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Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

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Fed Talking Points:

  • Risk appetite gained remarkable traction this past week with 8-day consecutive rallies for the Dow, VEU and emerging markets
  • With the Dow ending Friday on the cusp of record highs, the hesitation in the final thrust reflects well appetite and actual potential
  • The FOMC rate decision is top event risk ahead, but six total major central bank decisions makes for a very clear market-wide theme

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Dow Reflects the Appetite and Reality in Risk Trends

Risk trends have sidled up to the threshold of record highs – at least as far as US equity indices represent the undercurrent of sentiment. The Dow offered perhaps the most remarkable performance to close out this past week. The blue-chip benchmark extended an eighth consecutive session’s advance to match the longest climb since May 2018. With Friday’s close, we are sneeze away from a fresh record high and the torrent of headlines that follows such occasions – events that tend to drum up some speculative appetite all their own. And yet, there is still hesitation in this stance. Friday’s range was remarkable small which gives both credit to anticipation for next week’s event risk and shows the difficulty in traversing fresh record highs. When we look beyond the recent momentum, the big picture (18 months) shows congestion is still the principal stance which denotes a lack of genuine conviction.

Chart of Dow Index and 1-Day Range as Percentage of Spot (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

And, if we are to evaluate risk trends at large, it is important to draw conclusions from a broader mix of assets and various regions. Here too, there has been some very impressive lift in the short-term. This past week reflected a strong bid for many assets with a ‘risk’ lean – and retreat from the juxtaposed safe havens – but there were also stand outs for their momentum or consistency. The VEU rest of world index (global equities excluding the US) would rally 8 consecutive days itself for the longest charge since January 2018. It is interesting here to note the ratio of US performance relative to rest of world (Dow/VEU) has traded sideways for months. Another equally-impressive climb comes on the behalf of the EEM emerging market ETF whose own 8-day rally also matched the longest run since January 2018, with no longer charges since 2014. All impressive, yet all also significantly further from record highs while also facing their own resistance.

Chart of Ratio Between Dow and VEU Rest of World Index (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Trade War, Growth Forecasts and Monetary Policy Weave Together

The rally in all things ‘risk’ recently has not come out of the blue. There have been very clear milestones on which to stage confidence. Trade wars has proven the most significant in terms of change to bearings. This past week, China started the ball rolling by making a good faith gesture in waiving 16 US imports from tariffs. That is a small overall effort, but it led the US to respond with its own two-week delay (October 1st to 15th) in the planned upgrade in tariff rate (25 to 30 percent) on $250 billion in US imports. Again, not an actual reversal in course of substance, but adding momentum. China seems determined to build on this trend as it announced Friday that it would exempt future pork and soybean imports from ‘additional’ duties. This has raised the market’s awareness and encouraged deeper reading into unconfirmed reports that President Trump has considered an interim deal or that Washington and Beijing may strike a deal on the ‘90%’ on which they already seem to agree. In the end, this is removing a ‘man-made’ threat rather than seed real growth or returns. It is important to remember that in a best-case scenario.

Chart of USDCNH (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

With the pressure relief of building trade wars, there is naturally a levity to otherwise ground-ridden growth forecasts. The outlook for growth has moderated in most areas but remain a few bastions of confidence such as the US consumer (an important one). This past session, we were issued a run of data that seemed comprehensive for its review of the world’s largest economy. The University of Michigan consumer sentiment survey was the most prominent listing and it rose from 89.8 to 92 with an upgrade to the expectations component. Retail sales also grew, and the NY Fed’s growth forecast leveled out. Ahead, there is plenty of data that can be interpreted as a signal to the bearing for global economy – nothing more appropriate than the run of August data from China – but more likely, we will likely see fine adjustments associated to the course of monetary policy. And, if the threat of a recession registers as deflating, does that mean the corrective efforts of central banks are no longer necessary?

Top event risk this past week was the ECB rate decision whose full-blown escalation of dovish policy – 10bp rate cut to -0.50 percent, 20 billion euros in monthly asset purchases starting November 1st and tiered interest rates for banks – seemed to have more effect in building up expectations rather than pushing markets to run after it was unleashed. In fact, the Euro rallied after the group’s infusion, though local markets seemed to still find some buoyancy. Yet, the debate building as to whether further stimulus is generating greater cost than benefit…among the banks’ own members.

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Fed Top Billing for a Run of Rate Decisions

All three of the aforementioned themes will likely generate interest and market movement into the week ahead. And, more likely than not, they will be moving more in concert rather than as independent catalysts. That said, there were will be one particular thread that will be heavily pulling against the others: monetary policy. There is a range of six major central banks that will be updating their mix within the span of 24 hours Wednesday into Thursday, but the Fed’s (Federal Reserve) gathering is doubtlessly the most important. Sure, it is the quarterly event in which the updated forecasts on rates and economic outlook are due, but it is more important for the context. The ECB has lowered the lower threshold of global monetary policy (support for market and economic health in the absence of natural factors), will the Fed usher down the upper bound? If so, how fast will they move and what does the market expect it will render? Watch closely.

Chart of DXY Dollar Index and Expected Fed Cuts Through End of 2019, 2020 (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

The other central banks are of considerable importance locally and in the grand scheme. The Bank of England (BOE) decision is likely to be the most routine of the decisions. With Brexit risks still running high, they are acutely distracted and not likely budge. Significantly more interesting but perhaps not very market moving, the Bank of Japan (BOJ) is unlikely to alter policy at this meeting, but their frustrations have reportedly led to talks about pushing rates deeper into negative territory on the heels of the ECB. We’ll see for mention of this option. The Swiss National Bank (SNB) should be watched closely as their policy is primarily linked to the ECB’s. Will they account for this new wave and will it match influence? EURCHF in particular is important to watch. Then there are the two emerging market central bank decisions from Brazil (expected to cut 50bps) and South Africa (expected to hold) which still define the carry opportunities – when investors are looking for returns.

Chart of EURCHF (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

Pound Seems to Have Signaled a Reversal, Loonie and Kiwi Offer Late Volatility

As always, it is good to find options that may fall outside the influence of the unwieldy systemic. The British Pound continues to forge a remarkable progress – in fact triggering a range of technical reversals this past Friday – as Brexit headlines push and pull. Friday continued to build on the drama around the legality in the suspension of Parliament with Prime Minister Johnson reiterating he would stick to the October 31st deadline no matter what. The trigger for the GBPUSD, GBPJPY and GBPCAD ‘neckline’ breakouts though seemed to be suggestion that the main Irish party DUP would abide some European rules after the Brexit – reports that the Times made and were rejected, yet the currency gains held.

Chart of GBPCAD (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

There were a few other interesting moves among the majors that are not as prominent but should be considered nonetheless. The Australian Dollar is forging a particularly impressive recovery that seems to have a rooting in the RBA’s reticence to unorthodox easing and the improvement in trade headlines. So long as that doesn’t change, this is a currency at a hefty discount that can keep retracing its steps. Less fundamentally anchored, both the New Zealand and Canadian Dollars took a big hit to close out this past week. There weren’t any exceptional charges to these moves, which is encouraging for the spark; but it doesn’t offer much in the way of assurances for follow through. Keep tabs on pairs like AUDCAD or AUDNZD though.

Chart of AUDCAD (Daily)

Fed Decision Will Leverage Dollar, Risk and Growth Outlook Equally

Chart Created on Tradingview Platform

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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UK Markets Wait For Supreme Court Ruling, Brexit Update

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Sterling (GBP) News, Charts and Analysis – Webinar

  • UK Supreme Court ruling due shortly
  • UK PM Johnson to meet EU leaders on the sidelines at the United Nations

Q3 2019 GBP Forecasts and Top Trading Opportunities

UK asset markets are flat to slightly lower at the start of the week with traders waiting for the UK Supreme Courts ruling on whether PM Johnson’s recent shuttering of Parliament was legal or not. The judgement is expected early this week and will have a direct influence on UK assets one way or another.

This week PM Johnson will meet with European leaders at the United Nations General Assembly meeting to discuss the latest Irish backstop developments. Recent positive commentary has boosted the value of the British Pound until a report this weekend that European Commission President Jean-Claude Juncker sees a return to a hard border in Ireland pushed GBP lower.

There is a lack of front-line UK economic data this week to influence trading but speaches from BoE governor Mark Carney and other UK central bank officials should be followed closely.

GBPUSD has drifted lower through the session but has not threatened the recent 1.1959 low made earlier this month.

DailyFX Economic Calendar

GBPUSD Price Daily Chart (January – September 23, 2019)

UK Markets Wait For Supreme Court Ruling, Brexit Update - Webinar

Brexit Glossary: Brexit Jargon and Terms Explained

The IG Client Sentiment Indicator shows retail traders are 65.0% net-long, a bearish contrarian bias.

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on Sterling – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.



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EUR/USD Price Slumps as Germany PMI Data Points to Recession

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EURUSD Price Charts and Analysis:

  • EURUSD may sink further as 1.1000 gives way again.
  • Germany is expected to be in recession in Q3.

Q3 2019 EUR and USD Forecasts and Top Trading Opportunities

EURUSD Sinks as German Economic Woes Continue

The German economy is likely to fall into recession in the third-quarter of 2019, ‘as the downturn in manufacturing deepened and service sector growth lost momentum’, according to data provider IHS Markit. The composite index hit its lowest level since October 2012, while the manufacturing numbers are ‘simply awful’ according to the data provider. Germany is expected to enter an official recession in Q3 and may not see any growth this year.

According to Phil Smith, principal economist at IHS Markit, “The manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009. “With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”

EUR/USD Price Slumps as Germany PMI Data Points to Recession

EURUSD continues to point lower and may re-test the two recent low prints around 1.0925 made earlier this month. Below here there is very little in the way of strong support. There is a gap in April 2017 on the weekly chart between 1.0777 and 1.0821 which is likely to be filled in the short-term, before the January 2017 low at 1.0340 comes into play. In the current environment is looks very unlikely that EURUSD will break back above the cluster of lows/highs around 1.1100 and 1.1120.

EURSUD Price Daily Chart (January – September 23, 2019)

EUR/USD Price Slumps as Germany PMI Data Points to Recession

The IG Client Sentiment Indicator shows retail traders are 65.0% net-long of EURUSD, a bearish contrarian bias.

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

What is your view on the Euro – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at nicholas.cawley@ig.comor via Twitter @nickcawley1.



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US Dollar ASEAN Outlook Bullish, Trade Deal Hopes Fade, PHP at Risk

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ASEAN Fundamental Outlook

  • US Dollar remained in persistent consolidation mode against ASEAN FX
  • Drop in US-China trade deal hopes to fuel USD gains on haven demand
  • Philippine Peso also eyeing central bank rate decision, SGD to CPI data

Trade all the major global economic data live and interactive at the DailyFX Webinars. We’d love to have you along.

US Dollar and ASEAN FX Weekly Recap

At first glance, the US Dollar seemed to outperform against its major counterparts when using an equally-weighted index this past week. But the reality is that from a technical standpoint, the Greenback is still in a persistent consolidative mode since the end of July. Its lack of commitment also spread into against some of its ASEAN and Southeast-Asia fiat counterparts.

A couple of notable exclusions this past week were the Singapore Dollar and Indonesian Rupiah – see chart below. The former tends to closely trace the Greenback. The IDR saw most of its decline during the front-half of the week, when an attack on Saudi Arabian energy infrastructure caused an oil shock that triggered risk aversion. The commodity has since partially subsided as markets turned to the Fed and US-China trade talks.

The US central bank delivered its second interest rate cut, keeping the door open to “extensive cuts” should they be needed. Meanwhile, the Bank of Indonesia delivered a third reduction in benchmark lending rates this year. But the Rupiah was left unchanged as the central bank reiterated efforts to guard their currency. Prior to Friday’s close, ASEAN currencies suffered as Chinese delegation teams canceled trips to US farms.

Check out my Singapore Dollar currency profile to get acquainted with its unique character in markets!

US Dollar ASEAN Outlook Bullish, Trade Deal Hopes Fade, PHP at Risk

US-China Trade Deal Hopes Once Again Diminish

Once top-tier economic event risk passed last week, it was clear how important US-China trade talks were to financial markets. As mentioned earlier, once reports crossed the wires that Chinese officials canceled trips to farms in Montana and Nebraska, aggressive risk aversion kicked in. The MSCI Emerging Market index covered its upside gap from the onset of Friday’s session as US government bond yields tumbled.

The actions from Chinese officials were in response to comments from US President Donald Trump, who mentioned that he would not accept a partial deal, adding that ending the trade war by 2020 is not his priority. Taking a look at the next chart below, prospects of the two nations agreeing to an outcome has helped to drive capital flowing back into emerging markets since late August.

Emerging Market Capital Flows Amid Trade Wars

His lack of interest in wanting an interim deal diminished prospects of an agreement, which can be viewed by the reaction in financial markets on Friday. Talks between the two nations restarted this past week ahead of a high-level meeting anticipated between the economic powerhouses in the middle of October. This is why the US delayed imposing additional $250b in tariffs on China by two weeks to around the same time.

With trade wars still are a persistent threat to global economic health, this bodes ill for risk capital and will likely adversely impact currencies such as the Philippine Peso, Malaysian Ringgit, Singapore Dollar and Indian Rupee. Meanwhile, the highly-liquid US Dollar – still increasing its dominance as the world’s most widely-traded currency – is likely to benefit against them.

ASEAN Economic Event Risk

Focusing on ASEAN regional economic event risk in the week ahead, a top-tier item will be the Philippine central bank interest rate announcement. Much like the easing that we have seen from central banks in the world, the BSP is anticipated to continue the trend. The benchmark lending rate is widely expected to be lowered from 4.25 percent to 4.00 on Thursday.

As such, its surprise factor is diminished, with the central bank governor also hinting at further reductions in reserve requirement ratios. This does mean however that the Philippine Peso will continue to lose its yield advantage (alongside MYR, IDR) which is a long run threat for the currency. Inflation data will also be eyed out of Singapore and Malaysia.

For timely updates on ASEAN and Southeast Asia currencies, make sure to follow me on Twitter here @ddubrovskyFX

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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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