Dollar Broadly Pressured after FOMC, Sterling Strong ahead of BoE

Market overviews

Dollar stays broadly pressured today as post FOMC selloff extends. While Fed delivered the widely anticipated rate hike, it maintained the forecast of a total of three hikes in 2018 only, not four. Aussie is the only failing to join the party against Dollar today after weaker than expected job data. Sterling remains the strongest major currency for the week even though it turns slightly cautious against Euro and Yen today. BoE rate decision is the main event to watch and any hawkish twist in the announcement would propel Sterling further higher. In addition, Eurozone will release PMIs and German Ifo. US President Donald Trump will also finally announce his tariffs against China.

BoE to stand pat but may indicate a May hike

BoE is widely expected to keep the bank rate unchanged at 0.50% today. The asset purchase target will also be held at GBP 435b. After this week’s events, the announce has become very lively. The announcement that UK and EU has reached the Brexit transition deal has given the pound a strong boost. It still has to go through EU summit at the end of the week but that should just a matter of formality only. The development also cleared an important uncertainty for BoE in its monetary policy consideration.

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Sterling’s strength was somewhat limited later by disappointing inflation data. CPI slowed more than expected to 2.7% yoy in February, versus consensus of 2.8% yoy. Core CPI also slowed to 2.4% yoy, below expectation of 2.5% yoy. But later, the pound was lifted again by employment data as unemployment rate dipped to 4.3% from 4.4%. More importantly, wage growth showed acceleration with average weekly earnings including bonus jumped to 2.8% 3moy.

On the one hand, Brexit development would remove an excuse for BoE doves to urge for patience. On the other hand, the strength in wage growth now gives BoE hawks a bullet to push for rate hike. Sterling could be shoot up again if BoE announcement today signals that it’s getting closer for a May hike. That could be come by a twist in the language of the statement. Or, it could be signaled by some votes for hike by hawks like Michael Saunders and Ian McCafferty

More readings on BoE:

Trump to announce USD 50b tariffs on China today, China fights back… verbally… for now

Trump is set to announce the tariffs on 100 different types of Chinese goods today, as follow up to the section 301 of the Trade Act of 1974 investigation. Bloomberg reported that the targeted amount would be at around USD 50b annually. White House official Raj Shah also said in a statement that “tomorrow the president will announce the actions he has decided to take based on USTR’s 301 investigation into China’s state-led, market-distorting efforts to force, pressure, and steal U.S. technologies and intellectual property.” It’s believed that the tariffs won’t take effect immediately. And the list of targeted products will be finalized after industry input. But it’s only confirmed when it’s confirmed.

On the other hand, China is readying retaliation measures. But before that, China’s Ministry of Commerce pointed to WTO ruling against the Obama-era anti-subsidy tariffs. Back in 2012, China went to WTO to challenge U.S. anti-subsidy tariffs on Chinese exports including solar panels, wind turbines, steel cylinders and aluminum extrusions. And, the WTO ruled the United States had not fully complied with a 2014 ruling against its anti-subsidy tariffs on a range of Chinese products

The MOFCOM criticized that the US has “violated WTO rules, repeatedly abused trade remedy measures, which has seriously damaged the fair and just nature of the international trade environment and weakened the stability of the multilateral trading system.” The MOFCOM also pledged to oppose “protectionism by the US ahead of any possible trade measures against China” and to ” take all necessary measures to resolutely protect its interests”

Separately, a former vice commerce minister and now an executive deputy director of the China Center for International Economic Exchanges, Wei Jianguo, warned that “if Trump really signs the order, that is a declaration of trade war with China.” Wei said “China is not afraid, nor will it dodge a trade war.” And, there are “plenty of measures to fight back, in areas of automobile imports, soybean, aircraft and chips.

Dollar broadly lower as Fed maintained projection of 3 hikes in total this year

FOMC’s rate hike of 25 bps to 1.50-1.75% was fully expected. . What caught market attention the most was the median dot plot (which continued to project 3 rate hikes in 2018) and the upgrades in the economic projections. US dollar plunged from almost a three-week higher after the announcement. The message delivered in the accompanying statement and by Fed Chair Powell at the press conference was not as hawkish as some had expected. In particular, the median dot plot continues to point to 3 rate hikes this year (two more to come), rather than a total of 4 hikes in 2018. More in FOMC Projects Two More Rate Hikes This Year, Followed By Three In 2019.

Further readings on FOMC:

RBNZ stands pat, Spencer said NZD in vicinity of fair value

NZD is relatively steady after RBNZ kept OCR unchanged at 1.75% as widely expected, and maintained a dovish stance. Outgoing Acting Governor Grant Spencer gave an interview before handing over to Adrian Orr. He noted that RBNZ shouldn’t comment on NZD’s exchange rate. And, he emphasized that “we should only comment on the currency if it’s really pretty clear that it’s out of alignment and you’re wanting to have some impact, some sort of jaw-boning effect”. Though, he acknowledged that “in the past we have got into this situation where we sort of had to make a statement about the currency and if we didn’t the market was going to react.” But then, he also said that NZD is “in the vicinity of fair value”.

In the accompany statement, RBNZ maintained that “monetary policy will remain accommodative for a considerable period.” It said, “inflation is expected to weaken further in the near term”, before heading up to 2% target “over the medium term”. And, “tradeable inflation is projected to remain subdued through the forecast period.” At the same time, “non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure.” Regarding the economy, “growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth.”

On the data front

Australia employment was a disappointment to the markets. Australian economy added 17.5k job in February, below expectation of 20.3k. Unemployment rate also rose to 5.6%, above expectation of 5.5%. Japan PMI manufacturing dropped to 53.2 in March, below expectation of 54.3. Japan all industry activity index dropped -1.8% mom in January.

Looking ahead, while BoE is the major focus, there are other key features in the calendar too. Eurozone will release PMIs and German Ifo business climate. ECB will release monthly bulletin. UK will also release retail sales. Later in the day, US will release jobless claims, house price index, PMIs and leading indicator.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3964; (P) 1.4015; (R1) 1.4048; More….

GBP/USD’s rally resumed after brief retreat and reaches as high as 1.4169 so far. The break of 1.4144 resistance should confirm our bullish view that correction from 1.4345 has completed at 1.3711 already. Intraday bias is now on the upside for 1.4345 high next. Break will resume larger up trend to 61.8% projection of 1.3038 to 1.4345 from 1.3711 at 1.4519 first. On the downside, break of 1.3982 support is needed to signal completion of the rise from 1.3711. Otherwise, outlook will remain cautiously bullish in case of retreat.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4259) so far. Break of 1.3038 support, will suggest that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
20:00 NZD RBNZ Rate Decision 1.75% 1.75% 1.75%
0:30 AUD Employment Change Feb 17.5K 20.3K 16.0K 12.5K
0:30 AUD Unemployment Rate Feb 5.60% 5.50% 5.50%
0:30 JPY PMI Manufacturing Mar P 53.2 54.3 54.1
4:30 JPY All Industry Activity Index M/M Jan -1.80% -1.80% 0.50% 0.60%
8:00 EUR France Manufacturing PMI Mar P 55.5 55.9
8:00 EUR France Services PMI Mar P 57 57.4
8:30 EUR Germany Manufacturing PMI Mar P 59.8 60.6
8:30 EUR Germany Services PMI Mar P 55 55.3
9:00 EUR Eurozone Manufacturing PMI Mar P 58.1 58.6
9:00 EUR Eurozone Services PMI Mar P 56 56.2
9:00 EUR Eurozone Current Account (EUR) Jan 30.2B 29.9B
9:00 EUR German IFO Business Climate Mar 114.6 115.4
9:00 EUR German IFO Expectations Mar 104.4 105.4
9:00 EUR German IFO Current Assessment Mar 125.6 126.3
9:00 EUR ECB Economic Bulletin
9:30 GBP Retail Sales M/M Feb 0.40% 0.10%
12:00 GBP BoE Rate Decision 0.50% 0.50%
12:00 GBP BoE Asset Purchase Target Mar 435B 435B
12:00 GBP MPC Official Bank Rate Votes 0–0–9 0–0–9
12:00 GBP MPC Asset Purchase Facility Votes 0–0–9 0–0–9
12:30 USD Initial Jobless Claims (MAR 17) 225K 226K
13:00 USD House Price Index M/M Jan 0.40% 0.30%
13:45 USD US Manufacturing PMI Mar P 55.5 55.3
13:45 USD US Services PMI Mar P 56 55.9
14:00 USD Leading Index Feb 0.50% 1.00%
14:30 USD Natural Gas Storage -93B

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