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FOMC Decision: Optimistic Signals?

Today, all eyes will be on the FOMC rate decision. At the latest gathering, the officials raised the federal funds rate by 25bps for the second time in a decade, and revised up the projected path for interest rates in 2017 to indicate 3 hikes from 2 previously, surprising many market participants with their hawkish forward guidance. The forecast for this meeting is for the Committee to keep its rate hike powder dry, something overwhelmingly supported by market pricing. This will be one of the meetings that is not accompanied by updated economic forecasts nor a press conference by Chair Yellen and as such, the market action will probably come from the phrasing of the statement accompanying the decision. Considering that there has been further economic progress since the latest gathering, with the headline CPI rising above 2% for the first time since 2014, and wage growth accelerating to +2.9 yoy in December, we believe that the overall tone of the statement is likely to be quite optimistic. Something like that could bring forth market expectations with regards to the timing of the next rate increase and thereby, bring USD under renewed buying interest. According to the Fed funds futures, the market is currently anticipating the next hike to come in June.

Overall, we maintain the view that the most likely scenario is for the Committee to hike borrowing costs only twice this year, and not three times as currently projected by the "dot plot". We believe that the excessive USD strength that three hikes could cause, as well as a more dovish Committee this year in terms of voting rights, are both factors that could lead to only two hikes. We would need to see a material pick-up in inflationary pressures (particularly in the core PCE price index), and some further clarity regarding the government’s fiscal stimulus package, before we reevaluate this view.

Trump vs USD strength: Round 2

The Trump administration took another shot at the strength of the US dollar yesterday. The President’s top trade advisor, Peter Navaro, said that Germany is using a "grossly undervalued" euro in order to exploit the US and its EU partners, which caused USD to tumble. A few hours later, President Trump himself indicated that "other countries take advantage of America by devaluation", pointing the finger at China and Japan in particular. The dollar extended its losses following these comments, perhaps on increased speculation that the new administration will begin to focus on the value of the dollar moving forward. Even though the outlook surrounding USD appears negative at the moment, considering that major USD crosses such as EUR/USD and USD/JPY lie near critical technical barriers, and that the Fed may appear optimistic today, we believe that we could see a rebound in the greenback.

USD/JPY traded south yesterday, fell temporarily below 112.60 (S1), but hit support at 112.00 (S2) and rebounded back within the range it has been trading since the 11th of January, between the support of 112.60 (S1) and the resistance of 115.50. As a result, we still consider the short-term path to be to the sideways. For now though, it is possible for the pair to continue trading higher within the range. Now it is testing the 113.25 (R1) resistance, where a break is possible to initially aim for the next obstacle of 114.00 (R2).

Kiwi tumbles on disappointing employment data

Overnight, the New Zealand dollar came under selling pressure following the release of the nation’s employment data for Q4. Even though the labor force participation rate rose significantly and for the 5th consecutive quarter, the unemployment rate rose as well, indicating that despite an increase in the number of people available to work, the number of unemployed people rose as well. On balance, even though these data could slow down any further gains in the Kiwi, they are not soft enough to alter our overall optimistic view with regards to New Zealand’s economy. We think that a neutral stance by the RBNZ in coming months, combined with the fact that New Zealand’s yields remain very attractive compared to other G10 nations, are factors which could keep the Kiwi supported.

NZD/USD tumbled yesterday after it hit resistance at 0.7350 (R3), near the prior upside support line taken from back at the low of the 20th of January 2016. The rate is also back below the longer-term downtrend line taken from back at the peak of the 7th of September. Therefore, although the price structure on the 4-hour chart still suggests a short-term uptrend, we prefer to remain sidelined for now. We would like to see a clear close above 0.7350 (R3) before we get confident on larger bullish extensions. On the downside, a break below 0.7230 (S1) and the upside support line drawn from the low of the 3rd of January, could shift the short-term outlook to negative and perhaps carry larger bearish extensions.

Today’s highlights:

During the European day, we get the final manufacturing PMIs for January from several European countries and the Eurozone as a whole. The forecasts are for the final figures to confirm the preliminary estimates and as such, the reaction in EUR may remain muted.

From the UK, we get the manufacturing PMI for January and expectations are for the index to have ticked down, but to have remained elevated above the 50 mark separating expansion from contraction. Although something like that may hurt GBP somewhat on the news, as long as the index remains significantly above 50, we doubt that it will affect the BoE’s optimistic view on the economy.

What’s more, UK lawmakers will continue to debate the government’s Brexit bill in Parliament today, and later in the day they will vote on the motion. Given the heated debate yesterday, we would expect market focus to fall primarily on what type of amendments MPs will propose, in particular with regards to what kind of scrutiny Parliament will be given over the negotiations. Some MPs from the main opposition party, Labor, have indicated that they want an amendment that requires the government to report back to Parliament frequently on how the negotiations are proceeding, and to allow lawmakers to debate on the direction of the future EU-UK talks. If Parliament is seen as likely to gain a bigger say over what kind of deal the UK negotiates, speculation over a not-so-hard Brexit could support the pound somewhat, in our view.

As for the US indicators, we get the ADP employment report and the ISM manufacturing PMI, both for January, but we believe that ahead of the FOMC gathering, these releases will attract much less attention than usual.

From Canada, we get the Markit manufacturing PMI for January, though no forecast is currently available.

Besides UK lawmakers, we have one more speaker scheduled for today: BoJ Governor Haruhiko Kuroda will speak to the Japanese Parliament during the early European morning.


  • Support: 112.60 (S1), 112.00 (S2), 111.50 (S3)
  • Resistance: 113.25 (R1), 114.00 (R2), 114.80 (R3)


  • Support: 0.7230 (S1), 0.7180 (S2), 0.7130 (S3)
  • Resistance: 0.7280 (R1), 0.7310 (R2), 0.7350 (R3)
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