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'Dovish' Fed minutes weighs on USD

As expected the minutes of the July 25-26 FOMC meeting highlighted a broad division among Fed members. More specifically, the timing of the balance run-off was a major topic of discussion as several members were willing to pull the trigger last month, while the majority preferred to wait. Indeed, one reads 'several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook'.

In addition, the minutes showed that despite the strengthening of the jobs market, many members were worried about inflation levels. The minutes said 'Many participants saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside'.

All in all, the minutes were broadly in line with the June version, although some market participants construed them as dovish, I think that the September still is the key meeting as the Fed will announce the timing of the balance unwinding, while tightening borrowing cost in December.

Despite tumbling in the aftermath of the release of the minutes, the US dollar has reversed losses on Thursday morning amid a broad risk-off move. The uncertainties generated by Trump’s political jitters, together with worries about the upcoming ECB meeting in early September has helped the greenback to regain traction.

Russia: Retail sales to continue growing in July

Russia retail sales is set to be released today. Markets estimate a slight decline from June to 1% from 1.25 in July. The ruble is strengthening against the dollar and we believe that upside pressures should likely accelerate for the ruble. Late last July, the Central Bank of Russia has decided to hold rates unchanged at 9% probably on geopolitical fears.

The diplomatic relations bet ween the US and Russia are still one key driver for the USDRUB pair. For the time being the Russian economic fundamentals are improving. The unemployment rate which will also be released today should likely remain steady at 5.1%.

We consider that the Central Bank of Russia will before year-end to normalize its interest rate and its key rate should head back towards 8%. This would avoid any strong over-appreciation of the ruble due to improving fundamentals. The next meeting will take place the 15th of September. The central bank has definitely some room devalue its currency but will definitely do it at a slow pace not to derail ongoing recovery. One dollar will likely trade against 60 ruble within the short-term.

GBP/USD – 1.2883




Trend: Near term up




Original strategy :

Sell at 1.2980, Target: 1.2815, Stop: 1.3040

Position: -

Target:  -

Stop: - 




New strategy :

Sell at 1.2980, Target: 1.2815, Stop: 1.3040

Position: -

Target:  -

Stop:- 



As cable has rebounded again after yesterday’s marginal fall to 1.2842, retaining our view that consolidation above this level would be seen and corrective bounce to 1.2950 is likely, however, reckon upside would be limited to 1.2980-90 and bring another decline, below said support at 1.2842 would add credence to our view that the selloff from 1.3269 top is still in progress and bearishness remains for this move to bring correction of early upmove, hence further weakness to 1.2812 support would be seen but near term oversold condition should prevent sharp fall below 1.2800 and reckon 1.2740-50 would hold on first testing, bring rebound later.

In view of this, would not chase this fall here and would be prudent to sell cable on recovery as 1.2980-90 should limit upside, above resistance at 1.3032 would defer and suggest low is formed, risk a stronger rebound to 1.3059 and possibly towards 1.3100 but previous support at 1.3112 (now resistance) should remain intact, bring another decline.

Our preferred count on the daily chart is that cable's rebound from 1.3500 (wave (A) trough) is unfolding as a wave (B) with A ended at 1.7043, followed by triangle wave B and wave C as well as wave (B) has ended at 1.7192, the subsequent selloff is the larger degree wave (C) which is still unfolding with minor wave (III) of larger degree wave 3 ended at 1.1986, hence wave (IV) correction is in progress which could either be a triangle wave (IV) of a complex formation but upside should be limited to 1.3500 and price should falter well below 1.4000, bring another decline in wave (V) of 3 for weakness to 1.1500, then 1.1200. 


The minutes of the July FOMC meeting revealed an increasing level of concern among officials over the recent softness in inflation. For starters, more policymakers are now skeptical as to whether low inflation is indeed transitory. Perhaps more importantly, 'several' participants indicated that the risks to the inflation outlook could be tilted to the downside, something not seen in the June minutes. Some officials even noted that given this increased uncertainty around inflation, the Committee could afford to be patient with further rate hikes. As for the Fed's gigantic balance sheet, even though some members wanted to announce a starting date for normalization immediately at that meeting, most preferred to defer that decision until an 'upcoming meeting'.

The dollar declined on the news, as the Committee's increasing anxiety around inflation probably pushed back expectations regarding the timing of the next rate increase. We think that the currency could remain on the back foot for a few days, given that there are no major data releases or events on the US economic calendar in the near-term to distract investors and alter this negative sentiment.

EUR/USD rebounded ahead of the minutes, after it found support near the 1.1690 (S2) zone. The dovish tone of the minutes pushed the pair even higher, to break above the resistance (now turned into support) level of 1.1750 (S1). Even though the latest rebound may continue for a while and perhaps aim for another test near 1.1830 (R1), the recent break below the short-term uptrend line taken from the low of the 23rd of June suggests to us that the near-term outlook of the pair has turned neutral. Having said that, despite the near-term outlook turning neutral, as long as EUR/USD continues to trade above the medium-term uptrend line drawn from the low of the 17th of April, we consider the broader picture to still be positive.

Draghi is unlikely to deliver a new message next week; sources

The euro tumbled somewhat yesterday, after a media report familiar with ECB sources suggested that ECB President Draghi will not deliver a fresh policy message when he speaks at the Jackson Hole economic symposium next week. This probably poured cold water on expectations that Draghi could provide some hints about an eventual exit from QE in his remarks. One source even stated that 'expectations that this will be a big monetary policy speech are wrong', according to the article.

Indeed, Draghi signaling the next step in ECB policy at a non-monetary policy meeting would be strange, as he would be essentially committing to policy action ahead of time, and without necessarily having the blessings of the Governing Council. At the latest ECB meeting, he clearly stated that a discussion on tweaks to QE should take place in the 'autumn', suggesting we are likely to get some signals on stimulus changes either in September or October. Although a lot will depend on incoming data, we maintain our view that a likely scenario is that the Bank removes its QE easing bias at the September meeting, thereby laying the groundwork for a formal announcement in October that the pace of QE purchases may be reduced by the turn of the year.

It's not all bad news for euro bulls though. Since Draghi will probably not deliver major policy signals at the Jackson Hole, that means he is also less likely to use that speech as an opportunity to jawbone the euro, something that seemed quite likely prior to this media report. As such, this development does not change our outlook for the euro. We believe that it could continue to gain overall, though we would prefer to exploit further gains primarily against the weak GBP, which has been bleeding recently amid diminishing expectations for a near-term BoE rate hike and continued uncertainty over the ongoing Brexit negotiations.

EUR/GBP spiked lower after this report, to hit support near the 0.9080 (S1) hurdle. Nonetheless, the rate rebounded in the following hours to find resistance at the 0.9145 (R1) level. The price structure on the 4-hour chart remains higher peaks and higher troughs above a short-term uptrend line taken from the lows of the 17th of July. Thus, we expect the bulls to seize control again soon and aim for another test near 0.9145 (R1). A clear break above that hurdle could initially aim for the 0.9190 (R2) barrier, marked by levels last seen in late October 2009.

Today's highlights:

During the European day, we get the UK retail sales for July and expectations are for both the headline and the core figures to have slowed, which could bring GBP under renewed selling interest. In Eurozone, the minutes of the ECB July meeting will be in focus. Even though this release is usually not a major market mover, we will go through the discussion surrounding the QE program for any clues as to whether the Governing Council is set to announce a reduction in its purchases soon. From the US, we get the Philly Fed business activity index for August and industrial production data for July.

We have two speakers on the agenda: Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.

EUR/USD

Support: 1.1750 (S1), 1.1690 (S2), 1.1620 (S3)

Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)

EUR/GBP

Support: 0.9080 (S1), 0.9050 (S2), 0.9000 (S3)

Resistance: 0.9145 (R1), 0.9190 (R2), 0.9240 (R3)

GBP/JPY - 141.80

Trend: Near term down

New strategy :

Stand aside

Position: -
Target:  -
Stop:-

Despite rebounding to 143.20, the subsequent retreat suggests the rebound from 141.25 (Friday’s low) has possibly ended there and retest of said support cannot be ruled out, however, break there is needed to 140.80-85 (1.618 times projection of 147.75-144.05 measuring from 146.80) but near term oversold condition should prevent sharp fall below 140.50 and reckon psychological support at 140.00 would hold from here.

On the upside, whilst recovery to 142.10-20 cannot be ruled out, reckon upside would be limited to 142.70-80 and price should falter well below said resistance at 143.20, bring retreat later. Only a break of said this week’s high would suggest a temporary low has been formed at 141.25, bring retracement of recent decline to 144.00 (previous support turned resistance), however, reckon upside would be limited to 144.45-50 and 144.70 should hold, price should falter well below strong resistance at 145.30. As near term outlook is mixed, would be prudent to stand aside for now.

Our preferred count is that larger degree wave V with circle is unfolding from 251.12 with wave (I) 219.34, (II): 241.38 and wave (III) is subdivided into 1: 192.60, 2: 215.89 (23 Jul 2008) and wave 3 ended at 118.87 earlier in 2009. The correction from there to 162.60 is wave 4 which itself is a double three and is labeled as first a-b-c ended at 151.53, followed by wave x at 139.03, 2nd a ended at 162.60, 2nd b at 146.75 and 2nd c leg of wave 4 ended at 163.00. Therefore, the decline from 163.00 to 116.85 is now treated as wave 5 which also marked the end of larger degree wave (III), hence wave (IV) major correction has commenced for retracement of the wave (III) from 241.38 and upside target at 183.95-00 (50% Fibonacci retracement of the wave (II) from 241.38) had been met, a drop below 160.00 would suggest wave (IV) has ended at 195.85, bring decline in wave (V) for initial weakness to 130 (already met) and 120.


EUR/USD

Current level - 1.1730

Yesterday's test of 1.1680 has failed again, but the outlook on the senior frames remains bearish, for a slide towards 1.1580. There is a minor intraday risk of short-lived attempt towards 1.1850 hurdle.

USD/JPY

Current level - 110.03

The reversal below 110.00 resistance should be considered corrective, preceding final leg upwards, to 111.50-112.20 area. The latter will pave the way for a sell-off towards 107.00.

GBP/USD

Current level - 1.2882

The intraday bias is slightly positive, for a test of 1.2930 resistance. The outlook on the higher frames remains negative, for a test of 1.2800 area.

The GBP/JPY has made a temporary bottom at 141.25 and we can see MACD divergence that could push the price to the upside.141.25-50 is the zone where price might spike towards the 142.60-85 where new sellers might be waiting. Only a clear 4h close or h1 momentum above 142.90 should target 143.40. Bearish continuation happens only below 140.90, but at this point, the GBP/JPY is supported by Monthly and Weekly supports and bullish MACD divergence.

The pair hit fresh high at 0.7962 on Thursday, in extension of Wednesday's strong rally that formed higher base at 0.7810 zone. Release of upbeat Australian jobs data (27.9K new jobs created in July vs 20.0K f/c and Unemployment in July coming along with expectations at 5.6% vs 5.7% in June) additionally boosted Aussie dollar which was lifted by greenback's fall after FOMC minutes. Strong bullish acceleration suggests corrective phase from 0.8065 peak might be over. Fresh bulls need clear break above pivotal barrier at 0.7967 (Fibo 61.8% of 0.8065/0.7807 pullback) to confirm reversal and open way for attack at psychological 0.8000 barrier and key resistance at 0.8065 (23 July peak). Broken 20SMA offers immediate support at 0.7927, while daily Tenkan-sen at 0.7885 should contain extended dips.

Res: 0.7967, 0.8000, 0.8042, 0.8065
Sup: 0.7927, 0.7895, 0.7885, 0.7870

Investors got their fair share of economic data releases on Wednesday, but the deluge will continue in the latter half of the week with headlines from both sides of the Atlantic.

The economic calendar heats up at 08:30 GMT when the Office for National Statistics reports on UK retail sales. Receipts at retail stores rose 0.2% in July and 1.4% annually, according to a median estimate of economists. Excluding fuel, sales are also expected to rise 0.2% on month.

A half hour later, the European Commission’s statistical agency will release its final estimate of July consumer inflation. The consumer price index (CPI) is forecast to decline 0.5% in July, translating into a year-over-year reading of 1.3%.

Eurostat will also release July trade data at 10:00 GMT. The trade surplus is forecast to widen to €22.9 billion in July from €21.4 billion the previous month.

Shifting course to the United States, initial jobless claims and the Philadelphia Fed Manufacturing Survey will make headlines at 12:30 GMT. Just over an hour later, the Federal Reserve will release its monthly report on industrial production. The Fed’s broadest measure of factory output is forecast to climb 0.3% in July following a 0.4% increase the prior month. The capacity utilization rate is expected to edge up slightly to 76.7% from 76.6%.

From a geopolitical perspective, investors are also monitoring the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico. The Trump administration came out swinging on day one, a sign that the renegotiation process will be a highly contentious one.

EUR/USD

The euro generated some support on Wednesday, but remained well below yearly highs. The EUR/USD exchange rate is hovering near 1.1780. From a technical perspective, the pair is looking to test the 1.1785 resistance. A break above this level would expose the 1.1815 region. On the opposite side of the spectrum, immediate support is located at 1.1720.

GBP/USD

The British pound overtook 1.2900 US on Thursday, but continued to trade well below its previous highs. Cable will look to economic data for momentum on Thursday, with retail sales providing the catalyst. Analysts say the GBP/USD faces limited upside momentum, as the market continues to show a sharp bearish slope. Immediate upside is capped around 1.2930. Support is located at 1.2830.

Gold

Gold prices bounced back on Wednesday, as the US dollar weakened against a basket of global rivals. The dollar’s decline was partially attributed to a mixed reading of the July FOMC minutes, which signaled growing divergence about the future of monetary policy. Gold prices approached $1,290.00 a troy ounce in Asian trading. The yellow metal faces a critical resistance level at $1,300.00

GBPUSD made a sharp and strong decline in the last two weeks, with another leg down yesterday which can be wave 3) headed to 1.2750 near-term projection level. In fact current declien can become even more extended and sharper if we consider that wave 3) is normally the strongest leg in a five wave sequence. As such, we remain bearish on pound as long as 1.3030 holds.

GBPUSD, 4H

EUR/JPY - 129.10

Recent wave: A 5-waver is unfolding from 114.85 with wave iii and iv ended at 125.82 and 122.40 respectively, wave v has possibly ended at 131.40.

Trend: Near term up

Original strategy:

Bought at 129.45, Target: 131.00, Stop: 128.85

Position: - Long at 129.45
Target: - 131.00
Stop: - 128.85

New strategy :

Hold long entered at 129.45, Target: 131.00, Stop: 128.85

Position: - Long at 129.45
Target:  - 131.00
Stop:- 128.85

Although the single currency surged to 130.40 yesterday, the subsequent strong retreat dampened our bullishness and 128.90-00 needs to hold to retain prospect of another rebound, above 129.80-85 would bring another test of said resistance, break there would add credence to our view that at least the first leg of decline from 131.40 top has ended at 128.05 and extend gain to 130.85-90, however, as broad outlook remains consolidative, upside would be limited and said resistance at 131.40 should remain intact, bring another retreat later this week. 

In view of this, we are holding on to our long position entered at 129.45. Below 128.90 would risk weakness to 128.50, then retest of Friday’s low at 128.05 but break there is needed to revive bearishness and signal the decline from 131.40 top is under way for retracement of early upmove to 127.50-60, then towards 127.00-10.

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).