th of April 2015. A clear break below that zone is possible to trigger extensions towards our next support of 1.3600 (S2), defined by the inside swing high of the 31st of May 2013. The broader trend appears negative as well. What’s more, on the 10th of February the pair broke below the downside support line drawn from the 10th of March 2016, which enhances the case for the pair to continue trading south in the weeks to come.
As for the rest of today’s highlights
During the European day, we get Germany’s Ifo survey for February. The forecast is for both the expectations and the current conditions indices to have declined marginally, which is also supported by the slides in both the ZEW indices. Something like that could hurt the common currency somewhat. However, following the surprising surge in Eurozone’s composite PMI for February, we do not expect a modest slide in the Ifo indices to be particularly worrisome for ECB policymakers.
In the UK, the 2nd estimate of Q4 GDP is due out. The 1st estimate showed that economic growth held steady at +0.6% on a quarterly basis, beating the consensus for a slight slowdown. This was another confirmation that the UK economy has not been hit by Brexit uncertainties, at least not yet. With regards to the 2nd revision, the forecast is for GDP growth to remain unchanged. We see the risks surrounding that forecast as skewed to the upside given that industrial production for December, which was released after the 1st estimate of GDP, beat expectations significantly. Thus we think that if there is any revision, it is likely to be upwards, something that could extend sterling’s gains from yesterday.
As for the US economic data, we get existing home sales for January, though market focus is likely to be on the FOMC minutes.
In Canada, retail sales for December are due to be released and the forecast is for the print to have stagnated from the previous month, something that may hurt the Loonie somewhat.
We have only one speaker scheduled for today: BoE Deputy Governor for Financial Stability Jon Cunliffe.
