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Currencies: Will Fed’s ‘Normalization Commitment’ Finally Support The Dollar?


Sunrise Market Commentary

  • Rates: Flattening US yield curve after Fed verdict
    US Treasuries lost ground yesterday after the FOMC decision, flattening the yield curve. We conclude that US Treasuries reentered a sell-on-upticks phase after the Fed confirmed his view on 2017/2018 interest rate policy. A December rate hike isn’t fully discounted yet. Short term though, we could get some correction higher after a nine straight days decline.
  • Currencies: Will Fed’s ‘normalization commitment’ finally support the dollar?
    The dollar jumped higher across the board yesterday as the Fed indicated that it wants to continue a gradual rate hike cycle. Of late markets hardly believed the Fed’s intentions. Will this time be different? A break below the EUR/USD 1.1823 correction is needed soon in order to create a more constructive sentiment on the US currency

The Sunrise Headlines

  • US equities dropped on the FOMC decision, but it was a knee-jerk reaction and main indices closed narrowly mixed. A similar picture in Asia overnight, as markets have difficulties to find a firm direction (firmer dollar).
  • The Fed indicated it remained on track to raise short-term rates later this year and said it would begin shrinking its portfolio of bonds next month, starting to close the books on an unprecedented and controversial policy experiment.
  • The Bank of Japan kept monetary stimulus unchanged, but a dovish new board member opposed the decision in his first meeting, an unexpected dissension on a board chosen entirely by Prime Minister Shinzo Abe.
  • Spain’s government is willing to discuss giving Catalonia more money and greater financial autonomy if the region backs down from its demands for independence, one of Madrid’s senior ministers has told the Financial Times.
  • Greece is considering swapping 20 small bond issues for a few new ones, as it prepares to exit its bailout. It would consolidate the secondary market into a few liquid benchmark issues.
  • Shares in Australian gold miners were down as the price of the precious metal neared a one-month low after the US central bank said it would start to reverse its crisis-era stimulus programme from next month.
  • Today’s calendar contains the Philly Fed business survey and EMU consumer confidence. ECB Praet and Smets speak. France, Spain and the US tap the bond markets. The Norges Banks meets and the Riksbank publishes Minutes.

Currencies: Will Fed’s ‘Normalization Commitment’ Finally Support The Dollar?

Dollar jumps as Fed maintains course

Yesterday, the Fed, as expected, announced the start of the run-off of its balance sheet, while the policy rate was left unchanged. The Fed kept its rate path (median dots) of one more 25 bps rate increase this year and three next year. The process of gradual policy normalisation will continue even as several uncertainties remain. US yields rose modestly and the curve flattened. The dollar reacted accordingly. EUR/USD tumbled from about 1.20 to the 1.1862 area and closed the session at 1.1892. USD/JPY jumped to the mid 112 area and finished at 112.22.

Overnight, Asian equities are trading mixed. A stronger dollar and higher US yields are a mixed factor for Asian/EM markets. The BOJ, as expected, left its policy (target rates and asset purchases) unchanged. A new member, Kataoka, dissented as he saw little chance of the BOJ reaching its target in 2019. So, there was a soft note in the policy decision. Even so, USD/JPY makes only modest additional gains after yesterday’s post-Fed rally. USD/JPY trades at 112.43. EUR/USD stabilizes around 1.1885.

Today, the calendar contains EMU consumer confidence and speeches of ECB Praet and Smets. Consumer confidence is expected stable, just below its cyclical highs. The debate on the ECB’s APP programme is in full swing. Smets and Praet are close to Mario Draghi and key players inside the ECB. So, any comments from them on the fate of APP won’t go unnoticed. In the US, initial claims are expected to rise as a result of the tropical storms. Markets will ignore the increase as noise. The Philly Fed business survey is expected to show a stable, but strong headline figure (17.1). The headline index was volatile since the start of the year, but on the positive side. A good report might be slightly USD supportive.

Investors will take a second look at yesterday’s Fed policy decision. The dollar made a nice rebound, but EUR/USD still didn’t break any technically important level. The Fed assessment basically remains unchanged. Question is whether markets will gradually give more credence to the Fed rate path than they did until now. We see a chance for a modest dollar comeback as yesterday’s Fed ‘guidance’ suggest that there is little reason for US yields to decline again from current levels unless there comes high profile negative news. A fast break below EUR/USD the 1.1823 ST range bottom would be an indication that the USD rebound has somewhat further to go. Otherwise, doubts will soon return

From a technical point of view EUR/USD hovers in a consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that last week’s correction didn’t reach the range bottom. More confirmation is needed that the bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (against the euro). In case of a break, next support in EUR/USD comes in at 1.1774 and 1.1662

The day-to-day momentum in USD/JPY remains more constructive. The yen trades weak across the board and the dollar might be in better shape post-Fed. USD/JPY regained the 110.67/95 previous resistance. This a short-term positive. The yen might stay under pressure at least until the next event risk pops up. The 114. 49 correction top is the next important reference.

EUR/USD: will the dollar be able to capitalize on Fed normalization call?

EUR/GBP

EUR/GBP nears again the correction low

Yesterday , UK August retail sales were reported strong, supporting the recent BoE call for a rate rise in the coming months. A first sterling rebound after the report was short-lived and EUR/GBP returned to the 0.8880 area. This suggested that the GBP rally was losing momentum. However, EUR/GBP gradually declined again later on during the US session. The decline of EUR/GBP accelerated in line EUR/USD after the Fed policy decision. The pair closed the session at 0.8813. Cable finished the session little changed at 1.3495, a good sterling performance.

Today, the UK public finance data will be published, but they are at best only of intraday significance. Markets will look forward to the speech of UK MP on Brexit tomorrow in Italy. Earlier this week, it looked the speech could give the Brexit process a new positive dynamic, but recent comments sounded again sceptical. In this context, is there room for further GBP gains? Will EUR/GBP feel some pressure from a further decline in EUR/USD? Last week’s correction low at 0.878 is a first key support.

EUR/GBP made an impressive uptrend since April and set a MT top at 0.9307 late August. The euro was strong and UK price data were soft enough to keep the BoE side-lined. Recent UK price data amended this story and the ST-trend reversal of sterling was reinforced by hawkish BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look out how far the current correction has to go. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We start looking to buy EUR/GBP on dips.

EUR/GBP: GBP-rebound rebound slows

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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