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Gold Ticks Lower as Markets Eye Federal Reserve Statement
Gold has edged lower in the Wednesday session. In North American trade, spot gold is trading at $1248.46, down 0.18% on the day. On the release front, New Home Sales was unchanged at 610 thousand, short of the estimate of 615 thousand. Later in the day, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders.
The Federal Reserve is unlikely to make a rate move at its policy meeting later on Wednesday. So what can we expect to hear from the Fed? The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed's calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", and policymakers sent broad hints about a December rate hike. However, recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today's rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Another key issue on the Fed's agenda is when to begin tapering the Fed's $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
Pound Edges Higher as British Preliminary GDP Matches Forecast
GBP/USD has posted slight gains in Wednesday trade. In the North American session, the pair is trading at 1.3050, up 0.19% on the day. On the release front, British Preliminary GDP edged up to 0.3% in the second quarter, matching the forecast. In the US, New Home Sales remained steady at 610 thousand, short of the estimate of 615 thousand. Later in the day, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders.
There were no surprises from British Preliminary GDP in the second quarter, which gained 0.3%, compared to 0.2% in the first quarter. This follows first quarter growth of 0.3%. Government statisticians are saying that the economy experienced a "notable slowdown" in the first half of 2017. Although the services sector expanded by 0.5% in the quarter, construction declined 0.9% and manufacturing dropped 0.4%. The soft numbers have dampened expectations for a rate hike from the Bank of England. Policymakers have engaged in a public debate about rate policy, but a second straight quarter of low growth will be ammunition for those policymakers who are against a rate hike before 2018. Although economic expansion remains weak, inflation levels are higher than the BoE would like, courtesy of a weak British pound. The currency's woes have also hurt the British consumer, who has seen her purchasing power reduced.
The Federal Reserve will be in the spotlight later on Wednesday, as it concludes its monthly policy meeting and releases a rate statement. The Fed is not expected to alter its interest rate policy, but the rate statement could still be a market-mover. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed's calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today's rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Another key issue on the Fed's agenda is when to begin tapering the Fed's $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
U.K. Mid-Year Economic Outlook
Executive Summary
Economic growth in the United Kingdom remained modest in Q2, growing at a 1.2 percent annualized rate over the quarter. Monthly data suggest that a deceleration in consumer spending has played a role in the downshift in the British economy as rising inflation and stagnant wage growth have taken a bite out of household purchasing power. This combination of rising inflation, sluggish wage growth and tepid economic activity has put the Bank of England (BoE) in a bit of a bind. Although five members voted to keep Bank Rate unchanged at 0.25 percent at the last policy meeting on June 14, three members voted to hike rates by 25 bps at that meeting. We believe that the views of the majority will continue to prevail, and that policymakers at the BoE will refrain from raising rates through at least the end of 2017 as inflationary pressures from weak sterling begin to subside. Looking ahead, we forecast that real GDP growth will strengthen modestly in 2018 as some of the forces that have led to a slowdown this year reverse, although uncertainty related to Brexit continues to lurk in the background as a major downside risk to the economy.
Economic Growth Trudges Along in Q2
The 1.2 percent annualized growth rate in Q2 matched expectations (Figure 1). The data are preliminary and could be subsequently revised. Moreover, a breakdown of the overall GDP data into its underlying demand components will not be released until next month. In general, the 1.7 percent year-over-year growth rate that was registered in the second quarter indicates that the underlying pace of economic growth in the United Kingdom is only modest at present.
As noted above, a detailed breakdown of the Q2 GDP data into its underlying demand components is not yet available. Service industries accounted for all of the growth, while production-oriented industries such as manufacturing and construction contracted in the quarter.
In addition, monthly data suggest that a deceleration in consumer spending has played a role in the downshift that is underway in the British economy. Yes, real retail sales grew 1.5 percent (not annualized) on a sequential basis in the second quarter. On a year-over-year basis, however, real retail spending was up only 2.6 percent in Q2, which clearly represents a slowdown relative to the breakneck pace of the past few years (Figure 2).
This ratcheting back in the pace of consumer spending reflects a combination of two factors. First, although the unemployment rate has dropped to only 4.5 percent, the lowest rate in more than 40 years, wage growth in the United Kingdom remains painfully slow (Figure 3). At the same time, CPI inflation has shot higher due, at least in part, to the marked depreciation of sterling in the wake of last year's Brexit referendum (Figure 4). The combination of slow wage growth and higher inflation means that growth in real disposable income (i.e., purchasing power) has taken a hit. With the household savings rate at an all-time low of only 1.7 percent of disposable income, consumers have needed to reduce spending growth due to slower growth in real income.
Bank of England Likely To Remain on Hold
The surge in the overall rate of CPI inflation in the past year or so presents a conundrum to policymakers at the Bank of England (BoE). The British government tasks the BoE with maintaining an inflation rate of two percent over the medium term. With CPI inflation well above the BoE's target at present, some members of the Monetary Policy Committee (MPC) have felt compelled to tighten policy. Although five members voted to keep Bank Rate unchanged at 0.25 percent at the last policy meeting on June 14, three members voted to hike rates by 25 bps at that meeting. The next policy meeting is scheduled for August 3.
We believe that the views of the majority will continue to prevail, and that the MPC will refrain from raising rates through at least the end of 2017. As noted above, the depreciation of sterling—it weakened 20 percent on a trade-weighted basis between late 2015 and late 2016 (Figure 5)— helped to push CPI inflation higher. However, the trade-weighted value of sterling has largely moved sideways over the past few months, and we expect it to remain more or less stable in coming months. Therefore, the inflationary impulses hitting the economy from higher import prices should start to dissipate. The recent decline in energy prices should also help to reduce inflation. Although the overall CPI inflation rate could very well drift higher over the next month or two, we look for it to recede later this year as disinflationary forces come to the fore. Meanwhile, although we forecast that real GDP growth in the United Kingdom will firm somewhat, the pace of growth will generally remain lackluster through the end of the year (Figure 6). In our view, the combination of receding inflation and sluggish GDP growth should stay the MPC's hand for the remainder of the year.
We look for real GDP growth to strengthen modestly in 2018 as some of the forces that have led to a slowdown this year reverse. Namely, the decline in the CPI inflation rate that we forecast should help to boost growth in real disposable income again, which should translate into stronger growth in consumer spending. Stronger growth in the global economy, especially in the Eurozone, to which the United Kingdom sends 40 percent of its exports, should also contribute positively to real GDP growth. In that regard, the volume of British exports was up more than 7 percent in the first two months of Q2 relative to the same period in 2016. As the economic outlook improves, we look for the MPC to hike rates in late spring/early summer 2018. That said, any tightening that the MPC should undertake likely will remain gradual. We also expect that the MPC will maintain the size of its quantitative easing program at £445 billion (£435 billion government bonds plus £10 billion corporate bonds) through at least the end of 2018.
Brexit: The Elephant in the Room
The United Kingdom has built extensive economic and financial ties with other European Union (EU) countries over the past 44 years during which it has been an EU member. Exports to and imports from the other EU members accounts for one-half of British trade, and those countries own one-half of the directly invested capital in the United Kingdom. London has become the unquestioned financial capital of Europe.
But the decision by the United Kingdom to leave the EU means that new relationships governing these economic and financial ties must now be renegotiated by March 2019, and there is considerable uncertainty regarding the ultimate configuration of these new relationships. Will goods and services continue to be traded freely between the United Kingdom and other EU members after 2019? Will citizens of other EU countries be allowed to live and work in the United Kingdom after it leaves the EU? Will the unfettered access to European financial markets that the EU "passport" gives to London-based financial institutions continue? At this time, nobody knows the answers to these and myriad other questions regarding the Brexit process.
This uncertainty appears to be affecting investment spending in the United Kingdom. Survey data that measure investment intentions, which tend to be highly correlated with actual investment spending, weakened throughout 2016 (Figure 7). Investment intentions have rebounded somewhat this year, but they generally remain low. Until some of the uncertainty regarding the Brexit process is cleared up, many businesses in the United Kingdom may adopt a wait-and-see attitude regarding investment spending. We do not believe the uncertainty is enough to derail the current economic expansion in the British economy, but we freely acknowledge the risk that the economy weakens significantly more than we and other forecasters anticipate. Stay tuned.
Conclusion
Economic growth in the United Kingdom has slowed from its cycle-high reached in 2014, but the deceleration has not been as sharp as originally feared in the wake of Brexit. That said, production in investment-oriented sectors of the economy remains soft, and consumer spending has begun to suffer amid wages that have struggled to maintain their purchasing power. The recent stabilization of the sterling should help relieve some of the inflationary pressure caused by imports, and stronger growth in the global economy, especially in the Eurozone, should also contribute positively to real GDP growth. This in turn should keep the policymakers at the BoE on hold through at least the end of 2017. As such, we look for a modest strengthening in the U.K. economy over the next 18 months. The ongoing negotiations related to Brexit will likely continue to loom over the U.K. economy over the next few years, representing a major downside risk moving at a glacial pace.
Yen Steady at 112 as Japanese Inflation Matches Expectations
USD/JPY is showing little movement in the Wednesday session. In the North American session, the pair is trading at the 112 line, up 0.07% on the day. On the release front, the Japanese Services Producer Price Index edged up to 0.8%, matching the forecast. In the US, New Home Sales remained steady at 610 thousand, short of the estimate of 615 thousand. Later in the day, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders. Japan will release a host of inflation indicators, led by Tokyo Core CPI. The indicator is expected to post a small gain of 0.1%.
The Bank of Japan minutes from the June meeting revealed a split among members as to how much information the bank should disclose regarding a potential withdrawal from its quantitative easing program. Some policymakers were in favor of full disclosure about the bank's plans, while others said that publicizing information about an exit too soon could lead to market volatility. As expected, the BoJ maintained its ultra-loose policy, but there was an unexpected development, as the bank revised upwards its forecast for consumer consumption, for the first time in six months. An additional complication for policymakers is that the BoJ is now trailing other central banks with regard to tightening monetary policy – the Federal Reserve and Bank of Canada recently raised rates, and the ECB and BoE are contemplating tighter policy. If the BoJ continues to lag behind the other central banks, the yen could lose ground against other currencies.
All eyes are on the Federal Reserve, which concludes its monthly policy meeting later on Wednesday. The Fed is not expected to alter its interest rate policy, but the rate statement could still be a market-mover. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed's calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today's rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Aside from interest rates, Fed members will be discussing when to commence tapering the Fed's $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
Forex Market Awaits FOMC Statement; Pound Helped by UK GDP
It was a relatively quiet day in forex markets as traders were mostly looking forward to the Fed statement later in the US session and as UK second quarter GDP figures were in line with estimates.
In the day's main economic news, the preliminary estimate of UK second quarter GDP came in line with expectations at 0.3% quarter-on-quarter and 1.7% year-on-year. This was on the one hand a slowdown from the previous quarter's 2% year-on-year growth rate but the quarterly rate improved slightly from 0.2% in the first quarter. The UK Chancellor acknowledged that uncertainty about Brexit was a burden for the country's economy as he said more clarity on that front would help. The pound managed to broadly hold the 1.30 level against the US dollar and rose to as high as 1.3061. Euro/pound was relatively soft at 0.8922.
The euro was comfortably holding the 1.16 handle against the US dollar following the upbeat German Ifo business survey released the previous day, while the US dollar received a short-term boost from the surprisingly strong consumer confidence numbers which were also out on Tuesday. A rise in German 10-year yields on Tuesday was also supporting the single currency. German 10-year paper was yielding 0.55% on Wednesday from around 0.49% on Monday.
The US dollar stayed within relatively narrow ranges against both the euro and the yen in anticipation of the statement from the Federal Reserve's rate-setting committee later in the US session. The Fed could comment either on the pace of its future interest rate hikes or on when it would commence to slowly shrink its massive $4.5 trillion balance sheet. Some economists also thought that the Fed could reveal little and choose to give more clues during its annual Jackson Hole Symposium which is held every August. Euro/dollar was last at 1.1627 and dollar/yen was 111.94.
In US data, new home sales for June came in close to expectations at 610 thousand units and also close to the previous month's starts of 605 thousand (seasonally adjusted, annual rate). As such, the upbeat starts did not impact the dollar much.
Gold managed to recover some of the losses it made the previous day and during today's Asian session to climb back to $1248 an ounce. In the oil market, weekly crude oil inventory figures showed a much larger-than-expected reduction of 7.2 million barrels compared with analysts' forecast of a 2.62 million barrels drawdown. Consequently, WTI oil rose to around $48.45 a barrel and was trying to break through the previous day's high of $48.63.
Looking ahead, traders will of course focus on the FOMC statement later in the day. Thursday is looking relatively quiet for forex markets, with the exception of June durable goods in the US.
Trade Idea Wrap-up: USD/CHF – Hold short entered at 0.9570
USD/CHF - 0.9588
Most recent candlesticks pattern : N/A
Trend : Near term down
Tenkan-Sen level : 0.9561
Kijun-Sen level : 0.9527
Ichimoku cloud top : 0.9471
Ichimoku cloud bottom : 0.9469
Original strategy :
Sold at 0.9570, target: 0.9470, Stop: 0.9605
Position : - Short at 0.9570
Target : - 0.9470
Stop : - 0.9605
New strategy :
Hold short entered at 0.9570, target: 0.9470, Stop: 0.9605
Position : - Short at 0.9570
Target : - 0.9470
Stop : - 0.9605
As the greenback has maintained a firm undertone after staging a strong rebound from 0.9438 late last week, suggesting near term upside risks remains for this corrective bounce to extend marginal gain from here, however, reckon upside would be capped at 0.9600-05 (61.8% Fibonacci retracement of 0.9701-0.9438) and bring retreat later, below 0.9520 would suggest an intra-day top is possibly formed but break of 0.9450-55 is needed to signal the rebound from 0.9438 has ended, bring retest of this level first.
In view of this, we are holding on to our short position entered at 0.9570. Above 0.9600-05 (61.8% Fibonacci retracement of 0.9701-0.9438) would suggest a temporary low is formed instead, bring a stronger rebound towards resistance area at 0.9622-35.
Trade Idea Wrap-up: GBP/USD – Sell at 1.3100
GBP/USD - 1.3048
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 1.3031
Kijun-Sen level : 1.3039
Ichimoku cloud top : 1.3046
Ichimoku cloud bottom : 1.3022
Original strategy :
Sell at 1.3100, Target: 1.2980, Stop: 1.3135
Position : -
Target : -
Stop : -
New strategy :
Sell at 1.3100, Target: 1.2980, Stop: 1.3135
Position : -
Target : -
Stop : -
Although cable retreated after rising to 1.3084 yesterday, break of 1.2980-85 is needed to signal top is formed, bring further fall to 1.2950-55 but only below there would confirm the rebound from 1.2933 has ended, then another test of this support would follow, once this level is penetrated, this would add credence to our view that early fall from 1.3126 top has resumed for further weakness to previous support at 1.2912 which is likely to hold on first testing.
In view of this, would not chase this fall here and we are looking to sell cable on subsequent recovery as 1.3100-10 should limit upside. A firm break above 1.3100 would abort and suggest the fall from 1.3127 has ended instead, bring retest of this level but only break there would shift risk back to upside for further gain to 1.3150-60.
Trade Idea Wrap-up: EUR/USD – Sell at 1.1680
EUR/USD - 1.1637
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 1.1635
Kijun-Sen level : 1.1663
Ichimoku cloud top : 1.1667
Ichimoku cloud bottom : 1.1663
Original strategy :
Sell at 1.1680, Target: 1.1580, Stop: 1.1715
Position : -
Target : -
Stop : -
New strategy :
Sell at 1.1680, Target: 1.1580, Stop: 1.1715
Position : -
Target : -
Stop : -
Although the single currency moved higher to 1.1712 yesterday, the subsequent retreat suggests consolidation below this level would be seen and as long as 1.1712 holds, mild downside bias is seen for test of 1.1617-20 support, break there would signal a temporary top is formed, bring retracement of recent rise towards previous resistance at 1.1583 but price should stay above 1.1550, bring another rally later.
In view of this, we are looking to turn short on recovery but one should exit on such fall. Above said resistance at 1.1712-14 would signal the rise from 1.0340 low is still in progress and may extend headway towards 1.1750, then 1.1775-80.
Trade Idea Wrap-up: USD/JPY – Exit short entered at 112.00
USD/JPY - 111.90
Most recent candlesticks pattern : N/A
Trend : Near term down
Tenkan-Sen level : 111.85
Kijun-Sen level : 111.73
Ichimoku cloud top : 111.17
Ichimoku cloud bottom : 111.12
Original strategy :
Sold at 112.00, Target: 111.00, Stop: 112.35
Position : - Short at 112.00
Target : - 111.00
Stop : - 112.35
New strategy :
Exit short entered at 112.00
Position : - Short at 112.00
Target : -
Stop : -
As the greenback has maintained a firm undertone, suggesting near term upside risk remains for the rise from 110.62 (this week’s low) to extend gain to 112.08-10 (previous resistance and 50% Fibonacci retracement of 113.58-110.62), break there would bring headway towards 112.42-45 (previous resistance and 61.8% Fibonacci retracement), however, reckon upside would be limited and price should falter well below resistance at 112.87, bring retreat later.
In view of this, would be prudent to exit short and look to sell dollar again on subsequent rally. Below 111.55-60 would suggest top is possibly formed but break of previous resistance at 111.34 (now support) is needed to add credence to this view, bring weakness to 111.10-15, below there would suggest the rebound from 110.62 has ended, bring test of 110.83 support first.
Elliott Wave Analysis: USDJPY Breaking Higher; More Bullish Moves Expected
USDJPY can also be trading within wave A, as part of a bigger three wave recovery as USDCHF. Well, if that is the case, the more upside may come in sessions ahead. At the moment we see blue sub-wave iv in the making, that can see limited downside near the 111.5/111.70 region. Once sub-wave iv unfolds, a new push higher into the following leg v can come in play, with potential limited upside near the previous swing high of wave B at the 112.43 level.
USDJPY, 1H
