We are counting down to the Fed’s first and last rate hike in 2016. Will EUR/USD break 1.05?
ECB president Mario Draghi put investors’ mathematical ability to the test last week. He announced a reduction in bond purchases from 80 billion euro to 60 billion euro, starting in April and extended the purchase program from April to December. Investors were expecting the 80 billion euro purchase program to extend from April to September. As such, investors were caught on the wrong foot initially, thinking that the reduction was a tapering of quantitative easing. EUR/USD shot up close to 80 pips in the first minute, but investors quickly realised ECB had in fact increased its purchase program instead. Here’s the illustration:
Expectation
6 month extension of 80 billion euro a month (6 x 80) = 480 billion euro
Actual
9 month extension of 60 billion euro a month (9 x 60) = 540 billion euro
EUR/USD reversed, wiped out all of the gains and fell 130pips in less than an hour. Mario Draghi also emphasised on the need to maintain stimulus and dismissed the idea of tapering. With France holding its election and Italy expected to have an early election, the euro is expected to be under pressure until the end of the first quarter of 2017.
Bank of England (BOE) will be announcing its rate decision and statement this week. We expect them to maintain their interest rate, but the game-changer would be Carney’s statement. sterling took a beating last week as the “Brexit” journey is expected to start by the end of March. What makes the market look forward to Carney’s statement is whether he will continue to express his concern on the overshoot inflation. The UK CPI is scheduled for Tuesday, which should give some insights into BOE’s statement. A hawkish statement from Carney is likely to strengthen the sterling.
We are in the final lap of 2016. Before the world countdown to 2017, the financial market is counting down to the Fed rate hike. It is almost certain the rate hike will take place, as we see USD/JPY hit past 115. In the rare event the rate hike does not take place; hell will break loose for the dollar. Market is looking past the rate hike (even before it happened!) and anticipating guidance from Janet Yellen for 2017. If the Fed chair offers little or no hints on the next rate hike, we could possibly see profit taking in the dollar, as the big players are winding down and getting ready to spend quality time with their loved ones in the coming festive season of Christmas and New Year.
Our Picks
EUR/USD – Possible breakout. EUR/USD is near key support of 1.05. If Janet Yellen provides clear guidance to the next rate hike in the first half of 2017, this could give EUR/USD enough reason to break the support.
EUR/GBP – Possible breakout. If UK CPI is upbeat, a hawkish BOE is likely to push EUR/GBP lower. Can consider placing a pending Short below the Support of 0.8350.
XAU/USD (Gold) – Possible reversal. Fed rate hike has been priced in. If Fed does not offer much guidance for the next rate hike, investors may close out their Short positions ahead of the Christmas and New Year festive season.
Top News This Week (GMT+8 time zone)
UK: CPI y/y. Tuesday 13th December, 5.30pm.
We expect figures to come in at 1.2% (previous figure was 0.9%).
US: Federal Funds Rate. Thursday 15th December, 3am.
We expect figures to come in at 0.75% (previous figure was 0.5%).
UK: Official Bank Rate. Thursday 15th December, 8pm.
We expect figures to remain unchanged at 0.25% (previous figure was 0.25%).