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by Charalambos Pissouros

Tariffs Return to the Spotlight; FOMC Decides on Monetary Policy

Yesterday, tariffs returned to the front seat, with the first report that hit the wires suggesting that the US and China were seeking to resume talks in order to find common ground. Nevertheless, during the Asian morning today, a new report said that the US is considering to increase the rate in the next round of tariffs to Chinese goods. As for today, attention is likely to turn to the FOMC monetary policy decision.

US is Considering a Higher Tariff Rate on Chinese Goods

The dollar traded higher against all but one of the other G10 currencies on Tuesday. It gained the most against JPY, SEK and CHF in that order, while it underperformed only against CAD. The Loonie was the sole winner against its neighboring US dollar, strengthening after data showed that Canada’s GDP accelerated to +0.5% mom in May from +0.1% in April, driving the yoy rate up to +2.6% from 2.5% previously. Despite yesterday’s negative news on NAFTA, accelerating growth combined with the rise in Canada’s headline inflation rate for June may have further increased market participants' confidence over the prospect of another BoC rate hike by year end.

Tariffs returned back to the spotlight yesterday, with the first report that hit the wires suggesting that the US and China were seeking to resume talks in order to find common ground on trade. The news gave a small boost to global equity markets and risk currencies, like the Aussie, with European and US bourses ending their sessions in the green. The yen, already under massive selling interest following the BoJ decision yesterday, took another hit due to that. However, hours thereafter, during the Asian morning today, a new report said that President Trump's administration is considering to increase the rate in the next round of tariffs to Chinese goods. Remember that back in mid-June and early July, Trump threatened to impose tariffs of 10% to 200bn worth of Chinese imports. Now, the news suggest that he is planning to raise that tariff rate to 25%.

That said, market sentiment was hit only modestly and temporarily following the new report. Given that China is the nation directly affected by this, China’s Shanghai Composite index ended the Asian session around 0.7% lower, but Japan’s Nikkei remained in positive territory, closing 0.83% up. Even AUD/JPY, one of our favorite proxies among currency pairs for playing the “trade war” theme, slid only 30 pips to eventually recover most of the fall within the following hours.

As for our view, we believe that due to the conflicting signals, investors were reluctant to heavily position themselves, especially as they remain focused on the US earnings season, as well as the FOMC policy meeting later today. Another point to be made is that the main driving force behind the yen and Nikkei may still be yesterday’s BoJ decision and that’s why the yen remained on the back foot and Nikkei closed in the green.

Nasdaq 100 – Technical Outlook

Overall, Nasdaq 100 continues to trade within its rising channel formation, which started around the 4th of April. Recent hits that the FAANG stocks took had a direct affect on the index, which was forced to test the lower bound of that channel. But that bound has not been broken and until that happens, the outlook still remains positive.

For now, we are aiming for the first good potential area of resistance at the 7300 barrier, which held the price down recently, on the 30th of July. If we see a break and a close above that area, then this could be the first good sign that Nasdaq wants to make its way back up. Slightly above that barrier lies the 7345 level, which could play a key role in the index’s further uprise. If that level breaks, this could clear the way towards the 7457 mark, which was the high of the 27th of July. Above that lies the all-time high, near the 7515 hurdle, which could be an important resistance level to watch.

On the downside, if a break of the lower bound of the rising channel happens and Nasdaq 100 closes the day below the 7155 zone, marked by the low of the 30th of July, this could turn out ugly for the index as this could open the door to some lower levels. The next potential support area to keep an eye on is the 7085 zone, which held the price from dropping lower on the 6th of July. If that area is not able to withhold the index from falling further, Nasdaq 100 could then move lower and test 6970, which acted as a strong support level between the 25th of June and the 2nd of July. 

Will the FOMC Keep the Door Open for Two More Hikes by Year End?

As for today, the FOMC decides on monetary policy and expectations are for the Committee to keep interest rates unchanged. This is one of the “smaller” gatherings that is not accompanied by updated economic projections, neither a press conference by Fed Chair Powell. Thus, all the attention is likely to fall on the statement accompanying the decision.

When they last met, Fed policymakers decided to raise interest rates by 25bps, while the new “dot plot” pointed at two more rate increases by year end, instead of just one as the previous plot suggested. The case for further gradual rate increases was also supported by the minutes of that meeting, as well as Powell’s semi-annual testimony before Congress.

On the data front, both the headline and core CPIs continued to accelerate in June, while Friday’s data showed that in Q2, the economy expanded at the strongest pace in nearly four years. Although the core PCE index, the Fed’s favorite inflation metric, slowed to +1.9% yoy in June, it remains in line with the Fed’s view that inflation is close to its 2% target.

Thus, despite the latest criticism of Trump over higher interest rates, we believe that officials will maintain their upbeat stance, sealing the deal for a hike at the September gathering and keeping the door open for another one in December. According to the Fed funds futures, the market assigns near 90% chance for a hike in September, while there is a 65% probability for another one to follow in December.

USD/CHF – Technical Outlook

The US Dollar saw some buying activity kicking in yesterday, at least against most of its major counterparts, including CHF. USD/CHF managed to find good support near the 0.9870 zone, from which the pair bounced back up. The pair now seems able to continue running higher, but the upside could be limited, due to a downside resistance line, taken from the peak of the 13th of July.

For now, we will take a cautious approach and aim a bit higher, even though USD/CHF is still trading below the abovementioned downwards moving resistance line. We will initially target the 0.9935 resistance, which was the inside swing low seen on the 27th of July. If USD/CHF doesn’t stop there, the next potential area of resistance could be around the 0.9955 barrier, marked by the high of the 30th of July. If the bulls continue driving the pair higher, this could lead to a test of the 0.9975 hurdle, which is near the high of the 27th of July. That hurdle is also not far from the aforementioned downside resistance line that could slow down the acceleration and turn the pair back down again.

The RSI has moved above its 50 line and is pointing up, at the moment. This means that, at least for now, the rate could continue drifting north. The MACD is also helping out the bulls, as the indicator, even though below zero, has now shifted above its trigger line and is aiming higher.

Having said all that though, in order to get more bullish on this pair, we would like to see a clear close above the aforementioned downside resistance line. Such a break could open the path towards higher levels like the psychological 1.0000 zone. If broken, this could set the stage for a test of the 1.0025 barrier, or even the 1.0043 zone, marked by the peak of the 19th of July.

As for the Rest of Today’s Events

During the European day, we get the final manufacturing PMIs for July from several European nations and the Eurozone as well. As usual, the final prints are expected to confirm the preliminary estimates.

We get manufacturing PMI data for July from the UK as well, just a day ahead of the BoE policy decision. The forecast suggests that the index slid somewhat, to 54.2 from 54.4, but such a small slide is unlikely to alter market expectations with regards to a BoE rate increase the following day.

In the US, besides the FOMC decision, we get the ADP employment report for July. Expectations are for the private sector to have gained 186k jobs, slightly more than June’s 177k. The ISM manufacturing PMI for July is also due to be released and expectations are for a decline to 59.4 from 60.2 in June. We expect these releases to attract less attention than usual as investors may keep their gaze locked on the FOMC decision later in the day.

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