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Softer USD Gives A Positive Kick To EUR/USD

Published 11/02/2017, 03:57 AM
Updated 04/25/2018, 04:10 AM

FTSE -22 points at 7465 DAX -25 points at 13440 CAC -4 points at 5510 IBEX 35 +4 points at 10510

Jerome Powell will likely be the next Federal Reserve (Fed) Chair, according to Bloomberg news based on the opinion of 'four people familiar with the decision'. The Wall Street Journal reported that President Trump had already selected him. Powell is known to be a dovish FOMC member, as dovish as the actual Fed head Janet Yellen who hiked rates four times, by a total of one percent since she took office in February 2014. The Fed is expected to continue gradual interest rate hikes under Powell’s reign, along with the balance sheet normalisation.

In the meantime, the Fed kept the possibility of a December rate hike on the table, as expected. The market assesses 92.3% chances for an additional 25-basis-point hike before the end of this year. the ADP report showed that the US economy added 235K new private jobs in October, versus 200K expected by analysts. Friday's nonfarm payrolls (NFP) are expected to have surged by 312K versus -33K printed a month earlier. The USD softens on profit taking, dip-buyers could find interesting opportunities before Friday's jobs data.

The USD/JPY trades within the mid-upper Bollinger bands (on hourly basis), which corresponds to 113.07/114.60 area. Large option barriers trail above 114.00 at today’s expiry, there are light hedges for a decline below the 113 mark. The Fed/Bank of Japan (BoJ) divergence is indisputably in favour of a stronger US dollar versus the yen, however the slide in the US yields posterior to the Fed meeting weighs on the positive momentum. The US 10-year yield retreated to 2.35%, yet will remain on September – October positive upswing above the 2.30% level.

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The AUD/USD traded above the 200-day moving average (0.7710) on the back of a better-than-expected trade surplus in September and helped by a broadly softer US dollar. The pair could meet a minor resistance at 0.7742 (23.6% retracement on September – October decline) and a major resistance at 0.7815 (38.2% retrace) before reversing its two-month negative trend. The EUR/AUD gains downside momentum on the back of a widening yield spread especially with the peripheral EZ yields. The daily MACD (Moving Average Convergence Divergence) indicator stepped into the bearish zone.

The softer US dollar gave a positive kick to the EUR/USD in Asia, but the euro itself remains under the pressure of declining Eurozone yields and there is not a single reason for investors to move away from the Eurozone bonds, after the European Central Bank (ECB) committed to carry on with the monthly bond purchases until September 2018 and longer if needed. The half-speed purchases appear to be disregarded by the bond traders. The better yielding Italian, Portuguese and Greek 10-year yields are down to their lowest range in three months; Spanish 10-Year yield is also heading toward its three-month low as Catalan tensions ease.

The DAX (+1.78%) rallied to a fresh all-time high (13’488.59) on Wednesday; Volkswagen (DE:VOWG_p) surged by nearly 14% over the last four trading sessions to levels last seen before the emission scandal kicked in in September 2015.

Royal Dutch Shell (LON:RDSa)'s 3Q results will be in focus. Bloomberg preview hints at ‘another strong quarter, but cash flow seen softer’. The rebound in oil prices could be overshadowed by damages caused by the hurricanes and a fire at the Pernis site in the Netherlands.

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The FTSE 100 rose to 7532p, yet failed to consolidate gains above the 7500p level and closed at 7487.96p on Wednesday. The FTSE rolling index traded shortly below the 7450p in the overnight session. Futures (-26.5 points) hint at a softer open on Super Thursday.

The Bank of England (BoE) policy decision and the Quarterly Inflation Report (QIR) will be in trades’ focus in the UK. Investors are looking forward to hearing what the BoE Governor Mark Carney has to say after the inflation hit the 3% threshold in September, following the BoE’s decision to lower the bank rate to the historical low of 0.25% after the Brexit referendum and keep it at this level despite the rising inflation caused by the significant pound depreciation. Hence, the macroeconomic data no longer justifies the BoE’s ultra-loose rate policy. Therefore, the BoE is expected to raise the interest rate by 25 basis points with 90% probability at today’s meeting. The GDP outlook will likely remain unchanged for 2017 and could be revised higher for 2018, while the inflation forecasts could be raised for this year and revised lower for 2018.

The GBP/USD fluctuates near its 50-day moving average (1.3275). Given that the rate hike is widely priced in, the accompanying statement will be the major highlight for the pound traders, who will likely be pricing in what the BoE is ready to do in the coming months if the inflation doesn’t slow down. Carney had already warned that the inflation has certainly not peaked in September (3%), stipulating that the consumer prices could continue increasing at a faster speed in the coming months. Provided the high inflation expectations, an uptight policy statement could bring the BoE hawks down a notch and increase the shorts’ endeavor for the 1.30 mark. On the other hand, a sufficiently committed BoE could trigger a rally past 1.3243 (October resistance), toward 1.3416 (major 61.8% retrace on September – October pullback) and the 1.35 mark.

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