EUR/USD At 2 1/2-Year-High, Eyes U.S. Jobs Report

EUR/USD at new 2-1/2-year-high, now eyes on US jobs report

Macroeconomic overview: San Francisco Fed President John Williams said the US economy will likely be strong enough for the Federal Reserve to trim its bond holdings in September. He said Fed policymakers still were not sure how much they would trim the central bank's USD 4.5 trillion balance sheet.

Now, most policymakers see the economy as close to full strength and the Fed said in a statement last month it would likely begin cutting its bond holdings relatively soon. The Fed's rate setting committee had previously said the process would begin before year's end.

Williams added that he was comfortable with the view that the Fed could raise interest rates once more this year and around three times next year.

Williams said he expects the jobless rate, currently at 4.4%, to fall slightly and then hold just above 4% through 2018, with inflation rising to the Fed's 2 % target within one or two years.

Cleveland Fed President Loretta Mester said the Federal Reserve should not "overreact" to weak inflation especially since data will arrive before a mid-September policy meeting that could clarify whether the weakness is temporary.

Mester reiterated her stance that it is appropriate to increase the federal funds rate three times per year for the current and next two years (mirroring the dot plot), as doing so would prevent the economy from overheating and discourage investors from reaching for yield provided by riskier assets. Mester also supported the Fed's nearby start to reducing its holdings of Treasury and Agency MBS holdings.

Current trading in federal funds futures gives 40% odds of a Fed hike on December 13. We think the likelihood of December hike is even higher.

The ADP National Employment Report for July calls for private nonfarm payrolls to have risen 178k last month. The consensus forecast for ADP was +185k, while the consensus estimate for the Friday’s BLS-reported change in private nonfarm payrolls is +180k.

Keep in mind, the average net miss over the last five months is +61k, while the average absolute miss over the last five observations is 79k. Three of the last five prints overestimated, by an average +117k, while two underestimated, by an average -23k. We continue to doubt the predictive power of ADP on actual (BLS) private payroll growth, both overall and within the industry breakdowns.

That said, ADP's July estimate is close enough to the market consensus (and our own estimate) for Friday's employment situation report that we accept it at face value.

Retail sales in the euro zone increased by 0.5% in June on the month, well above market expectations of a 0.1% rise. As inflation slowed in June to 1.3%, showing little signs of a future rebound, euro zone consumers spent more than in May when retail sales went up by 0.4%. Year-on-year, the volume of retail sales surged 3.1% in June.

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Technical analysis: EUR/USD bulls are setting their sights on 1.2167 – 50% fibo of the 1.3995 to 1.0340 drop (2014-2017) after managing a monthly close above 1.1736, the 38.2% retrace of the above-mentioned fall. The pair hit a new 2017 high at 1.1910 on Wednesday.

Short-term signal: Buy at 1.1740
Long-term outlook: Bullish

GBP/USD: BoE to decide on interest rates today

Macroeconomic overview: Today the Bank of England will simultaneously publish its August Inflation Report, the MPC policy decision and the minutes of the MPC meeting. This will be followed by a press conference with the Governor, Mark Carney. We expect the committee to vote 6-2 in favor of maintaining the current monetary policy stance, with MPC members Ian McCafferty and Michael Saunders maintaining their dissent in favor of an immediate 25bp hike in the bank rate.

In recent weeks, a number of MPC members appeared to be moving closer to withdrawing some monetary stimulus.

On 22 June, the BoE’s typically dovish Chief Economist, Andy Haldane, surprised markets when he said,

“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.”

Shortly afterwards, Mark Carney said,

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

However, in the same speech, Mark Carney set a high bar for rate hikes by conditioning on: 1. other components of demand (including business investment) offsetting weaker consumption; 2. a firming of wage growth; and 3. economic activity holding up during Brexit negotiations. Three other MPC members – Ben Broadbent, Jon Cunliffe and Gertjan Vlieghe – recently advocated caution.

BoE staff forecasts for GDP growth and inflation are likely to be little changed from three months ago. Real GDP growth rose a subdued 0.3% qoq in the second quarter 2017 according to the ONS’ preliminary estimate, matching the BoE’s May projection. However, the 0.1pp downward revision to first-quarter GDP growth, to 0.2% qoq, could lead the MPC to judge the economy has somewhat less momentum than it previously expected.

Inflation eased to 2.6% yoy in June, down from 2.9% yoy in May, bringing it in line with the BoE’s projection after exceeding it in April and May.

Over the last three months, the yield curve that the BoE conditions its macro projections on has moved higher (by around 20bp at the two-year horizon) and the effective sterling index has fallen by around 2%. These movements will have partially offsetting effects for growth and inflation, but on balance the higher yield curve is likely to mean a slightly weaker path for growth, while the inflation overshoot is likely to be broadly unchanged as the effect of the weaker sterling is offset by lower growth.

Ultimately, with above-target inflation entirely driven by the effects of past sterling depreciation, little or no signs of domestically generated inflationary pressure, an economy that has entered a persistent slowdown and ongoing Brexit-related uncertainty, now is not the time to raise interest rates.

Britain's economy looks set for "steady but sluggish" growth over the coming months, after a closely watched business survey showed activity in the dominant services sector picked up only slightly in July. Services PMI rose to 53.8 in July from June's four-month low of 53.4, slightly above market forecasts but below its long-run average. The services PMI follows more upbeat numbers on Tuesday from the much smaller manufacturing sector, and weak construction figures on Wednesday. While manufacturing exporters have gained from the fall in the pound since last year's Brexit vote, today's survey showed consumer-facing businesses hurt by a reduction in demand due to stretched household budgets. Taken together, PMI data suggest the economy is growing at a quarterly rate of 0.3%, the same as in the three months to June.

Technical analysis: GBP/USD rose to a new 2017 high today, but is facing major fibo level of 1.3257, 50% retrace of the 1.5022 to 1.1491 fall. A daily close above 1.3257 will confirm the upside bias in the medium-term.

Short-term signal: We have placed a bid at 1.3120. If the order is filled the target would be 1.3360
Long-term outlook: We have changed long-term outlook to bullish, but uncertainty over Brexit negotiations could be a risk factor for this forecast.

TRADING STRATEGIES SUMMARY:
FOREX - MAJOR PAIRS:

FOREX - MAJOR CROSSES:

PRECIOUS METALS:

How to read these tables?

1. Support/Resistance - three closest important support/resistance levels

2. Position/Trading Idea:

BUY/SELL - It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.

LONG/SHORT - It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.

3. Stop-Loss/Profit Locked In - Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.

4. Risk Factor - green "*" means high level of confidence (low level of uncertainty), grey "**" means medium level of confidence, red "***" means low level of confidence (high level of uncertainty)

5. Position Size (forex)- position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!

Position size (precious metals) - position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).

6. Profit/Loss on recently closed position (forex) - is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.

Profit/Loss on recently closed position (precious metals) - is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.

Source: GrowthAces.com - your daily forex signals newsletter

Written By: Growth Aces