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Dollar gains on trade dispute as traders prepare for a BoE hike


Market Overview

The Federal Reserve monetary policy announcement has done very little to change the outlook for future rate hikes. The Fed did make one small change to the FOMC statement, a slight upgrade in the language to the outlook that “economic activity has been rising at a strong rate” rather than the previous “solid rate”. However, clearly the market has been anticipating this as there was very little move on Treasury yields (the 2 year stayed at 2.67% and the 10 year actually dipped around half a basis point to 2.985%), whilst currency markets barely budged (although there has been a mild strengthening of the dollar this morning, but this seems to be more of a trade story rather than Fed related). With the FOMC expecting “further gradual increases” in the interest rate, this was a very dull meeting and muted market reaction, probably just what the Fed had hoped for. This comes just as the potential for the US to ramp up its trade dispute with China continues to escalate. Talk of tariffs at 25% on $200bn of imports from China, rather than the previous mooted 10%, has been met negatively on Asian markets today. With the Fed out of the way traders now turn to the third of the G4 central banks to announce monetary policy this week, the Bank of England, and this one is sure to be far more interesting. A 25 basis points BoE rate hike (to 0.75%) is expected, but also well priced in, so the key will be what the narrative around the hike will be. Sterling has settled in the past week, but volatility is likely to rise sharply in the wake of today’s decision.

Bank of England

Traders will be keeping a close eye on the Bank of England monetary policy decision today at 1200BST. Sterling interest rate futures are pricing in well over 80% probability of a rate hike at today’s meeting and the consensus expects there to be +25 basis points to a rate of +0.75%. Also keep an eye on the voting on the committee which is expected to be 7-2 in favour of a hike. The narrative around the hike will also be interesting, as it has been a real struggle to get to this point where a hike can be made (after the MPC baulked in May). But with all the Brexit uncertainties and question marks over the sustainability of growth, will it be a dovish hike? Being “Super Thursday” there is also a chance for a grilling of BoE Governor Carney who will be absolutely nailed to the wall if the bank again fails to hike. An “unreliable boyfriend” may be putting it mildly as sterling would surely get smashed. The hawkish noises out of the MPC in recent weeks should mean that a hike is seen today, but if it is a case of “one and done” then do not expect too much traction from a sterling rebound.

Wall Street closed back lower again with the S&P 500 -0.1% to 2813 and futures around -0.2% lower again today. This comes as Asian markets have struggled today amid concerns over the escalating rhetoric on the US/China trade dispute, with the Nikkei -1.0%. The European markets are also coming into today on the back foot. In forex, there was little move on the Fed last night, but Asian trading has seen a mild strengthening of the dollar again across the majors, but it is interesting to see that the yen is also outperforming again. In commodities, it is interesting to see that gold is actually higher this morning despite the outperformance of the dollar (perhaps a safe haven flow is coming back to a degree?), whilst oil has bounced back a touch after yesterday’s inventory build related decline.

Aside from the BoE today, there is also a range of other data to keep an eye on, with the UK Construction PMI at 0930BST which is expected to 52.8 (53.1 last month). US Factory Orders are at 1500BST which are expected to grow by +0.7% (an improvement on the +0.4% last month).

 

Chart of the Day – USD/CAD   

The US dollar has broadly been consolidating across the majors for over a week now but the Canadian dollar has been performing well (despite the decline in the oil price). Subsequently, the move has come to pull USD/CAD lower breaching a three month uptrend channel and also completing a top pattern. The move below the old breakout band 1.3065/1.3125 completed the pattern last week and this band has now turned into resistance of overhead supply. Yesterday’s candle may have been a doji, but trading well clear of the pivot band at 1.3065/1.3125 adds to the confirmation that the market is moving lower now and a target of (at least) 225 pips towards 1.2840 is now in process. The confirmation comes with the RSI decisively now below 45 which was previously supportive and the MACD lines finding traction below neutral. Continue to look towards using rallies up towards the 1.3065/1.3125 pivot band as a chance to sell for a test of the next supports at 1.2945 and then 1.2855. This week’s high at 1.3095 is building resistance within the 1.3065/1.3125 band which is increasingly a near to medium term sell zone.

 

EUR/USD

The slip back from the ever growing resistance around $1.1750 continues. The weakness of yesterday’s move lower of around 30 pips was not born out of the Fed meeting but from earlier in the session. However, tis weakness has continued to drag the market a shade lower early today and a test of last week’s low at $1.1620 is now far more likely than an immediate upside breakout. The convergence of the five week trendlines continues and is now less than 120 pips, with the support at $1.1600. Once more the RSI has dropped back to the bottom of the 45/55 range which on several occasions in the past month has been a trigger for the buyers to return. A failure to do so today would give concern for the bottom of the converging trendlines. The hourly chart shows the hourly RSI is around 30, again a limit in recent weeks where the buyers resurface. Is there going to be a breakdown ahead of Friday’s Non-farm Payrolls? History suggests this is unlikely. Initial resistance is around $1.1670 and then $1.1700.

 

GBP/USD

Another very tight session on Cable suggests the market is unwilling to take a view ahead of the Bank of England today. An intraday range of 50 pips (the Average True Range is currently 92 pips) with a doji candle suggests the market is very reticent. A mild drop back today but the support band $1.3070/$1.3080 should be able to contain any sellers trying to pre-empt the Bank of England. Momentum indicators are entirely flat. Despite this, it is highly likely that this could be the calm before today’s storm. A rate hike is expected but will it be a dovish hike (the most likely of scenarios) which could see any jump higher on Cable fade in the coming days. Of course a failure to hike would quickly see Cable plumbing the depths well below $1.3000 again, with the $1.2850 and $1.2775 supports then open. Resistance is $1.3200/$1.3215 and then $1.3290, $1.3360 before the key medium term resistance at $1.3450.

 

USD/JPY

The weakness of the yen following the Bank of Japan decision is gradually unwinding again as Dollar/Yen peaking at 112.15 yesterday has just begun to slip back. The impact of a sharp bounce in JGB yields is certainly beginning to drag and means that what looked like a strengthening outlook on Dollar/Yen is being tempered. It was interesting yesterday to see that the old pivot around 111.40 played a role in being supportive on the session and this level will again be watched today. Momentum indicators are positively configured on a medium term basis, but the renewed near term improvement is just being tempered again. After yesterday’s mildly negative candle, another negative close today would again begin to question the strength of the bulls, especially if it included a close below 111.40 again. The old four month uptrend (debatable over whether this is still intact) comes in at 111.25 today. The hourly chart shows an unwind back to levels where the buyers should be interested now. Another added complication is that it is Non-farm Payrolls tomorrow which could mean traders sitting on their hands too.

 

Gold

The slide on gold seemed to get renewed momentum yesterday as a solid negative candle was formed and the market closed below $1220 for the first time since July 2017. The market continues to pull lower along the resistance of the downtrend channel, whilst momentum indicators retain their negative configuration. A break below the July low at $1211 re-opens the $1204.50 July low. There is resistance building up now between $1220/$1228 whilst the key resistance remains at $1236. Intraday rallies are now being sold into.

 

WTI Oil

The oil bulls have been hit hard in the past couple of sessions, with another move to the downside yesterday as the EIA inventories showed a surprise crude build. However, so far, the support of the key medium term pivot at $67 remains intact and subsequently the 11 month uptrend is also still standing firm. The bulls are under increasing pressure though as momentum indicators are deteriorating again, as the RSI falls over under 50, MACD lines are in decline below neutral and the Stochastics tick lower. The resistance at $70.45 is growing, but how the market reacts today will be key.

 

Dow Jones Industrial Average

The Dow has been flirting with the uptrend support in recent sessions, however yesterday’s intraday fall back into the close has now broken the trendline support and threatens a near term correction. Monday’s support at 25,287 is a key level to now watch as a breach would be a near term topping out and suggest a degree of correction coming. The momentum indicators have been just slipping from their positions of strength too, and the near term crossover sell signal has now been confirmed on the Stochastics, whilst the RSI is back below 60. A close below 25,287 would now imply a retreat back towards the old key breakout around 24,980 which is also the 50% Fib level. Resistance is growing at 25,490 under 25,587 which is the recent high.


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.