Dollar Higher But Gain Limited by Risks of FOMC Dovishness

Market overviews

Dollar trade generally higher today as markets await FOMC rate decision. But gain is very limited as traders are guarding against unexpected dovishness in Fed. In particular, such dovishness could be embedded in the new economic projections. Meanwhile, Swiss Franc is the second strongest for today, followed by Euro. On other hand, New Zealand and Australian Dollar are the weakest ones. Sterling is mixed as EU await UK government’s letter for Article 50 extension.

Technically, EUR/USD is losing upside momentum as seen in 4 hour MACD but there is no clear sign of topping yet. Break of 1.1294 minor support is needed to confirm completion of rebound from 1.1176. Similarly, USD/CHF will need to break 1.0052 minor resistance to indicate completion of pull back from 1.0124. AUD/USD was rejected by 0.7121 resistance overnight and could be heading back to 0.7003 low. USD/CAD rebounded strongly after dipping to 1.3250. It’s fate could depend on whether WTI could get through 60 key resistance or be rejected by it.

In Asia, Nikkei closed up 0.20%. Hong Kong HSI is down -0.28%. China Shanghai SSE is down -0.26%. Singapore Strait Times is down -0.38%. Japan 10-year JGB yield is up 0.0066 at -0.039, still negative. Overnight, DOW dropped -0.10%. S&P 500 dropped -0.01%. NASDAQ rose 0.12%. 10-year yield rose 0.012 to 2.614. 30-year yield rose 0.017 to 3.028.

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Fed to stand pat, release new projections, may announce end to balance sheet runoff

Fed is widely expected to keep interest rate unchanged at 2.25-2.50% today. Also the central bank is expected to reiterated that it’s in no hurry to make another move. The language that “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes” should be maintained .

There will be two major focuses for the announcement as well as press conference. Firstly, Fed’s is known to be preparing for ending the balance sheet roll-off this year. The balance sheet surged from less than USD 1T in 2008 to hit a peak of USD 4.5T as a result of the quantitative easing program. It then started to be reduced by USD 50B per month since early last year. The detailed plan might be revealed today with specifics on when and how the runoff would end.

Fed will also publish first set of new economic projections after it shifted to a “patient” stance. Forecasts on GDP, unemployment rate and inflation are important as usual. But a crucial part is projection on federal funds rate. Back in December, the median forecast was for interest rate to rise to 2.9% in 2019, with central tendency at 2.6-3.1%. For 2020, media rate was at 3.1%. The longer run neutral rate was projected to be at 2.8%, with central tendency at 2.5-3.0%. Today’s projections will hopefully answer questions like: Is there one or two expected rate hikes this year? Are some members expecting a rate cut? Where the neutral rate is? Will rate hike continue down the road to surpass neutral?

Here are Fed’s December projections.

Below are some suggested readings on FOMC:

High-level US-China trade talks to resume next week, aiming at a deal in April

It’s reported, without confirmation from named officials, that high-level US-China trade talk are going to resume week in a push to close the deal by the end of April. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin would fly to Beijing in the week of March 25 to meet Chinese Vice Premier Liu He again. The following week, Liu He is expected to fly to Washington to continue the negotiations.

At the same time, it’s reported that China is pushing back against some of the American demands on core issues. A key reason is the lack of assurance from Trump on lifting tariffs imposed. China is also said to be stepping back from the initial agreements over pharmaceutical data protection, patent linkages and refused to give ground on data-service issues. Nevertheless, some officials on both sides are seeing the “back-and-froth” as something expected in typical negotiations.

The date for signing a trade deal between the countries has been pushed back recently. While it’s still possible to happen in April, the more probable occasion would be as sideline of G20 summit in Japan in June. Meanwhile, in his typical rhetorics, Trump said at the White House yesterday that “talks with China are going very well”.

BoJ Jan minutes: Current policy stance appropriate as momentum towards 2% inflation target maintained

As revealed by minutes of January 22-23 BoJ meeting, “most members” believed it’s appropriate to ” persistently continue with the powerful monetary easing under the current guideline for market operations” as momentum towards 2% inflation target was maintained. Meanwhile, “many members” said it’s necessary to take account of developments of developments in economic activity, and financial conditions in a “balanced manner”.

The board also spent considerable amount of time discussing monetary policy stance in responses to downside risks. One member noted it was necessary to “devise ways to avoid a situation where an expectation that no policy change would occur for the time being would be fixed to an excessive degree in financial markets”

Another member noted that “it was not desirable to adopt a stance of not taking action until a serious crisis occurred”. This member also said “it was necessary to emphasize the Bank’s stance of taking swift, flexible, and decisive actions.”

EU Barnier: Concrete plan needed to assess reason and usefulness of Brexit extension

UK Prime Minister Theresa May is expected to send a letter to European Council President Donald Tusk today to seek an Article 50 extension. Ahead of that EU chief Brexit negotiator Michel Barnier demands concrete plan from the UK so that EU leaders can make a decision on approving an extension.

He said “Does an extension increase the chances of ratification of Withdrawal Agreement? What would be the purpose and outcome? How can we ensure that, at the end of a possible extension, we are not back in the same situation as today?”

“If Theresa May requests an extension before the European Council on Thursday, it will be for the 27 leaders to assess the reason and usefulness… EU leaders will need a concrete plan from the UK in order to be able to make an informed decision,” he added.

On the data front

New Zealand current account deficit narrowed to NZD -3.26B in Q4. Australia Westpac leading index rose 00% mom in February. UK CPI will be a major focus in European session and PPI will also be released. Germany will also release PPI. later in the day, FOMC rate decision, economic projections and press conference are the main event.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3268; (P) 1.3308; (R1) 1.3366; More…

USD/CAD dipped to 1.3250 overnight but quickly recovered. With 4 hour MACD crossed above signal line again, intraday bias is turned neutral. Further decline remains in favor as long as 1.3371 minor resistance holds. Below 1.3068/3112 support zone. Decisive there will indicate larger reversal and turn outlook bearish. On the upside, though, break of 1.3371 minor resistance will turn intraday back to the upside for 1.3467 resistance. Further break of 1.3467 will revive near term bullishness for 1.3664 key resistance.

In the bigger picture, structure of the medium term rise from 1.2061 (2017 low) to 1.3664 is not clearly impulsive. Hence, we’d stay cautious on strong resistance from 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685 and 1.3793 resistance to limit upside, and bring medium term topping. But in any case, medium term outlook will stay bullish as long as channel support (now at 1.3157) holds. Sustained break of 1.3793 will pave the way to retest 1.4689 (2015 high). Firm break of the channel support should confirm reversal target 1.2061 low again.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
21:45 NZD Current Account (NZD) Q4 -3.26B -3.55B -6.15B
23:30 AUD Westpac Leading Index M/M Feb 0.00% 0.00% 0.10%
23:50 JPY BOJ Minutes Jan
07:00 EUR German PPI M/M Feb 0.20% 0.40%
07:00 EUR German PPI Y/Y Feb 2.90% 2.60%
09:30 GBP CPI M/M Feb 0.40% -0.80%
09:30 GBP CPI Y/Y Feb 1.80% 1.80%
09:30 GBP Core CPI Y/Y Feb 1.90% 1.90%
09:30 GBP RPI M/M Feb 0.70% -0.90%
09:30 GBP RPI Y/Y Feb 2.50% 2.50%
09:30 GBP PPI Input M/M Feb 0.60% -0.10%
09:30 GBP PPI Input Y/Y Feb 4.10% 2.90%
09:30 GBP PPI Output M/M Feb 0.10% 0.00%
09:30 GBP PPI Output Y/Y Feb 2.20% 2.10%
09:30 GBP PPI Output Core M/M Feb 0.20% 0.40%
09:30 GBP PPI Output Core Y/Y Feb 2.30% 2.40%
09:30 GBP House Price Index Y/Y Jan 2.40% 2.50%
11:00 GBP CBI Trends Total Orders Mar 5 6
14:30 USD Crude Oil Inventories -3.9M
18:00 USD FOMC Rate Decision (Upper Bound) 2.50% 2.50%
18:00 USD FOMC Rate Decision (Lower Bound) 2.25% 2.25%
18:30 USD FOMC Press Conference

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