The US dollar tumble against all the other major currencies and Wall Street rallied after Fed Chair Jerome Powell poured cold water on expectations over a 75bps hike at the June FOMC gathering. Today, the central bank torch will be passed to the BoE, with investors anticipating a 25bps hike. If this is the case, they will quickly start looking for hints and clues with regards to the Bank’s future course for action.
Fed’s Powell Dismisses the Case of a Triple Hike in June
The US dollar traded lower against all the other major currencies on Wednesday and during the Asian session Thursday, losing the most ground against the risk-linked currencies Aussie and Kiwi.
This suggests that markets may have turned to risk-on at some point yesterday or today in Asia. EU shares traded slightly lower due to investors’ cautiousness ahead of the FOMC decision, but Wall Street saw strong gains, with Nasdaq rising the most. Today in Asia, appetite remained relatively supported, but much softer than in the US. China’s Shanghai Composite and Hong Kong’s Hang Seng gained somewhat, while Japan’s Nikkei and South Korea’s KOSPI stayed closed due to holidays.
The highlight and the catalyst behind the dollar’s slide and Wall Street’s advance, was the FOMC decision. The Committee decided to hike interest rates by 50bps as was broadly anticipated, but in the statement accompanying the decision there was no mention of anything indicating a faster pace of tightening, which may have come as the first disappointment if we take into account that there were strong expectations for a 75bps hike in June. Later, at the press conference following the decision, Fed Chair Powell said that there is a broad consensus that 50bps hikes should be on the table at the next couple meetings, pouring more cold water on the idea that even larger rises could be possible.
Remember that, yesterday, we noted that anything pointing a slower tightening pace than the market has been anticipating could result in a decent slide in the US dollar, and this is what happened. However, we also said that, conditional upon the Fed staying more aggressive than some other major central banks, we would consider that retreat as a corrective setback before another leg of buying. With Powell saying that they are absolutely prepared to move policy to restrictive levels if needed, meaning raising interest rates above their estimated neutral level, we stick to our guns.
We believe that the US dollar could make a comeback at some point soon, and among the currencies we expect to feel that heat are the Japanese yen, the euro, and the pound. At its latest gathering, the BoJ defended its ultra-loose policy, while even the more optimistic participants expect the ECB to deliver its first rate hike in July, and the anticipated size is of only 25bps. With regards to the pound, we have a BoE meeting today, and the consensus is for this Bank to also lift interest rates by only 25bps. In other words, the Fed remains in the group of the more hawkish central banks, if not the most hawkish (We will have to get more clues on how the BoC, which also appeared hawkish at its latest gathering, is planning to proceed moving forwards).
EUR/USD – Technical Outlook
EUR/USD traded yesterday, after the FOMC decision and Chair Powell’s press conference, breaking above the 1.0580 barrier, but failing to reach the next resistance, at 1.0655. Overall, the rate remains below the downside resistance line drawn from the high of March 31st, and thus, we will consider the near-term outlook to still be negative.
Even if the rate climbs a bit higher, we do expect the bears to jump back into the action from near the 1.0655 barrier, or the 1.0695 zone, marked by the inside swing low of April 25th. This could result in another slide and another test near the 1.0470/90 zone, the break of which will confirm a forthcoming lower low on both the 4-hour and daily charts and may see scope for declines all the way down to the 1.0350 territory, which provided strong support back in December 2016 and January 2017.
We will abandon the bearish case only if we see the pair climbing all the way back above the 1.0760, a territory which acted as a decent support on April 14th and 19th. The bulls could get encouraged to test the 1.0845 barrier, the break of which could extend the advance towards the 1.0935 territory, marked by the high of April 21st. If that barrier doesn’t hold either, then we are likely to experience extensions towards the inside swing low of April 1st, at 1.1025.
Will the BoE Deliver a Dovish Hike Today?
As we already noted, today, the spotlight is likely to turn to the Bank of England. It is a Super Thursday, as besides the decision, the statement and the meeting minutes, we also get the quarterly inflation report and a press conference by Governor Andrew Bailey.
At its latest meeting, this Bank decided to lift rates by another 25bps, as it was widely expected. However, what came as a surprise was the 7-1 voting, with the dissenter calling for no increase at all. Remember that at the February gathering, officials lifted rates by 25 bps as well, but the vote was 5-4, with the dissenters calling for a 50bps increase. Compared to that, March’s decision suggests a more cautious approach.
The consensus for this gathering is for another 25bps liftoff, with market participants seeing the case for a dissenter this time as well. If this is the case, the market reaction is likely to come from the statement, the minutes, and especially the inflation report. Updated inflation and growth forecasts, as well as rate-path projections, could well signal whether investors’ expectations are reasonable or not. According to the forward curve of the OIS (Overnight Index Swaps), investors see interest rates climbing above 2.25% by year end. So, anything more hawkish, or just confirming that could support the pound, while the opposite may be true in case the Bank’s projections are more cautious. Bearing in mind the relatively cautious stance the Bank adopted last time, and also fears of a technical recession due to the adverse effects of the latest energy shock on the UK economy, we see the latter case as more likely. In other words, we expect a dovish hike and a slide in the British currency.
GBP/USD – Technical Outlook
GBP/USD also moved higher after the FOMC decision, but the advance was limited near the 1.2635 barrier. Today, the pair reversed south again, giving back some of the Fed-related gains. The pair has been trading sideways since April 28th, but the prevailing trend remains to the downside in our view. Thus, we see decent chances for the slide to continue, and a dovish BoE could add credence to that view.
A break below 1.2410 will confirm a forthcoming lower low on both the 4-hour and daily charts and may extend the prevailing downtrend towards the 1.2250 territory, defined as a support by the low of June 30th, 2020. If the bears are not willing to stop there, then we may see them diving towards the low of May 18th, 2020, at 1.2080.
On the upside, we would like to see a move above 1.2700, marked by the inside swing low of April 25th, before we assume that the bulls are in full control. This could initially test the 1.2775 zone, marked by the high of April 26th, the break of which could encourage advances all the way up to the 1.2975 zone, marked by the inside swing low of April 13th.
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