Dollar lost momentum ahead of FOMC and GDP
Dollar failed to ride on previous week’s strength and weakened across the board last week, erasing previous week’s gains. Euro remains pressured in crosses despite rebounding against the greenback. Meanwhile, Sterling was the best performer and staged a broad based rally. Aussie extended previous week’s rally and strengthened against dollar too.
There were many reasons for dollar to extend rally last week. Empire State manufacturing index rose strongly to 22.9, much higher than expectation of 12. Net capital flow rose to record high of $116.8B. Core PPI increased faster than expected by 0.6% vs consensus 0.2%. Core CPI remained solid and increased 0.2% mom, 2.9% yoy. Housing starts surprising rebounded to 1.77M annualized rate. But dollar failed to ride on these positive surprises and struggled to break through near term targets against majors. In fact, dollar reacted more to downside surprises like drop in industrial production and below expectation building permits. After the last piece of US data, Philly Fed index, came in below expectation and stayed negative, there was further position squaring ahead of FOMC and GDP this week.
Euro remained sidelined despite weak Germany ZEW which continued to drop to -27.4. Sep HICP was flat but core increased by 1.5%, beating expectation of 1.3%. August Trade deficit widened to 5.8B.
The Japanese yen was firm against dollar and euro on Russia central bank’s comment that it was adding yen to its foreign exchange reserves from almost zero percent. The impact could be substantial as Russia’s reserve is the world’s third largest and has being growth quickly by about 50% this year. Rumors about BoJ might increase monitoring of carry trades, thought denied by BoJ officials, provided additional support to the yen.
Sterling started last week strongly after higher than expected house price inflation. CPI stayed increased 2.4% in Sep, staying above BoE’s 2% target for a fifth month. Core CPI in UK rose 1.4%, beating expectation of 1.2%. The hawkish BoE minutes revealed that the decision to keep rate unchanged at 4.75% was by a 7-2 vote instead of market expectation of a 9-0 vote. Andrew Sentance and Timothy Besley voted for a quarter point increase in the key rate to 5%. Q3 GDP also grew more than expectation by 0.7% qoq, 2.8% yoy. Though employment report and retail sales were weaker than expected, last week’s were generally supportive for a rate hike in November.
Despite lack of economic data last week, Aussie continued to ride on rate hike expectation that was triggered by RBA Governor’s Glenn Stevens’ comments on OCt 11 that he he was more likely to lift the overnight cash rate target from 6 percent than cut it.
Bank of Canada kept rate unchanged at 4.25%. BoC report said that the economy will be “in balance” starting next year, and the current level of the policy rate is consistent with achieving the 2% inflation target. CPI increased faster than expected at 0.5% mom, 1.7% yoy. These developments were easing concern that BoC will cut rate on slowing growth and provided support to CAD.
The Week Ahead
Focus will be more on the latter part of this week with FOMC rate decision, GDP, housing and durable goods data. Fed is still expected to keep rate unchanged at 5.25%. Focus will be on whether the tone of accompanying statement will indicate Fed officials are have less concern on slowing growth after recent indications of soft landing from economic data and falling energy prices. Meanwhile, recent inflation data shouldn’t ease Fed’s tone on this matter.
US Q3 GDP growth is expected to slow further to 2.2%. But PCE core is expected to remain at 2.7%. While existing home sales is expected drop further to 6.23M annualized rate with new home sales stay flat at 1.05M. It will be interesting to see if there will be upside surprises in housing data that provide another indication of bottoming in housing slowdown. Durable goods orders is expected to rebound in September by increasing 0.9% with ex-transport orders increases 0.7%.
Data from Eurozone will center around Germany including Ifo, Gfk as well as import prices and retail sales. UK economic calendar is empty this week. Data from Japan include trade balance and inflation.
Canadian retail sales will be released on monday and is expected to increase 0.8% in August, slowing from prior 1.5% but that should be enough to maintain the expectation that BoC won’t cut rate soon. Australian PPI, consumer prices will be closely watched for getting more evidence that RBA will raise rate again in November. Meanwhile RBNZ is expected to keep rate unchanged at 7.25%.
GBP/USD
Cable’s fall from 1.9072 has reached as low as 1.8517, meeting 1.8538 cluster support (100% projection of 1.9142 to 1.8602 from 1.9072 at 1.8532) but failed to sustain below this level. Subsequent strong rebound last week has pushed cable above 1.8702 resistance (50% retracement of 1.8898 to 1.8517 at 1.8708) which indicates fall from 1.9072 has completed. Short term bias is turned to upside and further rise should be seen to 1.8898 cluster resistance (61.8% retracement of 1.9142 to 1.8517 at 1.8903). Above will probably bring retest of 1.9142 high.
Recapping previous discussions, an important medium term top should be formed at 1.9142 with bearish divergence condition in daily MACD, RSI as well as weekly RSI. But it’s unclear which path the subsequent consolidation will take. Nevertheless, on the upside, risk of a larger scale consolidation remains as long as cable stays below 1.9199 resistance (61.8% projection of 1.7230 to 1.9024 from 1.8090). On the downside, as long as cable stays above 1.8517 support, we’ll treat cable as is sideway consolidation only. Firm break below 1.8617 low is needed to indicate deeper correction is underway for 1.8090 low (50% retracement of 1.7047 top 1.9142 at 1.8095)
From a short term angle, initial bias will be sideway initially this week as upside is probably limited by overbought condition, as displayed in 4 hours RSI. But as long as retreat is contained above 1.8739 resistance turned support, rally should resume sooner rather than later. Above 1.8860 will bring further rise to 1.8898 cluster resistance. On the downside, it will take a break below 1.8662 support to indicate rebound from 1.8517 has completed and shift focus back to 1.8517 low.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.
Shing-Ip Tsui is the founder and CEO of
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