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EUR/USD: Looking To Get Long At 1.1250

  • The Federal Reserve held interest rates steady on Wednesday and indicated that moderate US economic growth and strong job gains would allow it to tighten policy this year, with fresh projections showing policymakers expected two quarter-point hikes by the year's end.

  • While the statement reiterated that further gradual rate hikes will likely be warranted, the FOMC members’ interest projections (“dots”) suggest that this “gradual” pace will be even slower than thought thus far. Accordingly, the median dot for year-end 2016 now stands at a mere 0.9%. That forecast implies two rate hikes, only half as many as projected in December. The median dot for year-end 2017 was lowered by 50 bp as well, to 1.9%. To be sure, the median hides a split right in the middle of the FOMC, as eight of the seventeen Committee members project three hikes or more for this year, while nine anticipate two or less. But we think that Chair Yellen and certainly Vice Chair Dudley are in the more dovish camp. This unequivocally increases the downside risks to our forecast of three 25 bp rate hikes this year – even as the fundamental situation has continued to improve in line with expectations. The fact that Kansas City Fed President Esther George dissented in favor of a rate hike at this meeting, cannot alter the overall conclusion that the FOMC has turned even more dovish.

  • In a press conference, Fed Chair Janet Yellen said it remained to be seen whether a recent firming in US core inflation, which excludes volatile energy and food components, would be sustained. Fed policymakers projected weaker economic growth. They marked down their forecast for inflation this year to 1.2% from 1.6%, but see it recovering to close to the central bank's 2% medium-term target next year. They lowered also their estimate of where the targeted lending rate would be in the long run to 3.30% from 3.50%. Fed policymakers also see continued improvement in the job market, with the unemployment rate expected to decline to 4.7% by the end of the year and fall further in 2017 and 2018.

  • The Fed had adopted a cautious approach at its last policy meeting in January, amid a selloff on financial markets, weaker oil prices and falling inflation expectations. As in its January policy statement, the Fed did not say directly how it regards the balance of risks to the US economy.

  • Interest rate futures data showed the odds of the Fed hiking in June fell to 43.8% from 53.6%. The first time the odds go over the 50% mark is now September.

  • Data released on Wednesday showed US factory output rose 0.2% last month, which was a little stronger than market expectations for 0.1% gain.
    Manufacturing has cooled over the last year, hit by slower overseas demand and several months of dollar appreciation. A steep decline in oil prices also hit the US energy sector, reducing demand in some factories. But the dollar has weakened recently and the outlook for US domestic demand has improved due to robust job growth.

  • In the 12 months through February, the so-called core CPI rose 2.3%, the largest gain since May 2012, after increasing 2.2% in January. The market had forecast core CPI to stay at 2.2% yoy.

  • But a 13% drop in gasoline prices, which offset both the increase in core CPI and a gain in food prices, lead to the overall CPI falling 0.2% mom last month. This drop resulted in the CPI increasing 1.0% in the 212 months through February, slowing after a 1.4% rise in January.

  • The USD fell across the board in the wake of the statement. Bond yields from two to 10 years dropped strongly, while stock markets rallied. Our EUR/USD buy offer was not filled yesterday, but we keep our long-term bullish outlook on this pair. We have placed a buy offer at 1.1250. The nearest strong resistance level is February high at 1.1375. We penciled in stop-loss of our position at 1.1150, just below the 7-day exponential moving average.


AUD/USD: Aussie Supported By Fed And Drop In Unemployment Rate

  • Thursday's report from the Australian Bureau of Statistics showed unemployment fell to 5.8% in February, when the market had expected it to stay at 6.0%. That owed much to a fall in the number of people looking for work since actual employment underwhelmed with an increase of just 300 in the month.
    Full-time employment rose a solid 15.9k, only to be almost completely offset by a drop in part-time jobs. Still, the monthly jobs numbers are notoriously volatile and the Reserve Bank of Australia tends to focus on shifts in the unemployment rate to gauge the health of the labour market.

  • Measures of demand for labour were also flashing green. A well-regarded survey of industrial trends released on Thursday showed strength in home building had boosted conditions to their best in two decades. The survey from the Australian Chamber of Commerce and Westpac Bank also found the outlook for the labour market at its strongest since the mid-2000s.

  • Interbank futures continue to imply around a 50-50 chance of a rate cut by August. We do not expect more rate cuts in the coming months.

  • Yesterday the US Federal Reserve signalled a slowdown in the planned pace of its policy tightening, sending the USD reeling. Asked about the Fed's move, RBA Assistant Governor Guy Debelle said practically every central bank in the world was keen to see a falling currency. He added: "We would like a lower Australian dollar. But we can't all have depreciating currencies," conceding it would be hard to engineer a decline in the Aussie.

  • Our long-term AUD/USD is in better shape after yesterday’s Fed statement. Technical analysis points to further rises in the coming sessions. We are looking to open short-term long AUD/USD position at 0.7570. If the order is filled, the target will be at 0.7800.


EUR/CHF: SNB Leaves Rates Unchanged, As Expected

  • The Swiss National Bank kept its target range for three-month Libor between -1.25 and -0.25%. It also maintained a charge on cash deposits of 0.75%. Repeating its pledge to intervene in the currency market if necessary to weaken the franc, the SNB also cut its 2016 growth forecast and inflation estimates for this year and next.

  • New SNB forecasts put Swiss economic growth this year at between 1% and 1.5%, compared to around 1.5% in its December forecast. The SNB cut its outlook for inflation this year to -0.8% from -0.5% previously. It expected a rise in inflation of 0.1% in 2017, down from 0.3% previously. For 2018, it saw inflation of 0.9%.

  • A muted market response for the franc to the European Central Bank's decision to cut rates and expand asset purchases last week had lessened the need for the SNB to act on rates . A rate cut further into negative territory would have drawn more criticism from banks, insurers and pension funds which have had to adapt to paying a deposit charge on portions of their cash holdings.

  • Currency markets showed little immediate reaction to the SNB rate decision today.

  • For now, we expect the SNB to maintain its wait-and-see stance concerning interest rate moves. Economic activity in Switzerland in the final quarter of 2015 was better than widely expected (0.4% qoq). However, a renewed currency appreciation would pose a threat to Swiss exporters and the tourism industry, and the SNB will certainly take this into account. Therefore, the SNB will not hesitate to continue with its FX interventions if necessary.

  • We keep our long EUR/CHF positions unchanged.


EUR/GBP: Osborne Announces Growth Downgrade

  • Britain's unemployment rate remained steady at a 10-year low of 5.1%, as expected, for the third consecutive month. British wages rose more than expected in the three months to January offering a glimmer of hope that the slowdown in wages in late 2015 has bottomed out. Total earnings of workers, including bonuses, rose 2.1% yoy in the

  • three months to January from 1.9% in the fourth quarter and vs. a forecast of 2.0%. For the month of January alone wages jumped 2.5%, the biggest rise since August, after a 1.7% rise in December. The Office for National Statistics said this could be due to changes in the timing of bonus payments in the financial services sector.

  • The BoE had estimated that wage growth would be 1.75% in the fourth quarter of 2015 and rise to 3% by the end of 2016, though past BoE wage forecasts have usually proved too optimistic.

  • Earnings excluding bonuses wages were 2.2% vs. 2.0% in the last three months of 2015 and against a forecast of 2.1%.

  • Forecasts for growth in the British economy over the next four years were downgraded, announced by Britain's Chancellor George Osborne in budget.
    Osborne said that revisions to growth forecasts since his autumn statement in November meant that growth in the economy this year was now expected to be 2% instead of 2.4%. Besides, growth forecasts were downgraded to 2.2% in 2017 (2.5% forecast in November) and 2.1% in each year after that. Previous forecasts for 2018 stood at 2.4% and 2.3% for 2019 and 2020).

  • Osborne also warned against voting to leave the European Union in the June 23 referendum.

  • Osborne has given himself two fiscal targets in his handling of revenue and finances to reach over the period of this parliament. In the Budget last summer, he set the target of government public sector spending being in surplus by 2019/20, and this Budget will see spending in surplus by GBP 10.4 billion then.

  • But his second target, of reducing the ratio of debt to GDP in each of the next five years will not be met, with upward revisions to the November figures in each of the next five years, hitting a height of 82.6% in 2016/17.

  • Osborne implemented a series of measures to stimulate spending, and to help businesses, beginning with an increase in personal income tax allowances for all taxpayers, raising the floor at which taxation starts to 11,500 GBP from 10,600 GBP. Corporation tax, currently at 20%, will be cut to 17% by 2020, and the main rate of corporation tax will be reduced to from 28% to 20%.

  • The North Sea oil industry has been hit by the large fall in oil prices, and Osborne moved to support the oil industry with a series of tax relief measures: the supplementary charge for oil and gas producers is halved to 10%, and the abolition of the petroleum revenue tax.

  • The Annual threshold for full relief on business rates for small firms was raised by Osborne from 6,000 GBP to 12,000 GBP and its higher rate from 18,000 GBP to 51,000 GBP, freeing 600k firms from paying the tax.

  • One of the most innovative tax moves was to set a levy on sugary drinks, rated by volume which could raise increase prices by up to 20% and bring in GBP 520 million in revenue. Osborne froze tax on beer, cider and spirits like whisky but he increased it in line with inflation on wine, which accounts for 36% of alcohol sales in the UK. Also, for the sixth year running, he froze any tax increase on gasoline tax.

  • Our long-term EUR/GBP long is in good shape today and large white candlestick line on Tuesday highlights the overall bullish structure. 7-day exponential moving average is above 14-day ema, which is also a bullish sign. The nearest resistance level is February high at 0.7928.

Our research is based on information obtained from or are based upon public information sources. We consider them to be reliable but we assume no liability of their completeness and accuracy. All analyses and opinions found in our reports are the independent judgment of their authors at the time of writing. The opinions are for information purposes only and are neither an offer nor a recommendation to purchase or sell securities. By reading our research you fully agree we are not liable for any decisions you make regarding any information provided in our reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise you to contact a certified investment advisor and we encourage you to do your own research before making any investment decision.

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