FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The FOMC surprised markets by pledging to leave rates on hold until late 2014 and committing to an explicit inflation target. The Fed will target the y/y change of core personal consumption expenditure (PCE) at 2%, moving away from the previous informal target range of around 1.7% to 2%. The Fed also said it was not appropriate to adopt a fixed goal for employment because “the level of unemployment that can be achieved without sparking inflation is not largely determined by monetary factors”. The dollar fell across the board upon the announcement, reversing the gains from the previous sessions.
Risk assets rallied, and EURUSD broke through 1.3100. In the post-statement conference Bernanke said that unless there’s a substantial strengthening in the economy, the Fed will be holding those unusually low rates for a long time. He also said that leaving rates on hold until 2014 implies that sales of the balance sheet will not come before 2015. In the first ever “longer-run goals and policy strategy” it was revealed that 11 of the 17 members believe a rate hike is not appropriate before 2014. This change in strategy is likely to fuel the recent risk rally and will be encouraging for investors looking to move back into risk assets in the short term. Earlier, there was more strong data out of Germany with the Ifo improving once again while the January BoE minutes showed a 9-0 vote for no change in rates and the asset purchase program. The minutes acknowledge that the most serious near-term risks have moderated, but the overall tone remains dovish.
As expected the RBNZ left its cash rate on hold but NZD was swept higher as part of the US dollar move. Ahead today, there are few major policy announcements in the G10 space but markets will remain sensitive to news out of the Eurozone as investors analyse the changes to Fed policy. EURUSD traded in a range of 1.3121-1.3047 and USDJPY 77.56-76.98.
EUR
ECB sources told Bloomberg that the central bank remains opposed to taking losses on its Greek debt holdings. German CDU’s Meister called the call on the ECB to join the PSI as ‘indecent’, and said that IMF and politicians cannot dictate to the ECB. The role of the ECB in the PSI negotiations has been a fiercely debated topic n recent days. Yesterday, the FT reported that the IMF are putting the ECB under pressure to accept losses on its Greek holdings as the current stance is causing problems with private investors.
The Greek securities regulator said it will extend the short selling ban. This has been in force for several months already so is no surprise.
There was more strong data from Germany. The January IFO business. climate index rose to 108.3 vs 107.6 consensus. The expectations index rose to 100.9 vs 99.0 consensus. Our analysts note that this is clearly risk-on news and will support views of those who believe that the worst is over. This also confirms that Germany might continue to do better than the Eurozone average this year. As this was the third rise in a row, it may be seen as a turning point in the business cycle, according to the Ifo’s own interpretation. In our view, this still hinges on credit conditions, which in turn depend on the sovereign crisis. Here the ECB’s December LTRO clearly provided a lot of short-term support, but we think it is too simplistic to believe it will solve the crisis for good.
GBP
The January MPC minutes showed a 9-0 vote split for no change in rates and the asset purchase program. The minutes acknowledge that the most serious near-term risks have moderated, but the overall tone remains dovish. Our analysts note that there is a group in the MPC now a little less worried about the inflation undershoot. That group the ‘risks to inflation were more finely balanced and it was less clear than inflation would fall below the target in the medium term’. The committee still believes that there major downside risks to the global economy remain and that economic growth in the euro area will remain weak for the foreseeable future. This leaves the door open for more QE for Feb. There is a downside risk to our Pound 75bn forecast.
Q4 GDP was softer than expectations at -0.2% q/q vs consensus of -0.1%. The pound was sold heavily into the data however with the market positioned short, there was minimal negative impact on the release.
AUD
Although the headline Q4 CPI was weaker than expected, core CPIs were slightly higher and AUD eventually rose 50 pips on the numbers. Specifically, the trimmed mean core reading climbed 0.6% in Q4 (cons. +0.5%) and the Q3 number was revised up to 0.4% (prev. 0.3%). Our Australian economists note that this puts the annualized rate back in the middle of the RBA’s 2-3% target band, making the February policy decision a close call. Nevertheless, they continue to expect a 25bp cut to the cash rate in February.
NZD
As expected, the RBNZ left its cash rate on hold. Governor Bollard said. it remains prudent to keep the OCR on hold at 2.5%. The words ‘for now’ were dropped from the statement, suggesting the bank will be on hold for longer.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key upside trigger is at 1.3077 and support lies at 1.2839.
USDJPY BULLISH Pressure is on 78.29, a rally through this level would open the way for further gains towards 79.53. Support lies at 77.62.
GBPUSD NEUTRAL Resistance is at 1.5670 ahead of the bull trigger at 1.5780. Support lies at 1.5517 ahead of 1.5451.
USDCHF NEUTRAL Key downside trigger lies at 0.9244, a clear break below this level would open 0.9176 next. Resistance is at 0.9413 ahead of 0.9498.
AUDUSD BULLISH Initial resistance is at 1.0573, a move above this level would open the key high of 1.0753. Support lies at 1.0428 ahead of 1.0359.
USDCAD NEUTRAL Key support lies at 1.0052, a decline through this level would trigger a bear trend and expose 0.9975. Resistance is at 1.0189 ahead of 1.0254.
EURCHF BEARISH Initial support lies at 1.2058 ahead of 1.2000. Resistance is at 1.2133.
EURGBP BEARISH Momentum is negative; near-term support lies at 0.8273 ahead of 0.8255. Key resistance is at 0.8422.
EURJPY BULLISH Resistance is at 101.89 ahead of key high of 102.54. Support lies at 100.03.
SCHEDULE
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