EUR/USD: Long Trade To Profit
MyFXspot research | Dec 20, 2018 05:05AM ET
- EUR/USD: long at 1.1320, take profit at 1.1570
- GBP/USD: await signal
- USD/CAD: await signal
Fed raised rates and lowered dots, as expected
The Federal Reserve has raised the fed funds target rate by another 25bp to a range of 2.25%-2.50%. The committee, however, sounded more cautious about the outlook and pledged to “monitor global economic and financial developments”. The FOMC members’ median interest rate projections now only show two hikes for 2019, down from three, while the estimate for the longer run natural rate was lowered to 2.75 from 3.00%.
Despite tighter financial conditions and growing political pressure, the Federal Reserve today delivered a unanimous 25bp rate hike. With this move, the Fed has lifted its target rate four times this year, for a total of 100bp. That is the largest annual increase in short-term rates since 2006. Strong economic growth, a falling jobless rate and inflation rates close to the 2% target allowed the Fed to gradually normalize its policy stance. It is important to remember, however, that even after those rate hikes, the target rate remains below most estimates for the equilibrium rate. In other words, the policy stance has remained accommodative.
The post-meeting statement contained only a few changes. Those that were made, send the clear message that the FOMC’s confidence in the medium-term outlook has been rattled. First, it is now the Committee's “judgment” rather than its “expectation” that “some further gradual increases in the target range for the federal funds rate will be consistent with” meeting the dual mandate. Second, it is now the Committee’s judgment that risks to the outlook are “roughly balanced”. Moreover, the statement qualified the balanced-risk assessment by adding that the Committee will “monitor global economic and financial developments and assess their implications for the economic outlook.”
At the very least, these wording shifts represent a weakening in the Fed’s forward guidance in favor of a more data-dependent approach. This is how it should be, in particular as rates have gotten closer to the neutral level, while at the same times headwinds are mounting.
The macroeconomic forecasts have not been changed by a lot, with the 0.2pp downward revision to 2019 GDP growth (from 2.5% to 2.3%) being the single-largest adjustments. The changes that were made, however, all point in the same direction: GDP growth a tad lower, the jobless rate a tad higher, and inflation a tad lower. This mirrors the declining confidence in the outlook amid growing uncertainties and mounting headwinds. In line with this – and consistent with Chair Powell’s recent comments made to the Economic Club of New York –, the FOMC members have lowered their interest rate projections. The median projections (the “dots”) now show only two hikes for 2019, down from three, followed by one more hike in 2020. The resulting fed funds target rate for yearend 2019, 2020, and 2021 is thus 2.9%, 3.1% and 3.1%, respectively. At the same time, the estimate for the longer-run natural rate has been lowered to 2.8% from 3.0%. This implies that the Committee’s baseline scenario still looks to bring the fed funds target rate into a mildly restrictive are by the end of next year.
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With the downward revision to the 2019 dot, Fed officials now project the same amount of rate hikes for next year as we do.
The EUR/USD broke above 38.2% Fibo of September-November drop at 1.1445. A close above that level would be an important bullish signal.
Our long trade is in good shape. We have raised the target to 1.1570 and locked in profit at 1.1370.
Bank of England to stay on hold due to Brexit uncertainty
Today the Bank of England will publish the MPC decision and the minutes of the MPC meeting. The committee will almost certainly leave the monetary policy stance unchanged. We expect the vote to maintain the bank rate at its current level of 0.75% to be unanimous, as it was in November.
The major reason for the MPC’s wait-and-see position is that the UK economic and political outlook remains clouded in uncertainty over Brexit negotiations. The uncertainty has increased in recent weeks following the delay to the Commons vote on Theresa May’s Brexit deal.
The macro data news since the MPC’s last meeting has been mixed but, on balance, mostly negative. Worryingly, there are signs that uncertainty is weighing more heavily on firms. Business surveys have softened materially – the composite PMI eased to 50.8 in November, its lowest level since the kneejerk slump in the immediate aftermath of the Brexit vote. It points to a quarterly growth rate of just 0.1-0.2%, suggesting downside risks to the BoE’s forecast for 0.3% qoq growth in the fourth quarter of 2018. The one (and arguably only) bright spot is that wage growth has firmed, with regular pay growth rising to 3.3% yoy – the highest pay growth since 2008 as the labor market tightens, in part because of a fall in EU net immigration.
We continue to expect the BoE to remain on hold until Brexit uncertainty lifts.
The GBP/USD is recovering and going to break above the negative trendline. An upside breakout would be a bullish signal. However, trading this pair is very risky due to Brexit uncertainty. That is why we prefer to stand aside on GBP pairs.
Canada's inflation back below BoC target
Lower gas prices pulled Canada's annual inflation rate in November down to 1.7%, the first time in 10 months it has been below the Bank of Canada's 2.0% target, underscoring market expectations that imminent interest rate hikes are off the table.
The market had forecast the annual rate would fall to 1.8% from 2.4% in October. November's rate matched the 1.7% seen in January 2018.
The Bank of Canada, which has raised rates five times since July 2017 as the economy strengthened, said earlier this month that economic data heading into the fourth quarter had been weaker than expected.
The central bank is due to announce its next interest rate decision on January 9 and markets expect no change.
Statistics Canada said on Wednesday that gasoline prices fell by 5.4% from November 2017 on lower crude prices and overall energy costs dropped by 1.3% over the same period. In both cases, it was the first year-over-year decline since June 2017.
It also noted that the Bank of Canada's three core inflation measurements came in at 1.9%, the first time they have all been below 2.0% since June 2018.
The drop in the overall annual rate was the sharpest in absolute terms since May 2012, when lower gas prices pulled it down to 1.2% from 2.0% in April.
The Canadian dollar weakened to a one-and-a-half-year low against the USD on Wednesday, pressured by softer-than-expected domestic inflation data and further declines on Wall Street as the Federal Reserve again raised interest rates. Chances of a Bank of Canada interest rate hike in March dropped to 13% from 17% before the data, the overnight index swaps market showed. The Loonie lost ground on Wednesday even as the price of oil recovered somewhat from a sharp selloff during the previous session. The next major resistance is 1.3547, the June 2 2017 high.
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