USD And GDP Grind Lower
Swissquote Bank Ltd | Aug 10, 2016 06:52AM ET
Forex News and Events
US data weakens, sell USD
Current expectations for a Fed rate hike in September are standing at a meager 26%. Our view is that any decision will come down to the final data points prior to Yellen’s Jackson Hole speech. In this context for example, Friday’s strong payroll report will lose some relevance in the wake of newer data. The evidence is mounting that outside of a few key areas such as housing and labor, US economics are decelerating. Yesterday, while housing starts increased 198k vs. 191k exp, productivity further declined. For the third consecutive quarter US productive fell -0.5% vs 0.4% expected (from -0.6% prior read). This report suggests that the potential growth outlook for the US economics has fallen significantly. The lack of productively growth indicates that real wages are likely to remains stagnant and not experience the surge that many are predicting due to the tighter labor market. Today the market will get the June JOLTS job report for additional clarity on the state of the US labor market. JOLTS’ May dip could provide a leading indicator that the strong labor market might be easing, which in turn would further discourage expectations for September Fed tightening. However, the reported build up in protection ahead of Yellen’s speech indicates lingering uncertainty (plus low volatility has dropped the hedging costs) and the potential of underpricing risks. The next key US data investors will be watching for will be retail sales on Friday. With our base scenario of no hike in September and a rumor of excess USD liquidity, we expect that USD will remain soft and EM FX well bid as the reckless drive into yields continues. In addition, historically speaking, the August slow trading period favors carry trades.
The sterling to continue its freefall
The cable is heading lower towards 1.3000 and for the second time since the Brexit vote, this level has been broken. In our view, this freefall will only continue but this is definitely not only due to the Brexit vote. Last week, BoE Governor Mark Carney announced that the rate cut was triggered by the potential downturn implied by the result of the 23rd of June referendum. We found this statement misleading. Essentially, we believe that the BoE is simply trying to save the GDP while it is in a complete free-fall. 2017 GDP forecasts have been slashed to 0.8% from 2.3%.
UK total debt was around CHF 2 trillion at the end of 2015 and servicing this debt costs around 3% of the GDP each year. But in this era of lowering interest rates, and declining growth, the cost of debt is growing, making it increasingly difficult to pay back. This is the real reason why Mark Carney cut the rate and announced the massive expansion of the BoE's asset-purchase program to 425 billion pounds.
Get The News You Want
The BoE is just like any other major central bank in that “free money” reigns supreme. The Fed is now the only remaining central bank to announce a rate hike decision, the S&P 500 is at an all-time high but the Fed is afraid to raise rates by 25 basis points. All central banks act together and use the same monetary policy. The Fed is no different.
Crude Oil - Continued Reversal.
The Risk Today
EUR/USD is slightly weakening. The road is wide-open towards hourly support can be found at 1.1046 (05/08/2016 low). Hourly resistance is given at 1.1105 (08/08/2016 high). Expected to further decline. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD continues to weaken. The pair is now trading below 1.3000 and is heading towards support implied by the lower bound of the downtrend channel around 1.2900/20. Hourly resistance can be located at 1.3097 (08/08/2016 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment,
USD/JPY's short-term buying pressures seems to slow around hourly resistance given at 102.83 (02/08/2016 high). The short-term technical structure remains nonetheless negative and a failure to go above 102.83 would indicate a continued medium-term bearish momentum. Hourly support is given at 100.68 (02/08/2016 low). We favour a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF continues to bounce from hourly support given at 0.9634 (02/08/2016 low) while strong resistance is given at 9956 (30/05/2016 high). Volatility is very low and should indicate that this short-term bullish momentum is at stake. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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