FOMC minutes hit USD, GBP at year highs pre-BoE

Market Brief

The FOMC minutes intensified downside pressures on USD. Although all members agreed to drop existing thresholds (unemployment & inflation) for the first rate hike, minutes didn’t reflect any concrete comment on Yellen’s “6 months” after tapering ends to proceed with the first hike. Some participants prefer keeping the rates low as long as the inflation remains below 2%. The US 10-year government yields retreated below 2.70%, the DXY hit three week low (79.542).

GBP/USD extends gains to 1.6820, a stone’s throw lower than the previous year high (1.6823). The BoE will announce policy today and is likely to keep the bank rate stable at the historical low of 0.50% and the asset purchases target unchanged at GBP 375bn. We do not expect the BoE decision to significantly impact the current bullish dynamics in GBP-complex. The bullish momentum in GBP/USD intensifies, option bids trail above 1.6640/1.6700/1.6725 and 1.6800 for today’s expiry. A major resistance stands at 1.7043 (05/08/2009 high). EUR/GBP consolidated losses at the tight range of 0.82410/510 in Asia, trend and momentum indicators remain comfortably bearish suggesting extension of weakness towards 0.82042 (March 5th low).

The sentiment in EUR/USD turns cautiously bullish in continuation of USD weakness. EUR/USD rallied to 1.3871 despite expectations of a potential QE in the foreseeable future. The MACD (12, 26) turned positive post-Fed minutes rally and will remain positive for a daily close above 1.3815. The key resistance stands at 1.3967 (Mar 13th & 2014 high).

China printed USD 7.7bn trade surplus in March, the exports contracted by -6.6% (vs. -18.1% in Feb) while the imports slid by -11.3% (vs. +10.1% in Feb). The Chinese Premier Li said not to plan short-term stimulus plan to deal with short-term vol, adding his will to further open the capital market and service industries. USD/CNY spiked to 6.2130 early in Asia; Hang Seng and Shanghai’s stocks rallied 1.48% and 1.84% (at the time of writing) perhaps on Li’s comments on more economic freedom.

The Australian economy added 18’100 new jobs during March (vs. 2.5K exp. & 47.3K last). The unemployment rate retreated from 6.1% to 5.8%, yet the participation rate declined from 64.9% to 6.7%. AUD/USD advanced to 0.9400 post-FOMC minutes, corrected to 0.9371 on China exports then rallied to 0.9440 on stops (above 0.9400). The 30-RSI now stands at the overbought region (75%). The next key resistance stands at 0.9499/0.9500 (Fib 76.4% on Nov’13 – Jan’14 pullback & psychological level).

On a similar pattern, NZD/USD hit our 0.8745 target before corrective gains jumped to limit the upside. The short-term trend turns positive; the MACD will suggest the extension of gains for a daily close above 0.8675. Given the overbought conditions (RSI at 69%), a downside correction would be healthy at this levels.

The BoE will announce policy at 11:00 GMT. The economic calendar consists of French February Industrial/Manufacturing Production m/m & y/y, French and Swedish March CPI m/m & y/y, Norwegian March CPI and PPI m/m & y/y, ECB Monthly Report, Italian February Industrial Production m/m & y/y, Canadian February New Housing Price Index m/m & y/y, US April 5th Initial Jobless Claims & March 29th Continuing Claims, US March Import Price Index m/m & y/y and US Monthly Budget Statement.