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Weekly Digest - Focus on FOMC interest rate decision

Monday, September 16, 2019 11:27 AM GMT

Last week the EUR whipsawed in a wide range after the ECB stimulus decision, this week focus is on the FOMC interest rate decision

 

Last week saw three of the globe’s main currencies: euro, U.S. dollar and the U.K. pound experience significant volatility in the forex markets. Naturally, the issue of Brexit has continued to dominate the value of sterling, whose value fluctuated in unison with any developing or breaking news events involving the U.K. prime minister, who finally exercised his wish to shut down (prorogue) U.K. Parliament on Monday 9th. GPB/USD has rallied by circa 500 pips during the month, rising from circa 1.2000 in early September to close the trading-week out at a high not seen since July of over 1.2500, once the law preventing a no-deal Brexit passed. Optimism also increased that the U.K. would not crash out of the E.U. on a no-deal basis, after the U.K. prime minister’s rhetoric softened.

 Meanwhile, in terms of economic calendar data, the U.K. narrowly missed entering into recession, which is defined as two quarters in series of negative growth. The latest quarterly QoQ GDP figure printed on Monday September 9th by the ONS, which takes its instructions from the U.K. government’s treasury department, beat the forecast of -0.1% coming in flat at 0.00%, beating the previous quarterly figure of -0.2% with July’s growth coming in at a eyebrow raising 0.3%. Traders who remained long GBP/USD  based on technical analysis of the daily time frame, will have experienced significant gains since early September. The Heikin Ashi daily bars were mostly closed and bullish in the trading-week ending Friday 13th, indicating a strong bullish sentiment to remain long. Left on their standard settings the stochastics trended above the 80 level on Friday which could suggest the currency pair is overbought, the RSI was at circa 65, short of the 70 overbought level. The MACD remained bullish, whilst price breached the 50 DMA earlier in the week.

FOMC News at ZuluTrade

 

Although the political event of Brexit is still the most likely factor to impact on the value of GBP this week, there are certain high impact calendar events likely to affect the price of sterling, which Traders would be advised to monitor. Most notably, the latest U.K. inflation data will be published on Wednesday September 18th. On Thursday 19th the Bank of England’s latest base rate decision will be revealed. Following closely thereafter, the latest monetary policy forward guidance statement accompanying the rate-setting decision will be broadcast during the BoE press conference.

 The key CPI inflation figure for the U.K. is forecast by the Reuters news agency to come in at 1.8% year on year, falling from the 2.1% metric broadcast in August. Analysts in the U.K. mainstream media will immediately translate the data in relation to workers’ earnings, which are apparently rising at a rate of 4% per year. Retail sales data for August printed on Thursday, might indicate if the extra disposable income is being spent by U.K. consumers indulging in their favourite pastime, shopping. Traders should monitor the latest U.K. inflation figure as the reduction might take the FX market by surprise, a miss or beat could immediately impact on the value of sterling’s main currency pairs.

 At midday U.K. time on Thursday September 19th, The Bank of England is forecast to announce the U.K. base rate is unchanged at 0.75%. However, as with many central bank decisions it’s often the press conferences outlining the monetary policy, or the revelation of any forward guidance changes, that can cause the relevant currency to change in value. Analysts and traders will closely monitor the BoE Governor Mark Carney’s speech for any clues as to how he intends to handle Brexit, by way of revisions to the monetary policy.

 The value of the euro came under intense scrutiny last week as the president of the ECB Mario Draghi bowed out from his position with his last press conference. Rumours suggested that Mr. Draghi was set to announce a radical change in monetary policy. He did announce a recommencement of the bond buying/quantitative easing programme, which has seen over €2.6 trillion pumped into the Eurozone banking system since approximately 2015-2016. But the negative interest deposit rate was only adjusted to -0.50% from -0.40%, with the key borrowing rate remaining at 0.00%.

 Due the earlier leaking of the proposed ECB hawkishness, analysts and traders expected a more definitive statement and hawkish action. Moreover, speculation began to develop that any successor to Mr. Draghi could in fact reverse the loose policy position and not use further Q.E. to avoid a potential recession in the Eurozone and the wider European Union.

 The reaction in FX markets to his policy announcement and revised forward guidance was significant and is clearly illustrated on the following EUR/USD 15 minute time frame. The major-pair whipsawed in a wide range, oscillating between bullish and bearish sentiment as analysts and traders came to terms with Mr. Draghi’s statement. After slumping through the second level of support S2, EUR/USD regained its session losses, reversing direction to trade at the first level of resistance R1.

 

 When analysed on the daily time frame the gains EUR/USD has registered over recent weeks are more evident. Price has printed a September high since the ECB decision, at the close of trading on Friday September 13th, price traded at a high not seen since August 28th. Several of the most popular technical indicators, such as the stochastics and the RSI, are suggesting that the currency pair is not yet overbought. Price is trading close to the 50 DMA at circa 1.113, but still some distance short of the 200 DMA sited at 1.126.

 During this trading week the calendar events which could impact on the value of the euro includes the latest inflation figures; Reuters predict the key annual CPI figure for the E.Z. to be published on Wednesday 18th will come in at 1.0%, with August’s figure strengthening from -0.5% to 0.2%. Readings which (if the forecasts are met) could firm up the value of euro versus its peers.

 Negative data for the euro this week could be provided on Tuesday at 9:00am GMT by the publication of the latest German ZEW survey figures. Fears are mounting that the powerhouse and engine of growth for the Eurozone and Europe, could be entering recession. The ZEW survey metrics can be considered leading as opposed to lagging data, as they reveal the levels of sentiment throughout several German industrial sectors.

Some of the leading  economic calendar events that could directly impact on the value of USD this week includes the latest industrial and manufacturing data published on Tuesday. Various housing sector data for the USA is printed on Wednesday namely: housing starts, permits and mortgage applications.

 But by far the most prominent Trading calendar event this week, which will impact on the value of the U.S. dollar and equity indices, concerns the latest FOMC rate setting decision which will be revealed at 19:00pm U.K. time, on Wednesday September 18th. The widely held consensus, after both Bloomberg and Reuters have polled their panels of economists, is for a cut in the key rate (upper-bound) from 2.25% to 2.0%, the lower-bound rate is forecast to be cut by 0.25%.

 Half an hour after the Federal open market committee’s decision is broadcast, the Federal Reserve chief, Jerome Powell, will conduct a press conference justifying the FOMC decision. If a rate cut is declared then it’ll be fascinating to witness what justification exists, in the opinion of the FOMC. In normal circumstances a rate cut is designed to stimulate an economy, to perhaps get ahead of the curve to ward off a potential recession, or to increase inflation if stagnant or deflationary conditions are considered a threat to economic growth. None of the aforementioned factors appear to be in play with regards to the USA economy.

 Therefore, Jerome Powell and the committee may come under criticism that they’re bowing to President Trump’s increasing demands to lower the value of the U.S. dollar, in order to make exports more competitive. However, as an economy which is up to 80% dependent on imports for its economic performance, the policy may backfire on the USA with any benefits short-lived, based on the fact that imports (particularly from China) will rise in cost if USD falls in value versus its peers. 

 Other notable high impact calendar events which traders should be mindful of this week, includes the publication on Tuesday of the minutes for the last rate-setting decision by Australia’s central bank, the RBA. If the narrative is considered dovish the value of the Aussie dollar could come under further scrutiny. Canada’s latest inflation data is revealed on Wednesday, currently at 2.0% annually a fall or rise could cause the value of Canada’s dollar to fluctuate. Early Thursday morning during the Asian trading session, the Bank of Japan will reveal its rate-setting decision. Currently at -0.1% there is little expectation for any change. Late evening Japan’s inflation figure is also published, expected to remain unchanged at 0.5% year on year up to August. 

 The Swiss franc will come under increased scrutiny and potential speculation on Thursday morning prior to the London-European open, once the Swiss National Bank reveals its latest interest rate decision. The SNB policy rate is widely tipped to remain mired in NIRP territory (negative interest rate policy) at -0.75%. The latest import and export metrics for the Swiss economy will also be published early morning.

 

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