Fed Drives Down Dollar

News and Events:

Super Thursday unlikely to provide significant GBP boost

Following in the footsteps of the Federal Reserve yesterday and the Bank of Japan on Tuesday, the Bank of England is also expected to leave its monetary unchanged. Therefore, the market is not expecting much on this side. However, the BoE will also provide an updated version of its forecast for growth, inflation, unemployment and wages. Out of this, the main thing the market will scrutinise is how Mark Carney’s team has been taking into account the upcoming Brexit against the backdrop of relatively solid growth. In the latest inflation report published in November, the MPC revised its growth forecast to 1.4% for 2017 compared to 0.8% three months earlier in response to a weakening pound. However, despite the fact that the BoE was overly pessimistic in its August report regarding its growth forecast for 2017, the institution expects that the country will really start to feel the sting of Brexit at this end of this year. Given the fact that the economy has been surprisingly resilient recently, we would be surprised if the BoE revises its forecast to the upside for this year.

On the inflation front, the committee lifted its projections to 2.7% by year-end, compared to 2.0% previously. Since the November meeting, the pound sterling has appreciated slightly (on a trade weighted basis), meaning that it will not justify any upside revision in the consumption price gauge. Nevertheless, the pick up in crude oil prices may provide a reason for an upside revision. All in all, barring a major surprise, this BoE meeting should go unnoticed as the uncertainty stemming from the future EU-UK relationship combined with Trump’s policy reshuffle makes the task very difficult for central banks around the globe. GBP/USD is the only G10 currency that is not taking advantage of the broad dollar weakness this morning, suggesting that the market is anxious about today’s meeting.

Fed statement balanced resulting in weaker USD

As was widely expected, the FOMC held its fed fund rate unchanged. Markets were focused on the Fed’s analysis of the economic progress in the labor markets and inflation acceleration to gauge the pace of Fed hikes in 2017. Overall, the statement indicates that Fed members are calm over the status of economic improvement and are in no hurry to tighten aggressively. The statement highlighted that labor was near its mandate of full employment. On inflation, the committee indicated that levels were below the longer run objective. Yet by not declaring victory the statement took a dovish tone. While the Fed needs to keep its unbiased perspective there is a feeling that members are preparing for a potentially unforeseen reaction due to Trump’s fiscal or trade policy. Judging from Trump’s complete mismanagement of executive orders we are not convinced that meaningful policy can be generated. Hence, the probability that Trump will dynamically drive sustained US growth is unlikely. We maintain our forecast for two 25bp rate hikes in 2017. Yet the risk of a steep rate curve is clearly on the table. Given that the two hikes are priced into USD we continue to anticipate further weakness. With ADP coming in well above expectations markets will be watching Friday’s payroll report. Given the steady drop in global FX volumes and the lower conviction in USD, we are constructive on high beta and yield EM currencies.

Today’s Key Issues (time in GMT):

• ECB Publishes Economic Bulletin EUR / 09:00
• Jan Markit/CIPS UK Construction PMI, exp 53,8, last 54,2 GBP / 09:30
• Jan Reserve Fund, last $16.0b RUB / 09:30
• Jan Wellbeing Fund, last $71.9b RUB / 09:30
• Dec PPI MoM, exp 0,50%, last 0,30% EUR / 10:00
• Dec PPI YoY, exp 1,20%, last 0,10% EUR / 10:00
• Dec Electricity Consumption YoY, last 0,30% ZAR / 11:00
• Dec Electricity Production YoY, last 2,10% ZAR / 11:00
• janv..27 Foreigners Net Bond Invest, last -$157m TRY / 11:30
• janv..27 Foreigners Net Stock Invest, last $456m TRY / 11:30
• Feb 2 Bank of England Bank Rate, exp 0,25%, last 0,25% GBP / 12:00
• Feb BOE Asset Purchase Target, exp 435b, last 435b GBP / 12:00
• Feb BOE Corporate Bond Target, exp 10b, last 10b GBP / 12:00
• Bank of England Inflation Report GBP / 12:00
• Jan Challenger Job Cuts YoY, last 42,40% USD / 12:30
• janv..27 Gold and Forex Reserve, last 385.9b RUB / 13:00
• 4Q P Nonfarm Productivity, exp 1,00%, last 3,10% USD / 13:30
• 4Q P Unit Labor Costs, exp 1,90%, last 0,70% USD / 13:30
• janv..28 Initial Jobless Claims, exp 250k, last 259k USD / 13:30
• janv..21 Continuing Claims, exp 2063k, last 2100k USD / 13:30
• Nov Leading Indicators (MoM), last -0,13 MXN / 14:00
• janv..29 Bloomberg Consumer Comfort, last 45,2 USD / 14:45
• Jan Foreign Reserves, last $371.10b KRW / 21:00
• Jan AiG Perf of Services Index, last 57,7 AUD / 22:30
• Jan Vehicle Domestic Sales AMIA, last 192567 MXN / 23:00

The Risk Today:

EUR/USD‘s momentum has increased sharply. Hourly resistance area is given at around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD‘s buying pressures are increasing again. The pair is on the road towards 1.2771 (05/10/2016 high). The technical structure is still anyway showing positive potential. Hourly support is given at 1.2466 (30/01/2016 low). Expected to show further bullish move. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY had surprisingly exited the downtrend channel after monitoring resistance implied by the upper bound. Yet, the pair is back within it. Hourly resistance is given at 115.62 (19/01/2016 high) A break of hourly support given at 112.57 (17/01/2017 low) has confirmed further bearish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF‘s momentum is definitely bearish. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is clearly wide-open for further decline. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.