British pound remains in sell mode, calm markets await Fed
Trading in the forex markets is rather subdued today as the FOMC policy decision, dot plot and economic projections are expected. Markets could come back to life if there are any twists in the Fed’s projections. For now, Sterling remains in sell mode, although the momentum has waned a bit. The yen is also weak today, but it is only digesting some of this week’s gains. On the other hand, the Aussie is picking up slightly, along with the Kiwi, as risk sentiment stabilizes.
Technically, EUR / GBP is now approaching resistance at 0.8126 and the breakout will resume upward from 0.8448 to 0.8668 key structural resistance. GBP / JPY presses the key 149.03 support area and a sustained breakout would resume falling from 156.05 to 143.78 Fibonacci level. GBP / USD is also heading towards 1.3601 support and a breakout there would consolidate bearish momentum through 1.3570 support towards 1.3482 medium term support. The moves could come ahead of the BoE’s rate decision tomorrow, if the FOMC triggers some volatility in the markets.
In Europe, at the time of writing, the FTSE is trading up 1.38%. The DAX is up 0.72%. The ACC is up 1.22%. The German 10-year rate is up from -0.0085 to -0.321. Earlier in Asia, the Nikkei fell -0.67%. China Shanghai SSE rose 0.40%. Singapore Strait Times fell -0.49%. The 10-year JGB yield in Japan fell from -0.0038 to 0.036. Hong Kong was on vacation.
The Fed is not yet ready for tapering, some sneak peeks
No policy changes are expected from the FOMC today and the Fed is probably not yet ready to announce a tapering. President Jerome Powell would simply like to reiterate that “substantial further progress” has been “made on inflation”, and that there has also been “clear progress towards maximum employment”. In addition, it is appropriate to start shrinking “if the economy has developed broadly as expected.
An important point in the midpoint diagram, where two rate hikes have been written in pencil by 20223. For 2022, 7 out of 18 participants were anticipating one or two hikes. The overall picture could tip in the hawkish side if only one or two members advance their rate forecasts to 2022. At the same time, new staff economic projections will also receive attention.
Here are some suggested reads on Fed:
BCE Muller: We should be able to end the PEPP in March
ECB Governing Council Member Madis Muller said: “given the recovery we are seeing in the economy, as well as the outlook for inflation and above all extremely favorable financing conditions that we continue to having in the eurozone, we should be able to end PEPP in March as communicated and as the original plan was. He added: “If you are asking what is the most likely outcome, then for me personally it is the base case.”
Muller also argued that inflation could start stronger than the ECB forecast. “Looking at the possible factors that could push prices up and those that could push them down, the factors that push prices up seem to be stronger at the moment,” he said. “We are more likely to have inflation, for example, in 2023 above 1.5% rather than below. The same is probably true for the inflation forecast of 1.7% for 2022. “
However, “it would be a problem if there was a very pronounced cliff-edge effect at the end of the emergency pandemic procurement program,” he noted. “Part of the discussion we’ll have on how to phase out PEPP and what that would mean for asset purchases going forward.” A potential increase in the APP program was under discussion. But, “of course, the decision will depend on market conditions next spring and the economic outlook at that time.”
Ifo lowers Germany’s GDP growth forecast to 25% in 2021, raised to 5.1% in 2022
Ifo sharply lowered Germany’s growth forecast for 2021 from 3.3% to 2.5%. But the 2022 growth forecast has been revised up from 0.8% to 5.1%.
“The strong recovery from the coronavirus crisis, initially expected for the summer, is still postponed,” said Ifo chief economist Timo Wollmershaeuser.
“Industrial production is currently declining due to supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis. “
The BoJ holds its own, notes the constraints on the supply side
The BoJ left its monetary policy unchanged today. As part of the control of the yield curve, the key short-term interest rate is maintained at -0.10%. The 10-year JGB’s yield target is maintained around 0%, with no cap on bond purchases. The decision was taken by 8 votes to 1, with Goushi Kataoka dissenting as usual, pushing for a strengthening of the easing. He also pledged to closely monitor the impact of the pandemic and “will not hesitate to take further easing measures if necessary.”
The overall assessment of the economy was maintained as it “showed up as a trend” but “remained in dire straits” due to the pandemic at home and abroad. But he noted that some exports and productions have been “affected by constraints on the supply side”. Weaknesses have been observed in some industries with regard to fixed business investment. Employment and income “remained weak” while private consumption remained “stagnant”. The core CPI is around 0% and inflation expectations are “more or less unchanged”.
BoJ Kuroda: Consumption will strengthen, external demand remains solid
In the press conference following the meeting, BoJ Governor Haruhiko Kuroda said the recent drop in consumption was “unexpectedly.” But he remains optimistic about the outlook for consumption. He added that the drop was not due to lack of household income, but more to the pandemic which was preventing them from increasing spending. He added: “As the pandemic has subsided, consumption is expected to strengthen.”
Kuroda also said he expected “external demand to remain strong” and not expect a “clear slowdown” in US and Chinese growth. He added that real economic indicators, consumption and production were increasing very steadily in the United States. The misfortunes of Evergrande are perceived as the “purely” and individual stake of the company, and that of the real estate sector.
Australia leading index fell to -0.5% in August, more weakness ongoing
The Australia Westpac-MI leading index fell from 1.4% to -0.5% in August. Westpac said that “the Leading Index has held up surprisingly well during this downturn, but it looks likely that there is more weakness going on.” For example, commodity prices and equities should push the index further based on September’s developments.
Westpac does not expect RBA to change policy settings until February of next year. He expects asset purchases to be fully canceled by May / August next year.
Mid-day GBP / USD outlook
Daily Pivots: (S1) 1.3636; (P) 1.3665; (R1) 1.3688; Following…
The drop in GBP / USD from 1.3912 is still ongoing and the intraday bias remains on the downside for the 1.3570 / 3601 support area. A larger drop from 1.4248 should resume and the breakout of 1.3570 will target the key support level of 1.3482. A sustained breakout at this location will cause a larger bearish implication and target the 1.3163 Fibonacci level. On the upside, minor resistance above 1.3691 will bring the intraday bias back to the upside to 1.3912 resistance instead.
Overall, as long as the resistance at 1.3482 becomes support, we will continue to view the price actions from 1.4248 as a corrective move. That is, the uptrend from 1.1409 (2020 low) favors the recovery. A decisive breakout of key resistance at 1.4376 (2018 high) would indeed have long-term bullish implications. However, a sustained breakout of 1.3482 will cause at least a deeper drop to 38.2% retracement from 1.1409 to 1.4248 to 1.3164, or even further to 61.8% retracement to 1, 2493.
Update of economic indicators
|0:30||EUR||Westpac Leading Index M / M August||-0.30%||-0.10%|
|3:00||JPY||BoJ decision on interest rates||-0.10%||-0.10%||-0.10%|
|1:00 p.m.||CHF||SNB Quarterly Bulletin Q3|
|14:00||EUR||Consumer confidence in the euro zone Sep P||-6||-5|
|14:00||USD||Sales of existing homes August||5.89M||5.99M|
|2:30 p.m.||USD||Crude Oil Inventories||-6.4M|
|6:00 p.m.||USD||Fed decision on interest rates||0.25%||0.25%|