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by Charalambos Pissouros

Fed Hikes, RBNZ Stands Pat, Focus Turns to Italy

Yesterday, the Fed decided to deliver its 3rd hike for the year and removed from the statement the part describing monetary policy as “accommodative”. Overnight, the RBNZ stood pat, with the accompanying statement containing no surprises. As for today, focus is likely to turn to Italian politics, as the government is scheduled to release its budget target for 2019.

Fed Hikes Rates, Removes ‘Accommodative’ from Statement

The dollar traded slightly higher against most of the other G10 currencies on Wednesday. It gained the most against CAD, while it underperformed against NOK and JPY. The greenback traded virtually unchanged against SEK.

USD performance G10 currencies

The Canadian dollar was the main loser, weighed on by concerns that the US and Canada may not find common ground in trade talks. US President Trump said that he rejected a meeting with Canada’s PM Trudeau this weak and threatened again that the US will proceed with taxing the cars it imports from Canada. “We’re very unhappy with the negotiations and the negotiating style of Canada.”, Trump added.

Yesterday, the main event for USD-traders was the FOMC decision. As was widely anticipated, the Fed raised interest rates to the 2.00-2.25% range, and while there was only one change in the accompanying statement, it was enough to trigger the dollar’s initial reaction. Officials removed the part saying that monetary policy remains accommodative, which was interpreted as dovish by the market as the no longer accommodative policy means that rates are close to neutral and thus, a slowdown in the pace of hikes could be appropriate soon. If they have kept the “accommodative” wording, it would have been taken as a signal that more hikes are needed before rates reach neutral.

As far as the new “dot plot” is concerned, it continued to point to another hike this year, three in 2019 and one in 2020. With regards to the first forecast of 2021, the median dot was above the long-term estimate, but equal to the 2020 median, which suggest a pause during that year.

Having said all these, the game changer was Fed Chair Powell’s press conference after the decision. In his opening remarks, the Fed Chief said that dropping the “accommodative” part does not signal a policy outlook change, but just that policy is proceeding in line with expectations. In the Q&A session, he added that the Fed funds rate is still below the neutral estimate of every Committee member, and that they plan to keep their future decisions data driven, instead of trying to figure out where precisely the neutral level of interest rates is.

The dollar took a 180-degree turn on Powell’s remarks, recovered the ground lost on the decision, and traded even higher.  Perhaps investors took his words as a sign that the Committee will keep raising rates at current pace until the data suggest otherwise, and that how close to their neutral level interest rates are may not be so vital with regards to officials' future plans.

USD/CAD – Technical Outlook

After moving south for most of the September, it looks like now, USD/CAD is trying to regain some of its lost grounds. On Tuesday, even though the pair broke higher through its short-term downside resistance line, drawn from the high of the 10th of September, still it got stuck within a short-term 40-pip range between the 1.2935 and 1.2975 levels. USD/CAD managed to get out through the upper side of it about 45 minutes before the FOMC. After that, it was almost smooth sailing north for the pair, which managed to get back into the 1.30s again. For now, we will stick to the upside, at least for the short run.

Looking at the 4-hour chart, we can see that USD/CAD has now shifted above all of its EMAs and it looks like it could be heading for some higher levels. But before the pair could rush up again, there is a possibility to see a bit of retracement back to the downside, where it could test the 1.3015 zone, marked by the inside swing peak of the 19th of September. This is where the bulls could take advantage of a slightly lower rate and push USD/CAD towards higher resistance levels. The first initial stopping point could be seen at 1.3065 hurdle, which was the high of the 18th of September. Further acceleration of the rate could lead to the 1.3110 obstacle, marked by the inside swing low from the 7th of September, or even the 1.3175 barrier. This area was last seen as the high of the 11th of September, and now coincides with the short-term downside resistance line taken from the peak of the 27th of June. This could stall the rate for a while, until the bulls and the bears decide who takes the driver’s seat from there.

In order to abandon the bullish scenario, at least for the short term, we would need to see a close below the 1.2975 area, which was the pair’s resistance on Tuesday. This way, we could start examining the possibility for the pair to travel lower towards the 1.2935 zone. If the bears won’t get held there, USD/CAD could continue moving south, where the next potential area of support could be seen at 1.2885, marked by the lowest point of September.

USDCAD 4-hour chart technical analysis

RBNZ Stays on Hold, Kiwi Stays Largely Unphased

After the FOMC, it was the turn of the RBNZ to decide on monetary policy. Overnight, during the early Asian morning, as was broadly expected, New Zealand’s central bank decided to keep interest rates unchanged at +1.75%. This was one of the “smaller” meetings and thus,  it was not accompanied by updated economic projections or a press conference by Governor Adrian Orr. So, it was all about the statement.

RBNZ interest rates

That said, the statement contained little new information and thus, the Kiwi reacted very little at the time of the release. The Bank repeated that interest rates will remain at this level through 2019 and into 2020, and that the next direction could be up or down. With regards to the latest GDP data, officials acknowledged that growth was stronger than anticipated in Q2, but they noted that downside risks remain and that their projection for the economy has little changed.

Italian Politics Take Center Stage

Today, the Italian government was scheduled to publish its 2019 deficit and debt targets, with investors sitting on the edge of their seats to see whether the populist government will keep the budget deficit less than 3% of annual GDP, in line with the EU rules.

However, early headlines suggest that the meeting over the 2019 budget plan may be postponed due to complications in reaching an accord. Italy’s Finance Minister Giovanni Tria, who initially supported a 1.6% deficit/GDP ratio, has been willing to accept a deficit of 1.9%, while the Northern League and Five Star parties have been both pushing for a higher rate, between 2.0% and 2.5% so they can accomplish their pre-election promises.

Although all these suggest that the budget will be in line with EU rules, further delays would mean further uncertainty and could keep the euro under selling interest. Even if they agree and we get the number today, anything above 2.0%, which is the consensus according to market chatter, could raise concerns over the sustainability of the nation’s finances and could also prove negative for the common currency. We believe that a below 2.0% number is needed for the euro to experience a relief bounce.

EUR/NZD – Technical Outlook

EUR/NZD continues to trade near its medium-term upside support line taken from the low of the 14th of June. Even though the pair is showing some signs of weakness, still, as long as the uptrend line remains intact, we will stick to the upside and view the line as a good area for the bulls to jump in again.

If the abovementioned upside line continues to hold and EUR/NZD bounces off from it, for us to get comfortable with higher levels again, we would need to see a strong move back above the 1.7675 barrier, marked by yesterday’s high. If the buying activity remains, a further move up could lead to a test of the 1.7735 hurdle, a break of which, could set the stage for the 1.7785 and 1.7825 obstacles, where the last was seen as the highest point of September.

Alternatively, if eventually the break of the aforementioned upside support line happens, and we see EUR/NZD closing below it, this could change the near-term outlook to a more negative one, where the pair could slide towards levels last seen in the end of August. However, even if EUR/NZD gets below the upside support line, still, the bears could probably wait until they see the pair closing below the 1.7535 support zone, marked by the low of the 19th of September. In such a case, further declines could be inevitable and thus, we could start examining the 1.7480 obstacle as the next potential area of support. It was last seen acting as a good resistance on the 28th of August. If the selling doesn’t stop there, then a break below the abovementioned obstacle could set the stage for a test of the 1.7395 level, which was see as good support on the 29th of August.

EURNZD 4-hour chart technical analysis

As for the Rest of Today's Events

During the European morning, Germany’s preliminary CPI data for September are scheduled to be released. Expectations are for inflation in Eurozone’s economic power house to have held steady at 2.0% yoy, which could raise some speculation that the bloc’s headline CPI rate, due out the following day, may have remained unchanged as well.

Later in the day, we get the final US GDP data for Q2. Expectations are for the final print to confirm the 2nd estimate and show that the US economy expanded 4.2% qoq SAAR, which is the strongest rate in nearly four years. That said, barring any major deviations from the forecast, we doubt that this release will have a major market impact. We are nearing the end of Q3 and we already have models suggesting how the economy may have performed during this quarter. According to the Atlanta Fed GDPNow model, the economy expanded accelerated to +4.4% qoq in Q3, but the New York Fed Nowcast points to a slowdown to +2.3%.

Durable goods orders for August are also due to be released. Expectations are for headline orders to have rebounded 1.9% mom after falling 1.7% in July, while core orders are anticipated to have accelerated to 0.5% mom from 0.1%. Pending home sales for the same month are coming out as well.

As for tonight, during the Asian morning Friday, we get the usual end of month data dump from Japan. The nation’s unemployment rate for August is expected to have remained unchanged at 2.5%, while preliminary figures on industrial production for the same month are anticipated to reveal a rebound of +1.5% mom following a 0.2% decline in July. Retail sales for the month are forecast to have accelerated to +2.2% yoy from +1.5%. The Tokyo CPIs for September are also coming out and expectations are for the headline rate to have ticked down to +1.1% yoy from +1.2%, while the core rate is expected to have remained unchanged at +0.9% yoy. The BoJ’s summary of opinions from its latest policy gathering is due to be released as well. From China, we have the Caixin manufacturing PMI for September and expectations are for the index to have ticked down to 50.5 from 50.6.

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