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by Charalambos Pissouros

Fed Lays Groundwork for a December Hike, UK GDP on the Agenda

The US dollar gained against all its major peers yesterday following the FOMC decision. The Committee decided to stand pat as was widely expected and made almost no changes to the accompanying statement, keeping the door open for a rate increase at its upcoming gathering. As for today, pound-traders are likely to turn their attention to the 1st estimate of the UK GDP for Q3.

Fed Officials Keep Door Wide Open for a Dec. Rate Hike

The dollar traded higher against all the other G10 currencies yesterday. The main losers were NZD, EUR and GBP in that order, while the currencies that underperformed the least were JPY and SEK.

USD performance G10 currencies

The main event yesterday was the FOMC decision. The Fed decided to keep interest rates unchanged within the 2.00-2.25% range as was widely expected, while officials made almost no changes in the accompanying statement. The only change was that this time, officials noted that business investment has moderated from its earlier rapid pace. That said, they repeated that the labor market continued to strengthen, that economic activity has been rising at a strong rate, and that both headline and core inflation remain near their 2% objective. Once again, officials reiterated that they expect further gradual rate increases, consistent with the sustained economic expansion, strong labor market and inflation near their symmetric target.

In our view, policymakers kept the door wide open for a December hike, and while there were no major changes to the statement, the dollar’s gains suggest that some market participants may have been expecting a more cautious stance following October’s market turbulence. According to the Fed Funds futures, the probability for a rate increase next month rose slightly, to 76% from 73%, while market participants have pushed somewhat up the number of rate increases expected in 2019. Today, they anticipate 2.2 hikes compared to 2.0 yesterday. According to September’s dot plot, Fed officials expect three increases through next year. Therefore, we believe that there is still room for the market to bring its forecasts closer to the Fed if US economic data continue to come in on the strong side. Something like that is likely to keep the dollar supported.

Fed funds futures interest rates

USD/CHF – Technical Outlook

At one point on Wednesday, it looked like that USD/CHF could continue moving south, due to the break of the short-term upside support line taken from the low of the 28th of September. But before that day had ended, the pair reversed 180 degrees and moved back up sharply, placing itself back above that upside line. From there onwards, USD/CHF continues to climb higher. Our oscillators are indicating that the buying momentum could be picking up again, which is why for now, we will aim for higher levels.

Yesterday, USD/CHF broke through its key resistance at 1.0052, marked by the high of the 7th of November. At the time of this analysis, the pair has stalled fractionally above the other good resistance level of 1.0070, which was near the peak of the 5th of November. If the buying power remains strong, the pair could easily travel higher to test another strong resistance at 1.0095, a break of which could put us in a more comfortable position of targeting higher levels in the near term. Such a move could clear the path towards the 1.0142 hurdle, or even the 1.0161 barrier, marked by the high of the 9th of March 2017.

As mentioned in the first paragraph, our oscillators are also in support of the upside scenario. The RSI has shifted back above 50 and points higher. The MACD also got back into the positive zone, is above the trigger line and points to the upside as well.

In order for to start examining lower levels, we would need to see, not only a break of the aforementioned upside support line, but also a drop below the psychological 1.0000 level. This way we could initially target the 0.9970 obstacle, a break of which could lead the pair towards a test of the 0.9950 zone again, marked by the low of this week. This is where USD/CHF could also meet the 200 EMA, which could also give a bit of support to the 0.9950 zone. If the bears remain in control, that support zone could get violated, in which case the pair could continue sliding and the next potential target could be around the 0.9922, near the lows of the 18th of October.

USDCHF 4-hour chart technical analysis

Euro and Pound Among the Main Losers, UK GDP in Focus

As for the rest of the currencies, the yen managed to resist somewhat against its US counterpart. Among the G10s, it lost the least ground. Given its safe-haven status, this may have been due to the setback in equity markets. Following the Fed decision, the US indices gave back a fraction of the gains they made in the aftermath of the midterm elections, closing slightly in the red. The exception was Dow Jones which closed virtually unchanged. The risk-averse mood rolled over into Asia as well, with Japan’s Nikkei 225 and China’s Shanghai Composite Index closing 1.05% and 1.39% down respectively.

The euro and the pound were among the main losers, perhaps as, apart from the strengthening of the dollar, their individual stories were not so encouraging. Getting the ball rolling with the euro, Draghi’s comments that the ECB can change its forward guidance if outlook worsens, may have added some extra pressure to the common currency. Moving to the pound, a report noted that PM Theresa May is likely to ask Brussels for extra time in order to find common ground with her Cabinet members, while a government source said that a Cabinet meeting ahead of next week is unlikely. In our view, such delays lessen the likelihood for a November EU summit with hopes for a Brexit deal before year end mostly pinned on the December meeting.

 As for today, pound-traders are likely to turn their attention to economic data, and specifically, the 1st estimate of the UK GDP for Q3. The forecast suggests that the UK economy expanded 0.6% qoq in the three months to September, an acceleration from +0.4% in Q2. This is likely to drive the yoy rate up to +1.5% from +1.2%, which would be in line with the BoE’s forecasts in last week’s Inflation Report. Something like that could encourage market participants to bring somewhat forth their expectations with regards to the next BoE rate increase, but we stick to our guns that any move is unlikely to come before the official Brexit date, which is on the 29th of March 2019. According to the forward curve of the UK OIS (overnight index swaps), a hike is almost fully priced in December next year.

UK overnight index swaps

GBP/CAD – Technical Outlook

GBP/CAD had a fantastic run to the upside from the last day of October, where it was trading above a steep short-term upside support line, drawn from the low of the same day. Yesterday, the pair slowed its upside momentum and broke the upside line by just moving sideways. The pair is currently trading in a range between 1.7142 and the 1.7255 levels, which could be the one to watch in the short run. For now, we will stay put and wait for the pair’s next move.

This ranging activity could just be a good chance for the bulls to have a rest, before jumping into the action again. If GBP/CAD struggles to move below the 1.7141 area, that zone could act as good bouncing ground, that could lead the pair back to Wednesday’s high at 1.7255. A break above the 1.7255 barrier could mean that the bulls are still strong, and the pair could push higher to the 1.7280 zone, a break of which could set the stage for a test of the 1.7315 area, marked by the by the high of the 25th of July. A further acceleration of the rate may generate a possibility to see the 1.7410 level getting touched, as it was the high of the 17th of July.

Alternatively, if GBP/CAD decides to continue pushing lower, then breaks below the 1.7141 obstacle, for us to get comfortable with lower levels, we would need to see the pair breaking the 1.7088 as well, which was the low of the 6th of November. This is where we could see more bears jumping in and driving GBP/CAD towards the 1.7055 hurdle, which if broken, could set the stage for a test of the 1.7015 zone. Slightly below, we have the short-term downside resistance line taken from the peak of the 11th of October, which got broken this week and could get tested from above. The area to watch around there could be at the 1.6970 level, marked by the low of the 2nd of November.

GBPCAD 4-hour chart technical analysis

As for the Rest of Today’s Events

Besides the GDP data, UK’s industrial and manufacturing production, as well as the nation’s trade balance, all for September, are coming out as well. Industrial production is expected to have slid 0.1% mom after rising 0.2% in August, while manufacturing production is expected to have rebounded 0.1% mom after a 0.2% slide the previous month. Both the yoy rates are expected to have declined but bearing in mind that the manufacturing PMI for the month slightly rose, we see the risks surrounding the forecasts as tilted somewhat to the upside. As for the nation’s trade deficit, it is expected to have widened to GBP 11.4bn from GBP 11.2bn.

In the US, the PPIs for October are coming out. The headline rate is expected to have remained unchanged at +2.6% yoy, while the core rate is forecast to have declined to +2.3% yoy from +2.5%. This could raise speculation of a slowdown in the core CPI rate as well. However, even if the core CPI slows somewhat, we don’t expect something like that to prevent Fed officials from pushing the hiking button at the December gathering. We think that a notable tumble below 2% may be needed to force them alter their plans. The preliminary UoM consumer sentiment index for November is also coming out, alongside the preliminary UoM 1- and 5-year inflation expectations.

As for the speakers, we have one on today’s agenda: Fed Board Governor Randal Quarles.

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