FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar found some consolidation in the wake of yesterday’s FOMC decision. The statement itself confirmed that QE3 will finish on schedule at the end of June, and Fed Chairman Bernanke cited inflation as a reason why further stimulus would not be forthcoming. The key policy language pledging to keep the policy rate “exceptionally low&for an extended period” was unchanged. However, it is notable that no pledge was given to keep the balance sheet at its current elevated level for an extended period. Given that allowing the balance sheet to contract passively is likely to be the first normalisation step, this suggests at least some members of the FOMC want to maintain an ability to tighten should the need arise, and potentially at short notice. On the other hand, Bernanke warned any ‘determined’ central bank would do anything to fight deflation, so if conditions turn for the worse nothing can be ruled out, but the chances of QE3 are extremely small at this stage.
We expect this FOMC meeting to mark a turning point in the dollar’s fortunes and look for EURUSD to end the year at 1.30. Indeed, supporting this view, the dollar gradually strengthened as Bernanke’s press conference wore on, and we look for further gradual gains over the months to come. Overnight, EURUSD traded 1.4286-1.4358, USDJPY 80.26-80.64.
EUR
Newswires reported that talks have begun between Eurozone officials and banks in Greece, France, Germany, and the Netherlands on the subject of private sector involvement in the next phase of the Greek rescue.
Germany’s Chancellor Merkel offered her views on a variety of topics, although most of the points have been made before. She said that she wants a voluntary, substantial, contribution from the private sector in the Greek aid deal but said that this is not possible unless the ECB are in agreement.
Bernanke emphasised time and time again during yesterday’s press conference that a disorderly unravelling of the situation in the Eurozone would be very dangerous for the global economy. It was an indirect way of warning Europe to aim for a speedy resolution, consistent with recent comments from other G7 officials.
Ahead today German PMI and those for the Eurozone are due.
GBP
BBA loans for house purchases (cons. 30k) and CBI reported sales are due today. Activity indicators in the UK are crucial now to determine whether UK policy will make a turn to the dovish side.
The June minutes showed that the MPC voted 7-2 to keep rates on hold. As expected, Martin Weale and Spencer Dale voted for a hike, while new member Ben Broadbent voted to keep rates on hold. The dovish Adam Posen was once again the only voter for further QE although it was mentioned that ‘some’ members are in favour in principal, supporting Paul Fisher’s comments yesterday. The overall tone was dovish which weighed on sterling as downside risks to growth were highlighted by the majority of the members. We remain bearish on sterling.
TECHNICAL OUTLOOK
USDCAD 0.9671 key support.
EURUSD BEARISH The pair pulled back through 1.4303 to turn bearish and expose support at 1.4215 ahead of 1.4161. Initial resistance lies at 1.4442.
USDJPY BEARISH Key support is at 80.00, decline through this level would open 79.57 next. Initial resistance is at 81.06.
GBPUSD BEARISH The sharp fall through 1.6079/58 has paved the way for further losses towards 1.5972 and 1.5937. Resistance lies at 1.6200.
USDCHF BEARISH The focus is on support at 0.8340, break of which would open key level at 0.8327. Initial resistance lies at 0.8517.
AUDUSD BEARISH A move below 1.0532 would expose 1.0478, while resistance is at 1.0651.
USDCAD NEUTRAL Support lies at 0.9671; while this level holds there’s potential for a climb back to 0.9806.
EURCHF BEARISH Remains heavy below 1.2147, while the level holds focus is on downside. Initial support is at 1.2021 ahead of 1.1950.
EURGBP BULLISH The cross targets 0.8976, scope for 0.9041 next. Near-term support lies at 0.8854.
EURJPY BEARISH The break of initial support at 114.66 would open 113.52/47 area. Resistance lies at 116.00.
SCHEDULE
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