Waiting for the Fed FOMC
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.
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.