EUR/USD: Dollar Weighed By U.S.-China Summit And Geopolitical Risks
Growth Aces | Apr 06, 2017 05:07AM ET
EUR/USD: dollar weighed by U.S.-China summit and geopolitical risks
Macroeconomic overview: Most Federal Reserve policymakers think the central bank should take steps to begin trimming its USD 4.5 trillion balance sheet later this year as long as the economic data holds up, minutes from their last meeting showed.
Fed policymakers have previously indicated that any plan to shrink its portfolio would let the bonds naturally roll off, by not reinvesting them when they mature, once its interest rate hikes were "well under way."
In the minutes, almost all policymakers agreed that the timing of a change in balance sheet policy would depend on economic and financial conditions and generally preferred to taper or stop investments in both Treasury and mortgage-backed bonds.
An approach that phased out reinvestments was seen as less likely to trigger financial market volatility while doing so all at once:
was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.
What they all agreed on was that shrinking the balance sheet should be gradual and predictable and nearly all said that any altering of the policy "should be communicated...well in advance of an actual change."
Earlier this week, New York Fed President William Dudley said that taking steps to normalize the balance sheet would tighten financial conditions and could affect the pace of rate rises.
Prior to the minutes Wall Street banks expected no changes to the balance sheet policy until mid-2018, the latest poll by the New York Fed showed.
Elsewhere in the minutes policymakers appeared to see upside risks to the economy while there was still disagreement on how close the Fed was to meeting its 2% inflation goal this year.
In its March policy statement, the Fed said that its inflation target was "symmetric," indicating it could tolerate price rises temporarily overshooting its 2% target rate.
Along with the minutes, the central bank for the first time also published a set of so-called "fan charts" to show the extent of uncertainty around their quarterly economic forecasts. Uncertainty around them was substantial, the Fed said.
The Fed's next policy meeting is scheduled for May 2-3 and we expect another rate rise in June.
The dollar may be under pressure today, as financial markets are nervous over the U.S.-China summit. Geopolitical risks are also weighing on the dollar after North Korea test-fired a ballistic missile on Wednesday.
Yesterday’s macroeconomic data from the U.S. were mixed. U.S. companies added 263k workers in March, the most since December 2014, suggesting further tightening of the labor market, payrolls processor ADP said on Wednesday. ADP's March figure easily beat the median forecast of 187k increase. The ADP figures come ahead of the U.S. Labor Department's more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.
Get The News You Want
Separate data showed that the ISM Non-Manufacturing PMI for March undershot expectations (57.0), dropping 2.4 points to 55.2, its lowest in five months. The current reading suggests moderate growth, as the brisk momentum from the turn of the year seems to have significantly dissipated. The biggest of the internals weakened in proportion to or even a little more than the headline. The business activity index dropped 4.7 to 58.9, the new orders index dropped 2.2 to 58.9, and the employment index fell 3.6 to 51.6, a seven-month low. The latter's slow-growth implication doesn't bode well for this Friday's employment report.
Technical analysis: The EUR/USD remains below 7-day exponential moving average and is back below the previously broken 61.8% fibo of March’s rise at 1.0650. A close below this level would be pivotal for the bears.
Short-term signal: A close below 1.0650 would put our long position under pressure. On the other hand, we see risks for the USD-long positions coming from the impending U.S.-China summit and geopolitical concerns.
Long-term outlook: Bullish
EUR/GBP: Sterling recovered after better-than-expected PMI services data
Macroeconomic overview: British services PMI rose to a three-month high of 55.0 in March from 53.3 in February.
But some warning signals were flashing as the British government began the two-year process of leaving the European Union.
Despite the stronger-than-expected headline growth figure in Wednesday's PMI, the survey also suggested consumers were cutting back on luxuries. Hotels and restaurants, gyms and hairdressers ranked among the worst-performing services in the first three months of 2017. Official data last week showed real household disposable income - a measure of spending power in the fourth quarter of 2016 - saw its biggest quarter-on-quarter decline in nearly three years.
Services companies raised their selling prices at the fastest pace since 2008, a sign that inflation may rise more than the 3% this year. Businesses hired people at the slowest pace in seven months. Nearly half of British households plan to cut spending as worries about inflation escalate, according to a separate survey on Wednesday from pension provider Scottish Friendly and the think tank Social Market Foundation.
Taken together, the PMIs for manufacturing, construction and services published this week suggest economic growth will slow to around 0.4% in the first quarter from 0.7% in the fourth quarter of 2016.
The Bank of England is widely expected to keep interest rates at their record low throughout this year. However, one rate-setter voted last month for a rate increase and others said they might follow suit soon if there were signs that economy was maintaining its momentum of 2016.
Technical analysis: The EUR/GBP remains below 7-day exponential moving average, but a long lower wick on today’s candlestick suggests the trend may be reversing. A close above 0.8553 (23.6% fibo of March drop) would be another important bullish signal.
Short-term signal: We have opened EUR/GBP long at 0.8550.
Long-term outlook: Neutral
TRADING STRATEGIES SUMMARY:
FOREX - MAJOR PAIRS:
FOREX - MAJOR CROSSES:
PRECIOUS METALS:
Source: GrowthAces.com - your daily forex trading strategies newsletter
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.