Wait­ing for the Fed FOMC

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EURUSD:

Fol­low­ing pre­vi­ous Fri­day’s wel­come an­nounce­ment that Ger­many’s in­fla­tion lev­els had sur­pris­ingly in­creased in June by 0.3% (sur­pass­ing ex­pec­ta­tions for a 0.25 in­crease), op­ti­mism emerged that the ECB’s newly im­ple­mented stim­u­lus mea­sures were hav­ing an im­me­di­ate pos­i­tive ef­fect on their bat­tle against low in­fla­tion lev­els. Un­for­tu­nately, this newly found op­ti­mism was short lived.

The lat­est EU CPI fig­ures showed that in June, in­fla­tion lev­els re­mained stag­nant at an an­nu­alised 0.5%. Other eco­nomic per­for­mances pro­vided va­lid­ity to IMF chief Chris­tine La­garde’s com­ments at a re­cent fi­nance min­is­ters meet­ing in Lux­em­bourg that the EU eco­nomic re­cov­ery had not been ro­bust, and there are in­di­ca­tions that eco­nomic mo­men­tum was slow­ing. No­tice­able eco­nomic dis­ap­point­ments over the past week in­cluded EU Markit PMIs fall­ing be­low ex­pec­ta­tions, along­side an un­ex­pected de­cline in Ger­many fac­tory or­ders.

The EURUSD fur­ther suf­fered when it was an­nounced that the United States added an im­pres­sive 288,000 jobs to their econ­omy in June. Over­all, the EURUSD en­coun­tered a loss of just over 100 pips for the week, and suf­fered five days of con­sec­u­tive losses for the first time since Jan­uary (Daily time­frame).

In re­gards to the ECB in­ter­est rate de­ci­sion, as ex­pected, the ECB re­frained from al­ter­ing mon­e­tary pol­icy for two con­sec­u­tive months. How­ever, Mario Draghi dis­played an over­all dovish un­der­tone through­out his live press con­fer­ence ad­dress. De­spite the EURUSD de­clin­ing by over 500 since May, Draghi sug­gested that the EURUSD continues to trade at an el­e­vated level. Draghi also reaf­firmed that in­ter­est rates will re­main at record lows for an ex­tended pe­riod of time.

Look­ing ahead to the up­com­ing week, EU eco­nomic data is low in vol­ume. The only ma­jor eco­nomic an­nounce­ments this week is the lat­est Ger­many trade bal­ance on Tues­day and the ECB monthly re­port on Thurs­day. One po­ten­tially high-im­pact eco­nomic re­lease for this pair, which will likely en­cour­age EURUSD vo­latil­ity will orig­i­nate from the United States. On Wed­nes­day, the lat­est Federal Re­serve min­utes are re­leased. It is im­por­tant to re­mem­ber that dur­ing the most re­cent FOMC meet­ing, the Fed ap­peared far more dovish than ex­pected.

Un­less Ger­many’s trade bal­ance un­ex­pect­edly dis­ap­points, the low quan­tity of EU eco­nomic data could pos­si­bly en­tice in­vestors to­wards buy­ing this pair as the week de­vel­ops. Po­ten­tially dovish Fed min­utes would en­cour­age this pos­si­bil­ity.

Mov­ing onto the tech­ni­cals, a short term bullish trend line has now con­cluded. If the EURUSD continues to de­cline, up­com­ing sup­port lev­els are sit­u­ated at 1.3575 and 1.3544. Al­though, the Stochas­tic Os­cil­la­tor is now sit­u­ated in­side the over­sold bound­aries, and the RSI is not too far away from fol­low­ing suit.

The fu­ture out­look for this pair re­mains bleak and if the EURUSD does ap­pre­ci­ate in val­u­a­tion over the next week, I would ex­pect pre­vi­ously used sup­port lev­els to be used as pos­si­ble re­sis­tance. Po­ten­tial re­sis­tance lev­els can be found at 1.3620, 1.3640 and 1.3660.

The over­all EURUSD out­look re­mains bear­ish and I ex­pect upside gains to­wards 1.37 to be limited, un­less USD weak­ness in­spires risk ap­petite into the cur­rency mar­kets.

GBPUSD:

The GBPUSD con­tin­ued to rally over the last week and ad­vanced to­wards its high­est val­u­a­tion in nearly six years. The cur­rent UK fun­da­men­tals con­tinue to look ex­ceed­ingly strong and the mar­kets re­acted fa­vor­ably to the news that in June, the man­u­fac­tur­ing sec­tor ex­panded at its fastest pace this year. The sec­tor had pre­vi­ously been pin­pointed as a po­ten­tial tar­get for job growth and sur­vey com­plier, Markit sug­gested the sec­tor is cur­rently flour­ish­ing.

Ad­di­tion­ally, the GBPUSD ben­e­fited from the news that in June, the UK con­struc­tion sec­tor ex­panded at its fastest pace in nearly four months. The only dis­ap­point­ing UK eco­nomic per­for­mance arose when Ser­vice’s PMIs (largest GDP con­trib­u­tor) fell just short of ex­pec­ta­tions. Still, the PMI reg­is­tered at 57.7 (58.3 ex­pec­ta­tion). A read­ing above 50 in­di­cates ex­pan­sion.

How­ever, as the week con­cluded, there were some signs of in­vestors tak­ing profit and the pair con­cluded the week be­ing traded in a con­sol­i­da­tion range, in­clud­ing suf­fer­ing losses in two out of three days (al­beit very small). This was pos­si­bly en­ticed by a mix­ture of UK ser­vices PMIs fall­ing just short of ex­pec­ta­tions, along­side the United States’ im­pres­sive jobs re­port. Com­ments from Deputy BoE Gover­nor, Sir John Cun­liffe re­gard­ing the po­ten­tial UK in­ter­est rate hike will also have con­trib­uted to­wards the pairs small losses.

Speak­ing in an in­ter­view with the BBC, Cun­cliffe sug­gested that a UK in­ter­est rate rise would be de­pen­dent on how much room there is for the econ­omy to grow be­fore it en­coun­ters in­fla­tion pres­sures.

Bear­ing in mind that the lat­est UK in­fla­tion lev­els were recorded at an an­nu­alised 1.5% (a five-year low) and the BoE main­tains a thresh­old 2% CPI tar­get to con­sider an in­ter­est rate hike, this sug­gests that we re­main a con­sid­er­able dis­tance away from a BoE in­ter­est rate in­crease. This will dis­ap­point in­vestors who are op­ti­misti­cally hop­ing that the BoE raise rates as early as dur­ing the next in­ter­est rate de­ci­sion, this com­ing Thurs­day.

In re­gards to the tech­ni­cals on the Daily time­frame, a bullish trend line which has been in play since Novem­ber 2013 continues to con­trol the GBPUSD’s di­rec­tion. Fur­ther re­sis­tance is at 1.7250. This is a level not touched since Septem­ber 2008 and a pre­vi­ously fea­tured sup­port level be­tween Fe­bru­ary and April 2006. How­ever, 1.7250 re­mains 100 pips away from this pair’s cur­rent di­rec­tion and with the BoE al­most cer­tainly go­ing to re­frain from rais­ing rates next week, a rally to­wards this dis­tance would likely be de­pen­dent on an im­pres­sive UK man­u­fac­tur­ing per­for­mance on Tues­day and some risk ap­petite fol­low­ing the Federal Re­serve’s FOMC min­utes re­lease on Wed­nes­day evening.

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