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European Open Preview – Dollar on the defensive ahead of FOMC; eurozone inflation on the horizon
January 31, 2018 9:26 amVideo
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Here are the latest developments in global markets:
Major movers: Dollar awaits for FOMC; aussie recovers after disappointing data
The US dollar remained largely unfazed by President Trump’s State of the Union address overnight, despite the President calling for a massive infrastructure spending plan that would cost at least $1.5 trillion. Despite this speech proving to be a non-event, the greenback is likely to remain at the center of attention, with the FOMC decision later today likely to determine the currency’s short-term bias.
The Committee is almost certain to keep its policy unchanged, and since this is one of the “smaller” meetings that do not include updated forecasts or a press conference, the price action will be driven by any changes in the phrasing of the accompanying statement. Market chatter suggests there is a likelihood for a more optimistic message from policymakers, amid an improving economic backdrop. Should this be a case indeed, the greenback could recover some of its latest losses on the decision. That said, considering that heightened pessimism currently surrounding the dollar, and the fact that a March rate hike by the Fed is fully priced in, any positive reaction could remain relatively short-lived.
Elsewhere, the aussie tumbled briefly during the Asian trading session, after Australia’s inflation prints for the fourth quarter disappointed. Both the headline and the trimmed mean CPI rates rose, but by less than anticipated, likely denting expectations for a more optimistic tone by the RBA when it meets again next week. Nonetheless, aussie/dollar managed to recover almost all of its CPI-related losses in the following hours.
As for the rest of the commodity-linked currencies, both the kiwi and the loonie surged, with kiwi/dollar gaining 0.7% and dollar/loonie falling almost 0.4%. This may have been a result of the absence of any major statements on trade in President Trump’s address overnight. The President may have been expected to discuss his “America first” policy and perhaps signal more protectionist measures to come. Since he did not, investors may have taken the opportunity to re-enter long NZD, AUD, and CAD positions, as all of these export-driven economies are very sensitive to the global trade outlook.
Day ahead: Eurozone inflation, Fed meeting and Canadian GDP due
January flash inflation figures out of the eurozone will be dominating attention during morning European trading hours. On an annual basis, both headline and core (that excludes volatile food and energy items) inflation are expected to slightly ease relative to December’s respective numbers, remaining well below the ECB’s target for inflation of below but close to 2%. The numbers will go public at 1000 GMT, at the same time that the eurozone’s unemployment rate for the month of December will be released. The unemployment rate is anticipated to remain at the nine-year low of 8.7%. One hour earlier (at 0900 GMT), Germany, the euro area’s largest economy, will see the release of unemployment data for the month of January.
Over in the US, the Fed meeting – the last presided by chair Yellen – will be the highlight of the day and the one having the greatest potential to lead to positioning on the dollar. No change in rates is expected, though a “hawkish hold”, one that lends supports to the dollar, is not to be ruled out. The interest rate decision and accompanying statement will be made public at 1900 GMT.
Before the completion of the Fed meeting, other data out of the US that will attract interest include January’s ADP national employment report (1315 GMT) on positions added to the economy by the private sector – this is often viewed as a precursor to the nonfarm payrolls report which is due on Friday – January’s Chicago PMI (1445 GMT) and pending home sales data for December (1500 GMT).
Interesting for loonie traders would be Canadian GDP data for the month of November and December producer prices out of the country. Both readings will be made public at 1330 GMT.
The EIA report including information on US crude and gasoline inventories for the week ending January 26 is due at 1530 GMT. Crude stocks are expected to increase by around 0.1 million barrels, after decreasing for ten straight weeks. This compares to a drawdown of around 1.1m barrels in the week that preceded.
In equity markets, AT&T, Boeing, Facebook and Microsoft will be among companies releasing quarterly earnings on Wednesday.
Technical Analysis: USDJPY negative bias still in play
USDJPY lost significant ground in recent weeks, eventually reaching a four-and-a-half-month low of 108.28 on January 26. The Tenkan- and Kijun-sen lines are negatively aligned and the RSI indicator is below its 50 neutral-perceived level. All these point to a negative short-term bias. However, notice that the RSI has been moving sideways in recent days, perhaps suggesting that negative momentum is losing steam.
Should a hawkish message prevail in the FOMC statement later on Wednesday, then USDJPY is likely to advance. In this case, resistance could be met around the current level of the Tenkan-sen at 109.75 – including the 110 handle, a level of potential psychological significance. The 109 level below might also act as a psychological barrier.
If the Fed’s message falls short in terms of “hawkishness” however, the pair could extend its decline, with last week’s four-and-a-half-month low of 108.28 coming into view as immediate support. Additional losses would shift the focus to the 15-month low of 107.31 that was recorded on September 8.
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