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Daily Report
By Jameel Ahmad, Chief Market Analyst at FXTM
In line with forecasts, the Greenback continued to weaken against the majority of its counterparts on Tuesday. In fact, the Greenback only moved higher against the Yen, which declined following comments from Bank of Japan (BoJ) Governor Kuroda that a weaker currency is positive for the Japanese economy. This again encouraged investors to begin pricing in the prospect of future stimulus from the BoJ. Nonetheless, the Japanese economy received a boost overnight when it was declared that Japan’s industrial production rose last month to its highest level since January. This provided an indication to investors that Japan might finally be overcoming the detrimental impact the April sales tax had been having on economic data.
In regards to investors again beginning to price in further stimulus from the BoJ, this seems to be a story that fails to go away. Despite the comments from advisors to Prime Minister Abe and BoJ Governor Kuroda that a weaker Yen would be beneficial to the Japanese economy, I remain undecided on whether the BoJ will actually issue further stimulus. The main topic for discussion now in Japan is whether the economy can handle another sales tax in 2015. This needs to be clarified first and if a second sales tax is planned for April 2015, I wouldn’t expect any stimulus to be announced by the BoJ until at least the summer of 2015.
In reference to why investors are continuing to take profit on the Dollar, it is due to an awareness that the chances of the Federal Reserve appearing hawkish tonight are slim. Although 62 out of 64 Bloomberg economists are expecting the Federal Reserve to conclude QE as planned, there remains an outside chance that the Fed may unexpectedly continue QE, or slip in a surprising comment indicating that if US economic data encounters an unexpected downturn they will be prepared to introduce a fourth round of QE.
Additionally, I think investors are now realizing that they were getting slightly overexcited by pricing in a sooner than expected US interest rate rise. Although the US employment sector has made remarkable progress in 2014 and Consumer Confidence came in at a seven-year high yesterday shows the improved labour market is raising confidence levels, progress still needs to be made for the recovery of the US economy. For example, Durable Goods unexpectedly dropped for the second straight month in September and construction activity remains below pre-recession levels.
Although the Federal Reserve always seemed to be focusing on the labour markets when it came to discussing monetary policy, it will only be a matter of time before they indicate that they are also analyzing other aspects of the US economy and taking this data into consideration when determining potential interest rate increases. The Bank of England (BoE) previously said they would look at the amount of “slack within the economy” before considering raising interest rates and it would not surprise if the Federal Reserve also added a similar phrase to their commentary soon. Federal Reserve Chair Janet Yellen is not scheduled to speak tonight but I think she is looking far beyond improvements in employment, inflation and wage growth data when considering a rate rise.
Due to the Dollar weakness, the Eurodollar moved as high as 1.2761 on Thursday before concluding trading at 1.2732. The early morning news that the European Commission is set to approve France and Italy’s 2015 budgets should support the Euro this morning. However, it is important to understand that the Eurodollar’s recent appreciation is not linked to an improving EU economic sentiment; it is purely due to Dollar weakness. If anything the EU sentiment weakened further this week when German Business Confidence fell to a 22-month low. To add further dismay, the IFO indicated that they are not expecting any German growth at all in Q4. If the markets do react unfavorably to the Federal Reserve tonight, we can’t rule out the pair returning to 1.28.
The USD weakness also allowed the GBPUSD to surpass Monday’s resistance at 1.6128 with the pair moving as high as 1.6181 before concluding trading at 1.6130. Comments this morning from BoE Deputy Governor, Jon Cunliffe that UK interest rates can be kept at their current record low for longer than first thought, should limit GBP appreciation this morning. From here, where the Cable trades will be completely dependent on how the markets react to the Federal Reserve announcement this evening. An upside move to 1.62 remains possible, but it would require a dovish Fed comment tonight. Before then, resistance can be found at 1.6152 1.6181.
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