EUR/USD: A reversal in risk-related currencies is worth watching
Macroeconomic overview:
- Rising inflation means the Federal Reserve should hike interest rates two or possibly three more times this year, and could move as soon as next month, Philadelphia Fed President Patrick Harker said. He penciled in only two total rate hikes in 2018 in February.
- He added he wants to see inflation remain near a 2% target on a sustained basis before backing three more interest rate hikes this year. He said he is not yet seeing a "rapid acceleration" of inflation after the Fed's core measure hit 1.9% in March.
- Atlanta Federal Reserve Bank President Raphael Bostic said the U.S. economy is close to meeting the Fed's employment and inflation goals, with growth of around 2.5% expected this year. Bostic did not update his views on interest rates, but has recently said he has a base case for two additional rate increases this year. He also said that as the Fed debates possible changes to its inflation framework, he is "drawn to" systems that offset years of below- or above-target inflation with "misses" in the opposite direction.
- Yesterday, Giuseppe Conte, a law professor at the University of Florence and lawyer, was chosen by the two leaders of the Five Star Movement (M5S) and the League as a neutral and compromise candidate for prime minister of the new Italian government. Professor Conte is not a member of parliament, nor a member of either of the parties, but he is close to the M5S. While it is true that he has hardly any political experience, we note that the Italian constitution assigns the PM a crucial role. Should Giuseppe Conte become the new PM, he would be responsible for managing any political decision of the new government.
- In currency market, yesterday’s price action seemed to show some scratches in the renewed USD strength seen since the beginning of last week (after a brief correction in the previous week). Risk-related currencies such as commodity currencies and the Nordics strengthened perceptibly against the dollar.
- Certainly one needs to be cautious not to read too much into short-term price action. As seen with the brief correction 10 days ago, a slowdown in momentum does not always persist. Still, we think it is something worth watching because USD short-positioning has now been reduced significantly and the dollar has thus become more vulnerable to a potential turn in sentiment. If the strength in risk-related currencies proves sustainable, this might pave the way for a reversal in EUR/USD.
Technical analysis and trading signals:
- EUR/USD's drop accelerated last week, registering the second biggest one-week fall of 2018, to perform a close below the 1.1790 Fibo on Friday, 76.4% retrace of the 1.1553 to 1.2556 (November to February) gain. New 2018 low set at 1.1717 on Monday. Bears now need to overcome the key 1.1709 Fibo, 38.2% retrace of the wider (2017-2018) 1.0340 to 1.2556 rise.
GBP/USD supported by hawkish comments from Vlieghe
Macroeconomic overview:
- Bank of England Governor Mark Carney said he expected Britain's economy would bounce back from a weak start to the year when it was hit by heavy snowstorms, keeping the prospect of higher interest rates on the table.
- Speaking to lawmakers, Carney also denied that the central bank had confused investors and households by not raising interest rates earlier this month, in contrast to what had been widely expected until shortly before the BoE's meeting in May.
- "Our view is not that circumstances changed in the first quarter. It's more likely to have been temporary and idiosyncratic factors that slowed the economy," he said, echoing comments he made earlier this month.
- In February, the BoE said rates were likely to go up sooner and somewhat faster than investors had been expecting, prompting financial markets to price in a rate hike at the central bank's May meeting as a near-certainty at one point.
- Instead, the BoE's nine rate-setters voted 7-2 to keep rates at 0.5%, their emergency level for most of the decade since the global financial crisis, as they waited to be sure that the first-quarter weakness was a weather-related blip.
- Carney said today that surveys showed households and firms largely expected a rate hike in 2018 and more increases "at a very gentle pace relative to history" after that.
- Earlier today, Monetary Policy Committee member Gertjan Vlieghe said he expected slightly more interest rate increases over the next three years than the market assumption of just under three 25 basis-point hikes.
- "Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25 bp to 50 bp per year over the forecast period," Vlieghe said. "That is a forecast, not a promise, and will depend on how the economy evolves."
- Sterling, which on Monday hit its lowest level against the USD in nearly five months, rose against the the dollar after Vlieghe's comments. GBP/
- Vlieghe also backed the idea of the BoE following the example of the U.S. Federal Reserve and publishing forecasts from its policymakers for interest rates. "The advantages outweigh the risks, in my judgement. I think such a change would represent a further, modest, evolutionary improvement in communications."
- We expect the Bank of England will raise interest rates in August, by 25 bp.
Technical analysis and trading signals:
- Daily momentum remains negative and slow stochs struggle to cross bull side. Monday's 1.3392 low is the initial objective for bears and the next one is 1.33s from December. Today’s price action But a recovery move cannot be excluded if the strength in risk-related currencies proves sustainable.
Source: GrowthAces.com - your daily forex trading strategies