Forex News and Events
Fed minutes take markets by surprise
The Fed’s April meeting minutes have shown that most members of the US central bank are ready to raise at the next meeting. The EUR/USD reacted sharply by declining to 1.1220 before consolidating. Surprisingly, the Fed is again taking a hawkish stance with financial markets practically ruling out a June hike. Before the minutes the likelihood of a June raise was estimated at 4%, now it is up to 32%.
On the back of this release, short-term Treasury yields have increased to a 2-month high to 0.89%. However, in contrast US stock markets ended almost flat as fears of a possible end to the free money era have increased. Nonetheless, we should remember that a raise will only be possible if the economy picks up. The markets which, up to now were firmly focused on global conditions are now thoroughly scrutinising the true state of the domestic economy. Consumer spending, which is on the soft side will be closely monitored in particular. We feel that markets have overestimated any June action and that the dollar should continue to suffer in the run-up to the June meeting. We reload our bullish position on the EUR/USD.
Banxico meeting minutes
With expectations for a Fed rate hike increasing, our focus turns back to the potential reaction in EM currencies. Today Mexico’s Banxico meeting minutes will be released. We suspect that the overall tone will be for banks to maintain a defensive stance, especially given the threats of inflation and FX volatility due to fed policy. Last week Mexico’s CPI decreased 0.32% m/m in April driven by a fall in perishable food prices and FX pass-through. Moving forward, we see a stabilisation of food prices consistent with a year-end inflation forecast of 2.8%. With inflation well mannered, the Banxico will wait-and-see what develops with Fed policy path and commodity prices rather than moving forward with further policy action. Earlier, a surprise 50bp intra-meeting interest rate hike and heavy FX intervention provided the effect of slowing MXN depreciation, without derailing economic activity.
However, should the rally in US yields continue the closer we get to June, the expected weakness in MXN (along with much of the EM space) might demand greater action then just unscheduled FX intervention. Yet, the fear of FX intervention does not seem to be worrying MXN bears. While we do not have a level should the market converge into another “Taper Tantrum” pattern we should see Banxico react with both barrels blazing (surprise FX intervention and interest rate hikes). Elsewhere in the EM, South Africa ‘s SARB is likely to raise repo rate a further 25bp to 7.00% (against consensus of a hold) as CPI inflation levels are expected to climb above target and the weakness in ZAR only amplifies the risks. The concerns are that weak growth dynamics will keep the SARB sideline for now. We remain confident that the Fed will not tighten in June. However, now is not the time to venture into EM currencies.
The Risk Today
EUR/USD has broken hourly support at 1.1217 (24/04/2016 low). Hourly resistance is located at 1.1349 (17/05/2016 high) and stronger resistance lies at 1.1616 (12/04/2016 high). Expected to show further weakness. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.
GBP/USD is bouncing higher. Hourly support is given at 1.4300 (21/04/2016 low) while hourly resistance at 1.4543 (06/05/2016 high) has been broken. Stronger resistance is located at 1.4770 (03//2016 high). Expected to show continued strengthening. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY has breaking 110. Strong resistance is given at 111.91 (24/04/2016 high). Hourly support lies at 108.72 (18/05/2016 low). Expected to show further buying pressures as the pair lies within an uptrend channel. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is pushing higher and bullish momentum is growing. Next resistance can be found at 0.9913 (16/03/2016 high) while a break of hourly support located at 0.9652 (06/05/2016 low) would confirm deeper selling pressures. Expected to show continued In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.
