Will the FOMC minutes show more officials joining the cautious camp?
Today, the main event will be the release of the July FOMC meeting minutes. The statement accompanying that decision was very similar to the previous one, with the only changes relating to the inflation outlook and timing of the balance sheet normalization. We expect the financial community to dig into the minutes looking for more precise clues on the timing of the B/S normalization, other than the “relatively soon” part of the statement.
The statement was not clear on the inflation front either. The acknowledgment of inflation “running below 2%” was a downgrade from the previous description that it was “running somewhat below 2%”. However, officials still expect it to stabilize around the target over the medium term. In our view, this doesn’t paint a clear picture of the Committee’s view on inflation.
The minutes of the June meeting showed a split Committee, with some members attributing the recent softness in prices to idiosyncratic factors, while others expressed concerns that this weakness may persist. Up until the July gathering, the latter camp appeared to be right, as inflation continued to drift lower. If the minutes show that this cautious camp among policymakers has grown larger, the market probability for another hike in 2017 may decline (from 50% currently), and USD could come under renewed selling interest.
EUR/USD traded lower yesterday, breaking below the crossroads of the 1.1750 (R1) hurdle and the short-term uptrend line taken from the low of the 23rd of June.
The pair found fresh buy orders near the 1.1690 (S1) level and subsequently, it rebounded. The break below the aforementioned uptrend line has shifted the short-term bias to flat in our view. That said, in case the FOMC minutes today signal that the cautious camp among the FOMC is growing larger, the latest rebound could continue. A clear break back above 1.1750 (R1) could set the stage for further upside recovery, towards the 1.1830 (R2) zone. Switching to the daily chart, even though the short-term outlook may have turned neutral, the fact that EUR/USD is still trading above a medium-term uptrend line drawn from the low of the 17th of April keeps the broader picture positive, in our view.
Australia’s wage growth remains subdued
Overnight, Australia’s wage price index for Q2 showed that wages rose at the same lackluster pace as in Q1. We think this is likely to confirm the RBA’s concerns that even though the labor market continues to tighten, there is still no significant upward pressure on wage growth. The continued softness in wages enhances our view that the RBA is likely to remain on hold for the foreseeable future, and suggests that the Bank is unlikely to shift to a more hawkish stance anytime soon. As for AUD, we believe that its outlook is neutral for now. With the RBA unlikely to change tune, the currency’s forthcoming direction may be decided primarily by incoming data, movements in iron ore prices, and changes in risk sentiment.
Technically, it will be critical to see whether AUD/USD breaks below, or rebounds, from the key area of 0.7800, which acted as the upper bound of the wide sideways range that contained the price action from March 2016 until July 2017.
As for today’s economic data:
In the UK, employment data for June will attract attention. The consensus is for the unemployment rate to have remained unchanged, while average weekly earnings are anticipated to have risen at the same pace as previously. We view the risks surrounding the unemployment rate forecast as tilted to the downside, considering that the services PMI for June showed the strongest increase in employment growth since April 2016. A downside surprise could support GBP. Otherwise, market focus may be primarily on any surprise in wages, which have remained subdued in recent months despite the notable pickup in inflation, keeping real wage growth in the UK negative and thereby, dampening the outlook for household spending and economic growth.
What’s more, the fact that wages remain subdued confirms the BoE’s view that domestic inflationary pressures have not picked up, and that the overshoot in inflation entirely reflects the drop in sterling. Unless wages accelerate materially in the coming months (alongside economic growth), we maintain our view that a rate hike by the BoE in the near-term is a remote scenario, especially considering yesterday’s slowdown in core inflation.
GBP/USD tumbled yesterday, to find support near the key zone of 1.2850 (S1). The price structure on the 4-hour chart suggests a short-term downtrend, but considering the pair’s proximity to the crossroads of the critical 1.2850 (S1) level and the longer-term uptrend line taken from the lows of the 7th of October, we prefer to stay sidelined for now. A potential decline in the UK unemployment rate today could prove the catalyst for a rebound from the aforementioned crossroads. We prefer to wait for a clear close below that crossroads before we become confident that the latest downtrend may continue.
From Eurozone, we get the 2nd estimate of GDP for Q2 while in the US, building permits and housing starts for July are due out.
EUR/USD
Support: 1.1690 (S1), 1.1620 (S2), 1.1570 (S3)
Resistance: 1.1750 (R1), 1.1830 (R2), 1.1900 (R3)
GBP/USD
Support: 1.2850 (S1), 1.2810 (S2), 1.2760 (S3)
Resistance: 1.2910 (R1), 1.2950 (R2), 1.3030 (R3)