Now it’s the Fed’s turn to talk dovish as it’s likely to seek a weaker USD
Last week foreign central banks provided another reason for the US Federal Reserve to delay its long awaited interest rate rise with the USD once again on the rise.
European Central Bank President Mario Draghi did not miss an opportunity to talk the EUR down at last week’s press conference as his dovish remarks saw it obliterate support levels versus USD. Meanwhile the People’s Bank of China cut its one-year benchmark rate to 4.35% -- its sixth cut since November.
Then there’s growing speculation that the Bank of Japan will extend or even increase its mammoth 80 trillion yen ($660 billion) a year quantitative easing programme as deflation forces persist and GDP growth is disappointing. The ECB could do the same next year.
However, the Fed is unlikely to take this lying down and simply allow USD to once again soar into the stratosphere shocking off US exports and grinding down overseas profits of US-based multinationals (when translated into USD). The US seems more reticent than in the past to act as world’s importer of last resort.
It has indicated that it too is paying closer attention to exchange rates and is concerned about sparking global financial market turmoil if it raises interest rates. Indeed, the US has relatively low inflation pressures and even though US unemployment rate stands at healthy 5.1% the labour participation rate continues to ebb worryingly downward and now stands at 62.4%, the lowest since the late 1970s.
This week traders should get some further clues on central bank thinking. On Wednesday there’s the FOMC statement where the Fed will probably veer on the side of caution regarding interest rates, but it will be scrutinised for clues on whether rates could be raised in December or March 2016. However, if the US shows signs of cooling and if the next Non-Farm Payrolls number to be released on Nov 6, disappoints like the last one, talk of interest rate rises could quickly disappear.
If anything discussions in the US could turn towards establishing negative interest rates following the lead of some European central banks if the global economy doesn’t pick-up next year.
On Thursday / Friday the BoJ makes its monetary policy statement and holds a press conference, which could be a source of dovish talk for JPY.
In effect there’s plenty of scope for currency volatility as central banks jostle to weaken their currencies and to stimulate inflation and economic growth.
TECHNICAL ANALYSIS: EUR/USD stabilising, but watch out for FOMC
Mario Draghi certainly threw a spanner in the works last week as far as the technicals are concerned. EUR/USD Support at 1.1305, 1.1275 and 1.1098 were all swept aside. Even 1.1000 was briefly breached creating support at 1.0996. Below that levels of 1.0881 and 1.0808 show up on the charts.
However, EUR/USD seems to have stabilised at levels above 1.1000 for the time being as they pierced the low end of the bottom Bollinger band. Also, the strong sell signal generated by the slow stochastics on October 15 could be about to turn into a strong buy signal (but that’s not yet happened). And though the dailies breached both the 50- and 200-day averages, the two averages themselves have not crossed to generate a sell signal. Resistance can be seen at 1.1108, 1.1326 and 1.1339.
However, a far more decisive factor for the market will be the Fed’s FOMC meeting on Wednesday. A neutral / bullish statement on the outlook for US interest rates could see further stability / losses on EUR/USD. A more dovish statement, which is entirely possible given the state of the global economy and the recent USD rally, would give further upward impetus to EUR/USD.
By Justin Pugsley, Markets Analyst, MahiFX