Two interest rate setting meetings, conducted by the Bank of England and the USA FOMC, are the high impact events traders must remain vigilant over this week

Oct 30 • Morning Roll Call • 1716 Views • Comments Off on Two interest rate setting meetings, conducted by the Bank of England and the USA FOMC, are the high impact events traders must remain vigilant over this week

Last week saw the three main indices in the USA reach new record highs. In the tech/NASDAQ index, the results/earnings from companies such as Alphabet (formally Google) and Amazon, helped to propel prices in the tech index to its highest daily gain (2.2%), since March 2016.

The week ended with USA GDP coming in at 3% annualized, beating the forecast of 2.6%, a fall was expected due to the impact the hurricane season had on the economy. The main indices have also risen despite economic theory suggesting a rate rise would have equities falling, as investors divest from the equity markets, in preference to other investments. Whilst a rate rise looks likely when the FOMC makes its announcement on Wednesday, at the conclusion of its last meeting of the year, Trump’s proposed tax cuts look as if they’ll become law, therefore the profits of quoted companies should rise significantly, countering any loss potential interest rate rises will cause.

This promise of cuts is therefore more than offsetting any fear in the markets of a rate rise, from 1.25% to 1.5% and the tax cuts should be announced before the end of the year, whilst Trump’s preferred new Fed chair, should be announced during this coming week. The belief in a strong economy both in the USA and globally, also saw WTI oil rose to a six month high and Brent crude rise to over $60 a barrel for the first time in two years. Whilst further evidence of global growth has come by way of certain world indices reaching record highs; the EURO STOXX 60 producing its best growth figures since 2013 and the Japanese Nikkei 225 index, breaking through 22,000 for the first time since 1996.

EUR/USD posted its worst weekly performance of 2017 during last week, falling through the 100 SMA, plotted on a daily chart. However, ending the week at 1.16, it’s still significantly ahead (up circa 11%) of the 1.04 low, which began the start of the year. The dovish tone projected by Mario Draghi and the ECB last week, coming after the APP (asset purchase program) was cut from €60b a month to $30b a month, was accompanied by no commitment to raise rates. And the message that the central bank would step in at the shortest moment, to intervene (once again), if the taper negatively affected markets or the Eurozone economy, caused the euro to retreat in value. Whilst the taper isn’t halting suddenly, it will be conducted over a nine month period. Investor confidence in the single bloc currency was also not aided by the continuing tensions regarding Madrid and Catalonia, with Madrid now threatening to take any form of autonomy and independent decision making away from Catalonia.

GBP/USD fell to a three week low on Friday as despite the U.K. GDP quarterly figure coming in above forecast at 0.4%, other hard data and surveys from, for example; the CBI and by various house price data providers, indicated that U.K. consumers might be close to their borrowing thresholds, given that wages are stagnating in comparison with inflation. Brexit is unfortunately an issue which will regularly get a mention in all FX analysis until the U.K. finally exits. Tory political confusion and infighting, combined with disagreement with the remaining E.U. 27 members, has ensured that very little progress has been made, since the referendum occurred in June 2016.

The BoE is odds on to announce a base interest rate rise of 0.25% on Thursday, however, given the various dovish statements from the deputy governor Sir Jon Cunliffe last week, investors are now betting that any rate rise won’t signal a tightening of monetary policy in 2018, or more rate rises. More likely, the narrative accompanying any rate rise will suggest a wait and see policy, as the rate rise is only being considered as a tool to cool inflationary pressures. The pound has made significant gains in 2017 versus the U.S. dollar, after crashing from June 2016 until December. In January it hit a circa 31 year low at 1.20, therefore at 1.31 the increase is approx. 9% over the year to date. Versus the euro, sterling has made a modest recovery over recent weeks, from a yearly low of circa 0.83 in April, EUR/GBP is now at 0.89, an approx. 7% increase.

USD/JPY has witnessed significant gains since the October monthly low was posted on the 16th, with investors now expecting the FOMC to announce a 0.25% rise to 1.5% on Wednesday at the conclusion of their meeting and the USA economy appearing to be on solid ground. Yen has lost its safe haven appeal, whilst the dollar has experienced a recovery versus the majority of its peers. Investors and FX traders will be monitoring the accompanying narrative from the FOMC for clues as to how the Fed/FOMC sets about the reduction of its gargantuan $4.5 trillion balance sheet and if it’ll discuss and potentially deliver a prospectus, in the form of forward guidance for rates to potentially normalize to circa 3% in 2018.

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