Article by ForexTime
One of the main talking points today is the comments from Monetary Policy Committee (MPC) dissenter, Ian McCafferty, who was quoted by a newspaper yesterday saying that the Bank of England (BoE) should increase lending rates regardless of recent weaker economic growth. The GBPUSD responded by moving as high as 1.6110, before finding resistance around 1.6128.
Following Friday’s GDP providing further validity to the BoE’s prior warnings that UK economic momentum would slow in as 2014 concluded, alongside inflation at 1.2% being far away from the BoE’s threshold target of 2%, there were concerns the MPC dissenters might consider changing votes. The comments from McCafferty indicate that at least one member has a strong view on raising rates sooner, rather than later. However, there is a low quantity of UK economic data due this week and where the GBPUSD pair trades is really dependent on demand for the Greenback.
Unless speculation escalates that the Federal Reserve will unexpectedly continue QE on Wednesday, I am expecting investors to be risk adverse today – and the Cable’s reluctance to reach resistance at 1.6128 so far should result in the pair consolidating for the rest of the day.
The major event this week is the FOMC decision, where I am expecting the US Federal Reserve to announce the conclusion of Quantitative Easing (QE). Not only would confidence in the global economic recovery benefit from signals that the world’s largest economy is at least moving towards normalizing monetary policy, but there are few reasons for the Fed to continue with QE. Although the FOMC Minutes indicated concern among the Fed members that a higher valued USD would have a detrimental impact on inflation levels, and the usually hawkish James Bullard surprised by suggesting the Fed should continue QE if inflation targets appear at risk, last week’s inflation release was still above economists’ expectations.
One thing that I am expecting and that I have been forecasting since the early summer, is that the Federal Reserve are likely to use Wednesday to clarify that they won’t raise rates anytime soon. Investors got carried away by the summer’s improved US economic data and I am expecting the Fed to explain that while the economic outlook has improved, there remains a great deal of progress left to be made before they will consider rate rises. It would not surprise if Federal Reserve Chair, Janet Yellen, again repeated that the labour market is underperforming alongside average wage growth remaining low.
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I expect the Fed will spend at least the remainder of 2014 monitoring economic data before talks regarding the possible timeframe for a rate rise elevate in the New Year. Despite the global sell-off a fortnight ago leading to speculation of a rate rise shifting from May to November, I am continuing to estimate that the rate rise will happen in September. I remain optimistic that a weaker Euro will improve economic data and this is turn will cool worries about the robustness of the global economic recovery, and will allow both the Bank of England (BoE) and Federal Reserve to raise rates.
As we noticed with the Cable previously withdrawing 100% of its yearly gains within three months, investors will take profit and close positions if they suspect a rate rise is not imminent. Therefore, it would not surprise if widespread USD profit taking is noted after the Fed announce a rate hike is far from around the corner. Due to the EU economic sentiment remaining questionable and GBPUSD gains appearing limited as traders are anxious about “economic headwinds elsewhere” – risk appetite might be out of the question. Instead, traders should be looking for pairs that investors would usually turn to in times of risk aversion such as the USDJPY.
While a divergence in economic sentiment between the pair might be clear to see, the combination of the the fact that the Federal Reserve is not expected to suddenly appear hawkish, alongside the Bank of Japan (BoJ) unlikely to add monetary stimulus anytime soon, opens up the question whether USDJPY is overbought. Previously, the forecast for the USDJPY was to pullback to 105 during October and, although the move happened sooner than anticipated, the pair can still conclude around the area. A 50 pip pullback has already been noted on Monday morning, with further support located at 107.099, 106.620 and 106.105.
Additionally, both the USDCAD and USDCHF are looking overbought. A potential USDCHF pullback would be dependent on EURUSD appreciation, with the USDCAD perhaps a more appropriate option. The recent decline in the CAD appeared to mirror the rapid depreciation in Oil, but the Canadian economic outlook has been gradually improving since the end of spring. Potential USDCAD support could be found at 1.1175, 1.1125 and 1.1100.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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