USD: Fed likely to be evasive on Wednesday over future monetary policy
The big event this week – the almost certain hike in US interest rates by the US Federal Reserve will be a non-event as it has been so well anticipated, but more important still, little will probably be said about the future course of monetary policy.
In other words, the Fed probably won’t be doing much to drive USD crosses when it makes its announcements on Wednesday and there’s probably not a lot they can say except to acknowledge the recently robust performance of the US economy and its likely continuation for the time being.
From Jan 20, 2017, the US will be led by a very different administration under Donald Trump who is aiming for 4% GDP growth, a big deregulation push, tax cuts and an infrastructure renewal drive.
Until the Fed knows the full extent and scope of these plans, and that will take time as there will be debates to be had within Trump’s team and with Congress, then it really can’t make forecasts about growth, inflation and employment with much confidence nor the trajectory of monetary policy.
Also, the Fed may want to stay relatively quiet for fear of being accused of political meddling – particularly as many Republicans would love nothing better than to cut the central bank down to size. Many have not forgiven the central bank for its quantitative easing programmes or bailing out the banking system during the 2007-9 financial crisis.
Instead catalysts for direction are likely to come from elsewhere next week – not least the ongoing Italian political drama, which is playing out to the sound of a looming banking crisis that urgently needs addressing. The lack of a resolution will merely weigh heavier on the EUR.
In terms of US interest rate expectations – currently for two hikes in 2017 and three each in 2018 and 2019 – markets are more likely to be guided by the data with US retail sales and producer inflation numbers due on Wednesday, consumer prices and weekly jobs numbers on Thursday followed by building permits on Friday.
TECHNICAL ANALYSIS: EUR/USD – The bears need to take-out 1.0500
The rumblings of a neglected banking crisis and political deadlock in Italy are duly pressuring the EUR ever lower, also helped by the decision by the European Central Bank to prolong its quantitative programme, albeit at EUR 60bn / month rather than EUR 80bn.
EUR/USD once again looks like it could have a stab at parity, but as noted many times in this column, the closer it gets to 1.0000, the stiffer support will become. Among the key support levels needing to be swept aside on the way are 1.0506, 1.0459, 1.0419 and 1.0241.
However, more downside attempts this week are possible with the daily RSI still in a neutral 38, the slow stochs have generated a relatively strong sell signal and the pair probably have some scope to dig into the lower Bollinger band before consolidating.
However, if EUR/USD can remain above 1.0500 – then the market will likely test resistance levels, which can be seen at 1.0625, 10667, 1.0712 and 1.0802.
By Justin Pugsley, Markets Analyst, MahiFX