FOMC minutes send the dollar lower
- Yesterday, the FOMC minutes from the latest policy gathering contained a few dovish hints with regards to policy. Although “many” policymakers saw a near-term rate hike as being warranted, a “few” opposed such an action due to the weakness in the inflation outlook. These “few” participants preferred to delay a hike until data confirmed that inflation is clearly on a path towards the Fed’s 2% goal. Moreover, “many” participants judged that the recent soft patch in inflation might not reflect only transitory factors, but may prove to be more persistent, a significant change in tone compared to the previous signals from the Committee. The dollar was already on the back foot ahead of the release of the minutes, and drifted even lower in the aftermath.
- In my view, the key message from the Committee was that a December rate hike remains extremely likely, but any rate increases following that one will probably be conditional upon inflation picking up. Therefore, how inflationary pressures evolve over the next few months will probably prove critical for market expectations regarding the pace and magnitude of tightening in 2018. At the time of writing, the Fed fund futures suggest that the market has priced in a little more than one hike for 2018, as opposed to the Fed’s “dot plot” signals for three. Should price pressures intensify over the next months, then market pricing could come closer to the “dot plot” and USD could gain as US yields move higher. On the other hand, continued softness in inflation may lead investors to speculate that the Fed may pause its hiking cycle for a while and thereby, weigh on the greenback. In the more immediate term, the dollar will probably continue to respond to headlines regarding the likelihood for tax reform.
- USD/JPY edged lower yesterday, falling below the support (now turned into resistance) barrier of 111.70 (R1) ahead of the FOMC minutes. The rate then moved even lower after the release, to find fresh buy orders near the 111.10 (S1) level and subsequently, it rebounded somewhat. In my view, although the broader outlook of the pair remains sideways between the resistance of 114.30 and the support of 108.70, considering that the latest slide started after the price tested the upper bound of this range, there is a prospect for even further declines within the range. Thus, I would expect the bears to remain in charge and aim for another test of the 111.10 (S1) zone soon, where a clear break could open the way for the next support barrier of 110.70 (S2).
ECB minutes to shed some light on QE recalibration
- Today, the ECB will release the minutes of its October policy meeting, where the Bank announced a reduction in the pace of its future QE purchases, but did not provide a clear roadmap on when purchases may end completely. Even though this release is usually not a major market mover, it could attract extra attention this time, given the magnitude of this policy decision. In particular, the market is likely to focus on the conversation regarding whether the Bank should have announced a clear end-date to QE or not. Considering that some influential policymakers like Weidmann noted after the meeting that they preferred to have announced such an end-date, it will be interesting to see whether this view was shared only by a few members, or whether there was more support for such action. In case we see more than a handful of policymakers having supported such an action, EUR could gain on speculation that the ECB could indeed announce such an end-date next year.
- EUR/USD surged yesterday from near the upside support line taken from the low of the 7th of November, to break above two resistance (now turned support) barriers in a row, mainly due to USD weakness before and after the release of the FOMC minutes. During the European morning Thursday, the rate looks to be headed for a test of the 1.1860 (R1) territory. In case the ECB minutes today are judged to be on the hawkish side, it could be the catalyst for a break above this key territory. A clear break above 1.1860 (R1) would signal a forthcoming higher high on the 4-hour chart, and could turn the short-term picture back to positive. Something like that could pave the way for more upside extensions, perhaps for a test of the 1.1930 (R2) zone.
As for the rest of today’s highlights:
- We get the preliminary Markit manufacturing and services PMIs for November from several European nations and the Eurozone as a whole. Most of the manufacturing indices are expected to decline a little, while most of the services prints are forecast to tick up. Relatively unchanged PMIs are unlikely to move the euro too much.
- From the UK, we get the 2nd estimate of GDP for Q3 and expectations are for this print to confirm the preliminary estimate and show that the economy gathered some speed during the quarter. This release will also include the updated business investment for the quarter, which is likely to attract a lot of attention as investors and the Bank of England policymakers try to gauge whether Brexit-related uncertainties have begun to influence business decisions.
- In the US, markets will be closed in celebration of the Thanksgiving Day.
USD/JPY
Support: 111.10 (S1), 110.70 (S2), 110.20 (S3)
Resistance: 111.70 (R1), 112.45 (R2), 113.10 (R3)
EUR/USD
Support: 1.1810 (S1), 1.1770 (S2), 1.1725 (S3)
Resistance: 1.1860 (R1), 1.1930 (R2), 1.2000 (R3)
