The Federal Reserve will announce its decision at 18:00 GMT. At the same time, updated macroeconomic projections of FOMC officials will be released, including the “dot plot” (interest rate estimations). Jerome Powell will hold a press conference at 18:30 GMT (the first post-meeting press conference).
A 25bp rate hike to 1.50-1.75% is widely expected today, it would be the first hike of the year. Markets have already discounted a hike. “There is nearly universal agreement that the FOMC will hikes rates at Powell’s first meeting. This is being taken for granted. The failure to raise interest rates would be significantly more disruptive than a hike at this juncture. Indeed, the focus is not so much on the rate hike, but the forward guidance provided by the FOMC statement and the Fed’s forecasts (dot plot)”, wrote analysts from Brown Brothers Harriman.
Most analysts expect no significant changes in the statement. The “dot plot” and Powell’s press conference are likely to be the main movers if the Fed raises the Fed Funds rate. The current debate hovers around how many times will the Fed raise rates during 2018 and also includes the impact of tax cuts on the economy.
“We think the Fed will signal it is time actually to hit the brakes by raising the Fed funds rate above the longer-run dot of 2.75% (the Fed's view on the nominal level of the natural rate of interest when the economy has normalised) in coming years, as we expect the Fed to raise the dot signal for 2019 from slightly more than 2 hikes to (close to) 3 hikes”, said analysts at Danske Bank.
According to Goldman Sachs, with tax cuts now implemented and an additional boost from higher federal spending this year, most participants are embracing the "from headwinds to tailwinds" narrative, so they expect a slightly hawkish tone.
Implications for DXY
If the Fed delivers as expected, the impact on the currency market is likely to be related with the ‘dots plot’ and the updated forecast for the US economy. Signals of more rate hikes and/or a positive revision of main economic variables should offer support to the US dollar. On the flip side, signals of a slowdown in the tightening cycle, could weaken the US dollar.
The US Dollar Index was modestly lower before the release. On a wider perspective, DXY has been moving mostly sideways, near the 90.00 handle during the current month. If the greenback strengthens after the meeting, the immediate resistance might lie at 90.55/60. Above the next area to watch is 91.00. A consolidation on top of 91.00 could open the doors to a test of a downtrend line from 2017 at 91.25. A break higher would improve the technical outlook for the USD.
A slide of the US dollar, would see the DXY testing the 89.85 immediate support. Below that area the next key level is 89.50. A daily close significantly below would be supportive of further declines. Next support is seen at 89.00.
About the interest rate decision
With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks. In the US, the Board of Governors of the Federal Reserve meets at intervals of five to eight weeks, in which they announce their latest decisions. A rate hike tends to boost the local currency. A rate cut tends to weaken the local currency. If rates remain unchanged (or the decision is largely discounted), attention turns to the tone of the FOMC statement, and whether the tone is hawkish, or dovish over future developments of inflation.
About the FOMC statement
Following the Fed's rate decision, the FOMC releases its statement regarding monetary policy. The statement may influence the volatility of USD and determine a short-term positive or negative trend. A hawkish view is considered as positive, or bullish for the USD, whereas a dovish view is considered as negative, or bearish.
About FOMC economic projections
This report, released by Federal Reserve, includes the FOMC's projection for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member's interest rate forecasts.
Analysts at UOB Group explained that in the G20 financial minister's communique, the group recognizes need for “further dialogue and actions” on trade and to stand by their G20 leaders’ Hamburg declaration on trade.
"The group reiterated that they will refrain from competitive devaluations, not target foreign exchange for competitive reasons.
It urged for flexible exchange rates, as it can serve as a shock absorber where feasible. In a first for the G20, the group recognized the risks that cryptocurrencies posed and that crypto assets should continue to be monitored by national standard-setting bodies."
Analysts at Scotiabank note GBP/USD short-term technicals as neutral/bullish.
"Sterling has edged back a little from the overnight high, with the 1.4085/00 area still capping GBP gains.
The overall technical picture looks positive for Cable, however; the pound broke above its 40-day MA this week and is sustaining the break out from the 2018 consolidation (bull wedge pattern).
Bullish trend signals are aligning on the short, medium and longer run charts, suggesting 1) limited downside movement and 2) an ongoing, underlying bid tone to price action.
Above 1.41 is positive for gains towards 1.4250/1.4350."
- EUR/GBP: Central Banks is the trade, bearish bias.
- EUR/GBP: Brexit negotiations also favour the pound.
EUR/GBP has been falling back from the recovery highs to just shy of the 0.88 handle, sliding in late Asia at the start of this week on Brexit optimism and extending the downside through European markets yesterday. Currently, EUR/GBP is trading at 0.8726, down -0.21% on the day, having posted a daily high at 0.8761 and low at 0.8723.
The 0.8755 double top capped the minor reocery attempst in Asia and the European bears pilled in again. Then came the UK wage data where the pound found additional support. the data was showing a 2.8% gain in average earnings to 2.8% (highest since late 2015) and a nudge lower in the ILO unemployment rate. This comes ahead of the BoE this week where markets will be looking for a hawkish hint towards a rate hike in May where the market has already factored in 19bps of tightening. There is a bid in the pound over the euro on the basis that while there is optimism for the European economy, there is a cautiously constructive view on policy risks. QE steps are likely to be reduced and halted this year until 2019
Eyes stay on Brexit
The recent agreement on the Brexit transition period likely bolsters the BoE's assumption that the adjustment to the post-Brexit world will be “smooth”, and that a BoE rate hike in May should be on the cards. For a detailed description of the current Brexit noise, see here: Brexit negotiations and recent agreements fueling a bid in the pound explained - ING
0.8690 is the cliff edge. "A close below here would trigger losses to the 78.6% retracement at 0.8527 (of the move up from the 2017 low)," argued analysts at Commerzbank. The price is building a case for the downside still while trading heavy below the ascending trend line support. 0.8730 has been peirced and this was regarded as a level that guards a run down to the December and January lows are located at 0.8689/87.
- The index remains on the defensive around 90.00 ahead of FOMC.
- US 10-year yields keep highs in the 2.90%-2.91%.
- Federal Reserve meeting next on tap. Focus on ‘dots plot.
The US Dollar Index – which gauges the buck vs. a basket of its main competitors – remains entrenched into the negative territory today although it manages well to keep business at/above the critical 90.00 milestone.
US Dollar looks to FOMC for direction
After failing once again to advance beyond the 90.40/50 band on a sustainable fashion, the index sparked a correction lower which has found strong support in the 90.00 neighbourhood for the time being.
The buck will be in the limelight later in the session, as global markets will closely follow the developments from the FOMC meeting.
It is worth recalling that market participants see the Federal Reserve hiking the Fed Funds rate by 25 bp, although the debate will gyrate around the revised ‘dots plot’ and the updated forecast for the US economy.
On the US docket, Existing Home Sales surprised to the upside today, expanding more than expected at 3.0% during last month, or 5.54 million units.
US Dollar relevant levels
As of writing the index is losing 0.39% at 90.06 facing the next support at 89.76 (low Mar.19) seconded by 89.56 (low Mar.14) and then 89.41 (low Mar.7). On the flip side, a break above 90.44 (high Mar.20) would open the door to 90.57 (high Feb.8) and finally 90.93 (high Mar.1).
The U.S. current account deficit widened in Q4, and it will probably continue to grow larger, explained analysts at Wells Fargo.
“The U.S. current account deficit widened to $128.2 billion in the fourth quarter, the largest deficit since Q4-2008.”
“The gaping $214.3 billion deficit in international trade in goods, which was already known before this morning’s data release, was partially offset by the $60.4 billion surplus in international trade in services. Americans also earned more income on their overseas investments than they had to pay to foreigners.”
“Foreigners continue to be willing financiers of the red ink in the U.S. current account. They made $54.1 billion worth of foreign direct investment (FDI) purchases in Q4. Net inflows of portfolio capital totaled $84.9 billion in the fourth quarter.”
“We forecast that the current account deficit will widen further in coming quarters, which should continue to exert modest downward pressure on the U.S. dollar.”
- The RBNZ meeting is scheduled on Wednesday at 20.00 GMT.
- The AUD/NZD soars more than 100 pips in less than 48 hours.
The AUD/NZD is trading at around 1.0734 up 0.37% on Wednesday so far as the Aussie is on a tear against the Kiwi. On Tuesday, the RBA minutes gave little new information and the Australian House Price Index came better than anticipated while later on Wednesday the RBNZ will release its Interest Rate Decision at 20.00 GMT, exactly two hours after the widely awaited FOMC meeting at 18.00 GMT. The RBNZ is expected to stay on hold.
AUD/NZD Daily chart
On Tuesday the bears fell into a bear trap below 1.0650 after which the market gained more than a 100 pips in less than 48 hours. Bulls seem pretty enthusiast to say the least as their eyes are now likely set on the 1.0800 figure which was the top of the trading range of the last month. The 1.0700 figure should now provide support as it was a previous demand zone.
AUD/NZD 4-hour chart
The bulls are now testing the 200-period simple moving average at the 1.0740 level. The next scaling points in sight are situated at 1.0760, 1.0780 and 1.080 which are all separated by a 20-pip gap and are essentially previous swing highs. Support is seen at the 1.0700 previous demand zone and 1.0650 cyclical low. Both RSI and MACD are seen as constructive so far.
- Crude oil prices prolong the rally to the vicinity of $65.00 after EIA.
- US oil supplies shrunk more than expected by 2.6 mbpd last week.
- WTI retakes the $64.00 handle and beyond in the wake of the release.
Prices of the barrel of the West Texas Intermediate are extending the weekly squeeze higher after the EIA reported US oil supplies went down more than initially estimated.
WTI advances beyond $64.00 on EIA’s report
Prices of the WTI are moving to fresh multi-week peaks above the $64.00 mark per barrel today after US crude oil inventories decreased more than forecasted in the week ending on March 16.
In fact, the EIA reported that crude oil supplies dropped by 2.622 million barrels vs. a forecasted build of 2.6 million barrels. Furthermore, Weekly Distillates Stocks fell by 2.022 million barrels and Gasoline Inventories decreased by 1.693 million barrels (less than expected).
Additional data saw stockpiles at Cushing rising by 0.905 million barrels, adding to last week’s 0.338 million barrels gain.
In the meantime, crude oil prices keep the march north unabated and bolstered by increasing geopolitical concerns over the Saudi Arabia-Iran situation, leaving behind jitters on rising US oil production for the time being. That said, WTI is already up more than 7% since lows in the $60.00 neighbourhood seen on March 14.
Later in the session, the FOMC will hold its meeting, while Baker Hughes will publish its oil rig count on Friday.
WTI significant levels
At the moment the barrel of WTI is advancing 1.74% at $64.72 facing immediate up barrier at $65.41 (200-month sma) followed by $66.35 (high Feb.2) and finally $66.72 (2018 high Jan.25). On the other hand, a breach of $62.77 (55-day sma) would aim for $61.97 (10-day sma) and finally $60.03 (low Mar.8).
- A 25bp rate hike is priced in by the market as the focus is on the dot-plot.
- Gold bulls attempt to break $1320 ahead of FOMC.
Gold is trading at around 1319.50 up 0.64% on Wednesday so far as the market is awaiting the end of the two-day FOMC meeting which will likely provide the market with the confirmation of a 25 bp rate hike. The market will pay attention if whether or not the FOMC still sees risks as “roughly balanced” and if the median dot-plot moves up, according to Deutsche Bank macro analysts.
In the New-York session, US Existing Home Sales came better than anticipated however the news was largely ignored as investors are on hold before the Fed provides more clues to the number of rates.
Gold has been supported at the $1306 level among trade wars, geopolitical tensions and a fresh new bear leg in the US dollar since the start of 2018. The precious metal and the greenback have been pretty much inversely correlated since the start of the year as shown in the graph below. (Green line is for the greenback).
Gold vs USD
Gold daily chart
Since mid-February gold has been consolidating in a descending wedge. On the daily chart, the price is finding support yet again at the 1306 support and also close to the 100 and 200-period simple moving average. A bull breakout would likely lead the price to 1340, previous swing high, resistance; followed by the 1360 region, high of the year. On the flip side, a bear breakout below 1306 would open the gates to 1285 which is the 61.8% Fibonacci retracement from the December 2017-January 2018 bull run. Further down the 1260 figure should provide support as well. Technically the bull trend is still intact.
Gold 4-hour chart
The yellow metal’s bulls are trying to break above the 100 and 200 SMA (4-hour). The RSI and the MACD have posted a positive divergence but bulls will need a close above the 200 SMA and 1330 psychological level to be out of the woods.
- The pair’s up move run out of legs just below the 1.2300 handle.
- USD stays offered and challenges the key 90.00 milestone.
- Spot should come under scrutiny on the expected Fed’s move on rates.
The upbeat tone around the European currency stays well and sound on Wednesday, with EUR/USD attempting – without success so far – to regain the key barrier at 1.2300 the figure and above.
EUR/USD bolstered by USD-selling, Fed on sight
The pair is extending its recovery following yesterday’s sharp sell-off, coming back from as low as the mi-1.2200s to test the proximity of the 1.2300 mark earlier in the session, or daily peaks.
The renewed selling bias around the buck stays as the main catalyst of today’s advanced in spot, although the up move should be clearly put to the test later in the day in light of the Fed meeting and its expected 25 bp rate hike.
Despite market participants have almost fully priced in higher rates today, the focus of attention will remain on the overall tone from the first press conference by Chief Powell as well as the updated outlook on the economy and the critical ‘dots plot’.
Data wise in the US docket, Existing Home Sales surprised to the upside expanding at a monthly 3.0% in February, or to 5.54 million units.
EUR/USD levels to watch
At the moment, the pair is gaining 0.38% at 1.2288 and a breakout of 1.2414 (high Mar.14) would target 1.2448 (high Mar.8) en route to 1.2557 (2018 high Feb.16). On the flip side, immediate contention emerges at 1.2241 (low Mar.21) seconded by 1.2206 (low Feb.9) and finally 1.2165 (low Jan.18).
• A modest USD weakness/NAFTA optimism prompts some aggressive long-unwinding trade.
• Bullish oil prices provide an additional boost to Loonie and contribute to the downfall.
• The key FOMC announcement would be looked upon for some fresh directional impetus.
The USD/CAD pair extended its retracement slide from 9-month lows and weakened farther below the key 1.3000 psychological mark.
The pair's early European session recovery attempts met with some fresh supply near mid-1.3000s, with a fresh wave of US Dollar selling pressure prompting some aggressive long-unwinding trade.
Meanwhile, optimism over the NAFTA negotiations, further reinforced by the Canadian PM Justin Trudeau's comments to get a good deal, provided an additional boost to the Canadian Dollar.
This coupled with the prevailing bullish sentiment around crude oil prices, which tends to underpin the commodity-linked currency - Loonie further collaborated to the pair's heavy offered tone through the early NA session.
It would now be interesting to see if the pair is able to find some dip-buying interest or bears maintain their dominant position as investors keenly await the latest monetary policy update by the US Federal Reserve.
Apart from the highly anticipated FOMC decision, this week's important Canadian macro releases - consumer inflation figures and monthly retail sales, might also influence the pair's momentum in the near-term.
Technical levels to watch
A follow-through weakness below the 1.2960-50 region is likely to get extended towards the 1.2920-10 area before the pair eventually drops back to retest the 1.2870-60 support.
On the upside, any recovery attempts back above the 1.30 handle now seem to confront fresh supply near mid-1.3000s, above which the pair could make a fresh attempt to reclaim the 1.3100 handle.
Major US equity indices witnessed a subdued opening on Wednesday as investors remained on the sideline ahead of the latest FOMC monetary policy update.
The US central bank is widely expected to raise interest rates by 25 bps points but the key focus would be on its forecasts over the pace of future increases. The big question is the number of additional rate hikes for the rest of 2018, which would eventually influence investors' appetite for riskier assets - like equities.
Any indications of a more aggressive monetary policy tightening cycle, signalling three more rate hikes this year could push the US Treasury bond yields higher and turn out to be the catalyst triggering a repeat performance of last month's heavy sell-off.
Aside from this, the recent weakness in technology stocks, led by a sharp drop in the shares of Facebook, continued denting investors’ confidence and collaborated to the weaker trading action during the opening hour of trade.
At the time of writing this report, the Dow Jones Industrial Average was down around 30-points to 24,700 and the broader S&P 500 Index slipped nearly 3-points to 2,715. Meanwhile, tech-heavy Nasdaq Composite Index lost over 5-points and was last seen hovering around 7,355 level.
FX Strategists at Scotiabank now shifted their outlook on USD/CAD to bearish in the shorter horizon, allowing at the same time a probable visit to 1.2950.
“Momentum indicators are fading from overbought levels and DMI’s are converging in a manner that hints to a shift in the balance of risk”.
“Near-term support has been observed in the 1.3020-1.3000 area however we look to further near-term weakness toward 1.2950”.
“The late 2017 high at 1.2920 is critical and a break would pave the way for further medium-term weakness toward the longer-term MA’s currently clustered in the mid/upper 1.26s”.
Last year the Polish zloty was the second best performing CEEMEA currency firming 5.3% against the euro and 20.2% versus the US dollar as the zloty benefited from robust economic activity with the pace of GDP growth accelerating to 5.1% y/y in Q4 from 4.9% in Q3, explains Piotr Matys, EM FX Strategist at Rabobank.
“The external backdrop throughout last year was also conducive for the zloty due to synchronised global recovery amid low inflationary pressure. In addition to that capital inflows to Polish assets were fuelled by accommodative financial conditions with the Fed raising rates gradually at the time when other major central banks continued to provide unprecedented amount of liquidity.”
“All those positive factors outweighed the risk that Poland could be penalised by the EU for breaching the rule of law by implementing various controversial measures regarding the Constitutional Tribunal and the judiciary.”
“While the Polish currency had a promising start to 2018, it proved short-lived. Rising market concerns about global trade wars and the prospect of a faster pace of tightening by the Fed undermined sentiment towards risky assets as reflected in the sharp sell-off in Polish stocks. After rallying in January to the highest level since 2011, the WIG20 Index plunged more than 14%.”
“It is worth watching EUR/PLN as the price action so far this year resembles the inverse head and shoulders technical pattern, which indicates that the predominant trend may reverse. By measuring the distance between the head (the year-to-date low) and the neckline, we obtained a short-term target of 4.25, although we would aim first at the December high at 4.2252.”
“Not only has the inverse head and shoulders been validated, but more importantly EUR/PLN has cleared the long-term downside trendline from the 2016 high producing a bullish signal.”
“A close above the 4.26~ pivot would support the notion that a major shift in the underlying trend is taking place in EUR/PLN. The September high at 4.3324 would be next potential target.”
“Gains in EUR/PLN could be driven by an escalation of market concerns about Trump’s protectionist policies, a hawkish Fed vs persistently dovish Polish MPC, the ongoing dispute between Warsaw and Brussels that could culminate in EU funds for Poland being significantly reduced, and/or rising geopolitical tension.”
“We have to be mindful that for major market participants current levels may prove attractive to sell EUR/PLN, which would limit scope for further gains. After all, the zloty is supported by lack of significant imbalances in the Polish economy: GDP growth is broad-based, C/A deficit is low and budget gap is below the 3% of GDP. Capital outflows from emerging assets have been so far relatively limited as well.”
“That said, the price action in EUR/PLN has been constructive and bullish signals generated by technical indicators could be reflected in the coming months in fundamentals, i.e. the Polish economy losing momentum and the outlook deteriorating significantly should full scale trade wars unfold.”
- USD-weakness is now driving spot to daily lows in the 57.45/40 band.
- Russian Retail Sales expanded less than expected 1.8% YoY.
- US FOMC meeting, ‘dots plot’, next of relevance in the docket.
The broad-based selling pressure around the greenback is now forcing USD/RUB to drop to the area of session tops in the 57.45/40 band.
USD/RUB weaker on data, USD-selling
The pair came under further downside pressure today amidst the generalized and renewed offered bias surrounding the buck.
In addition, the ongoing rally in crude oil prices is motivating the barrel of the European reference Brent crude to record fresh tops in the mid-$68.00s, lending support to RUB and thus collaborating with the downside.
In the data universe, Russian Retail Sales expanded at an annualized 1.8%, missing consensus, while the unemployment rate ticked lower to 5.0% (from 5.2%) during February.
In the meantime, the pair is receding from Monday’s multi-week tops just above 58.00 the figure, with RUB under scrutiny in light of the recent poisoning scandal between Russia and the UK.
Looking ahead, spot should remain vigilant on the upcoming FOMC meeting and the revised economic outlook as well as the updated ‘dots plot’.
USD/RUB levels to watch
At the moment the pair is down 0.11% at 57.44 and a break below 57.22 (10-day sma) would expose 56.83 (21-day sma) and then 55.59 (low Jan.25). On the upside, the next hurdle is located at 58.02 (high Mar.19) seconded by 58.16 (200-day sma) and finally 58.75 (2018 high Feb.9).
The US Treasury Secretary Steven Mnuchin was out on the wires in the last hour, commenting on the recent hot topic of the US trade tariffs.
• Focus now is on NAFTA and trade relations with China
• Will consider TPP once it accomplishes its goal on trading relationships
• Goal is not to have a global trade war
According to analysts at Nomura, we appear to be on track for a rate hike at today’s FOMC meeting and the focus now is largely on the medians of FOMC participants’ target federal funds rate projections (the “dots”) in the Summary of Economic Projections (SEP).
“Given recent remarks by FOMC participants, we think the dots distribution will shift up across the forecast horizon. We believe more likely than not the medians will rise for 2018-20 but this remains a very close call.”
“Recent remarks, particularly by Chair Powell and Governor Brainard, have highlighted an improved economic outlook as headwinds appear to be shifting to tailwinds. Tailwinds include synchronized global growth, strong aggregate demand, still-accommodative financial conditions and, most important, substantial fiscal stimulus in an economy close to full employment. Governor Brainard’s speech on 6 March was particularly notable given her hawkish shift.”
“More likely than not, the median dot will imply four hikes in 2018 (up from three) and three in 2019 (up from two and a quarter). However, we do not expect the median of the longer-run dots to change from its current level of 2.75% although upward adjustments to some dots may be possible. Elsewhere, relative to the December SEP, we expect upward revisions to growth forecasts for 2018-19 but a downward revision for 2020 as we think the boost from fiscal policy will wane that year. Moreover, we expect downward revisions to the unemployment rate forecasts for 2018-20 from their levels in December.”
• Upbeat UK wage growth data increases near-term BoE rate hike prospects.
• FOMC/BoE monetary policy update should help determine the near-term trajectory.
The GBP/USD pair trimmed some of the UK jobs data-led strong gains and has now retreated around 20-25 pips from session tops.
The British Pound regained traction after the latest UK wage growth data revived BoE rate hike move in the near-future and lifted the pair to an intraday high level of 1.4076. Despite a strong up-move, the pair lacked any strong follow-through and remained below the 1.4100 handle.
Ahead of today's key event risk - the highly anticipated FOMC decision, investors seemed reluctant to place aggressive bets and could be one of the key factors keeping a lid on the pair's bullish momentum.
Apart from the US monetary policy update, Thursday's BoE meeting would also play an important role in determining the pair's near-term trajectory. Against the backdrop of positive Brexit development, increasing prospects for a BoE rate hike might limit any immediate downside, at least for the time being.
Valeria Bednarik, American Chief Analyst at FXStreet writes, “the 4 hours chart shows that the price holds well above a bullish 20 SMA, while technical indicators hold well above their mid-lines, having lost upward strength amid the wait-and-see stance from market players rather than a sign of upward exhaustion. The pair has a relevant resistance area around 1.4070/80, as it topped multiple times around it these last few days, with scope to extend its gains up to 1.4145 on a break above it. To the downside, 1.4030 is the immediate short term support, with a more relevant one and a possible bearish target on a soaring greenback at 1.3960."
The German Chancellor, Angela Merkel is out on the wires saying that future EU-UK relationship cannot be as close as it is now.
• Wants friendly relationship with UK post-Brexit
• Wants ‘deep, detailed’ free trade accord with UK
• We believe US tariffs are against the law
• We are prepared, if necessary, to take countermeasures against US tariffs
Analysts at Nomura expect US existing home sales to increase only modestly by 0.2% m-o-m to an annualized rate of 5390k.
“Incoming data on pending home sales, which track contract signings, were weak in January, suggesting some drag on existing home sales (contract closings). Although consumer fundamentals remain favorable, mortgage applications for home purchases fell in February, pointing to some downside risk on our existing home sales forecast. Looking ahead, the ongoing shortage of previously owned homes for sale as well as the prospect of rising mortgage rates will likely weigh on sales.”
• China said to introduce counter-tariffs, targeting US agricultural exports.
• Global trade war concerns prompt some safe-haven buying.
• Downside remains limited ahead of the key FOMC announcement.
The USD/JPY pair dropped to fresh session lows, closer to the 106.00 handle, in a knee-jerk reaction to the WSJ report on possible Chinese countermeasures against the planned US tariffs.
According to the report, citing people familiar with the matter, China is said to target US agricultural exports, depending on what the Trump administration proposes. The headlines fueled concerns of a full-blown US-China trade war and prompted some aggressive safe-haven buying.
The pair, however, managed to quickly recover around 25-pips from lows and seemed to track a goodish pickup in the US Treasury bond yields. Investors seemed reluctant to place aggressive bets and preferred to wait on the sidelines ahead of the latest FOMC monetary policy update, due to be announced later during the NY trading session.
Technical levels to watch
The 106.00 handle might continue to act as an immediate support, below which the pair seems to aim back towards challenging mid-105.00s before eventually dropping to the key 105.00 psychological mark.
On the upside, 106.60 level seems to have emerged as an immediate resistance, above which a bout of short-covering could lift the pair beyond the 107.00 handle towards testing the 107.35-40 supply zone.
Preliminary data for GBP futures markets from CME Group noted open interest shrunk fort the first time after three consecutive gains by around 2.5K contracts on Tuesday vs. Monday’s finally 232,861 contracts. Similarly, volume went down significantly by more than 82K contracts extending the weekly drop.
GBP/USD still targets 1.41 and beyond
Cable’s up move still appears healthy, although the recent decline in both open interest and volume begs some caution in the near term. In addition, yesterday’s ‘inside day’ could be indicative of some respite in the up trend. That said, the imminent BoE event and progress on the Brexit front should be crucial for Cable.
Analysts at TD expects the Fed to hike rates by 25bps at the March FOMC, in line with a nearly-universal consensus.
“We look for changes in the statement to show an upgrade to the balance of risks and convey stronger conviction in the outlook. While markets have speculated about the risk of four 2018 hikes, we think the bar is too high to see a shift in the median 2018 dot but look for the 2019 dot to shift higher, signaling three hikes next year.”
“On the data front, existing home sales for February and the Q4 current account balance are both scheduled for release. The market expects home sales to rise 0.4% m/m to a 5.4m unit pace while the current account deficit is expected to widen to $125.0bn.”
According to statistics released by the Bureau of Economic Analysis (BEA) this Wednesday, the U.S. current-account deficit increased to $128.2 billion (preliminary) in the fourth quarter of 2017 from $101.5 billion (revised) in the third quarter.
• The deficit was 2.6 percent of current-dollar gross domestic product (GDP) in the fourth quarter, up from 2.1 percent in the third quarter.
• The $26.7 billion increase in the current-account deficit mostly reflected increases in the deficits on goods and secondary income and a decrease in the surplus on primary income.
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