Uncertainty over Fed policy path as dollar slips back again

Market Overview

Jerome Powell has an incredibly tough job. As the Fed has cut rates for a second time, the FOMC chair is being battered from all sides. Dissenters at both ends of the spectrum, whilst also fielding a constant barrage of snipes from a President who is by convention supposed to keep out of monetary policy decisions. The rate cut has come with deeply divides on the views of the FOMC, as shown on the spread of the dot plots. The dots suggest that all things remaining equal, the Fed may not be cutting anymore in 2019 or even 2020. The prospect of this being a “mid-cycle adjustment” (as Powell referred to the cut in July) could still ring true. The initial reaction of yields higher and dollar strength has just petered out slightly this morning. Looming in the background is the progress of the US/China trade dispute. A worsening outlook for business fixed investment and exports are chief reasons behind the Fed cuts. For now, there is an uncertain feel to the Fed’s next move, but if the October meetings of the US/China trade delegates are unsuccessful then there could easily be need for further cuts as the global outlook would deteriorate further. Fed funds futures are suggesting another cut by December is still likely. However, for now the Fed outlook is decidedly mixed. This is leading to a lack of direction on major markets such as EUR/USD and gold. This morning we are seeing a big move lower on the Aussie after Australian unemployment increased to 5.3% (5.3% exp, 5.2% last), but also included an unexpected decline in full time unemployment. The Bank of Japan monetary policy decision  to stand pat once more comes as no surprise (no change expected at -0.1%), although the yen is still strengthening.

Wall Street closed in positive territory after a strong rebound into the close, with the S&P 500 +1 tick at 3007, whilst US futures are slightly lower at -0.3%. In Asian markets there is a degree of support forming with the Nikkei +0.3% and Shanghai Composite +0.2% higher. In Europe there is more of a cautious look to the opening moves, with FTSE futures -0.3% and DAX futures -0.2%. In forex trading, there is a consolidation to EUR and GBP, whilst JPY is a big outperformer (post BoJ) and AUD a big underperformer (post Aussie unemployment). In commodities, gold is looking to rebuild support again, whilst oil has ticked slightly higher after another day of retracement lower yesterday.

Monetary policy is again in focus today with the SNB and Bank of England both on the economic calendar. The Swiss National Bank monetary policy is at 0830BST which is expected to once more stand pat at -0.75%. The Bank of England rates decision is at 1200BST and is also expected to hold rate steady at -0.75%, whilst the minutes are expected to show this to be a unanimous decision by the MPC. Into the US session the US Current Account is at 1330BST and is expected to improve marginally to -$127.8bn in Q2 (from -$130.4bn in Q1). Weekly Jobless Claims at 1330BST are expected to tick back higher to 213,000 (from last week’s low level of 204,000). The Philly Fed Business Index is at 1330BST and is expected to drop back to +11.0 in September (from +16.8 in August). Existing Home Sales at 1500BST are expected to decline by -0.4% to 5.37m in August (from 5.42m in July).

 

Chart of the Day – EUR/AUD

The euro has been a real struggle for outperformance on major crosses in recent weeks. Against the surging Aussie, through August into September, the euro was dragged back towards 1.60 big figure. However, support has now been decisively forming. The corrective momentum of late August into September has  dissipated and the market is back into rally mode. This comes with a higher low at 1.6015 above a key low at 1.5900. The market has also begun to form higher highs too as the move above last week’s high of 1.6165. This improvement is being seen through a confirmed bull cross on Stochastics, whilst RSI is at two week highs and MACD lines are also on the brink of a bull cross too. The inference is that a low has now been posted and a recovery is building. A strong bull candle is in prospect today and a consistent close above 1.6165 implies around 150 pips of additional recovery towards the resistance of the old mid-August low around 1.6300. Intraday weakness is now a chance to buy, with a continued run of higher lows something to keep the bulls in control. The hourly chart shows an initial support band between 1.6130/1.6180.

 

EUR/USD

A period of indecision continues for EUR/USD. With a series of key fundamental data points and announcements over the past week, EUR/USD has been pulled all over the place. The net result is that the market continues to trade broadly between $1.1000 and $1.1100. Once more, yesterday’s candle looked to be a retracement move of the previous session and the market has been pulled back lower on the FOMC, only to quickly settle again this morning. This is all leaving momentum indicators with an increasingly neutral configuration and the market with a lack of direction. The downtrend channel of almost three months is tending to be a guiding hand lower but the lack of conviction in the outlook of the past two weeks is remarkable. Closing either decisively below $1.0990 (negative and re-opens $1.0925) or above $1.1110 (four week high and base pattern formation) would give some direction. However, for now, EUR/USD remains a very difficult call.

 

GBP/USD

The rally has stalled in the past few sessions, unable to break the shackles of consolidation. A run of contradictory candlesticks is now breaking a two week uptrend. This has been a rather steep trend higher and any consolidation was likely to break it, but the bulls will still need to take note of slight loss of impetus in the rally. However, whilst the market remains supported above the $1.2380 key breakout the recovery is still in process. Momentum strength has just eased a shade, but RSI remains above 60, MACD lines rising and Stochastics strong above 80. We are still happy to buy Cable into weakness and the performance of sterling against the dollar in the wake of the FOMC decision was still relatively strong. The hourly chart shows this to be a minor pause for breath and is likely to be a chance to buy. Initial support at $1.2435. Resistance at $1.2525 is preventing further recovery towards the key resistance at $1.2580 and the implied base target of $1.2600.

 

USD/JPY

The bulls continued to run the recovery with an uptrend in the wake of the FOMC decision. Although there has been an initial drop back this morning, we would continue to see this as a chance to buy. A retreat to the uptrend of the past three and a half weeks gives an opportunity. There is twin trend support at 107.80 today with not only the near to medium term uptrend, but also the old four month downtrend (once broken to the upside, old downtrends then become a basis of support). Whilst the market continues to hold the breakout of the pivot band 106.75/107.50 we remain confident that the outlook remains positive. This also comes with the market still trading above the 21 and 55 day moving averages (which are now beginning to rise). Momentum has taken a slight hit The market continues to edge higher and sustain positive momentum. Posting another positive candlestick, Dollar/Yen remains on track for a test of the 109.00 next key resistance. Momentum remains strongly configured with the RSI into the mid-60s, MACD lines still rising and Stochastics above 80. Subsequently, intraday corrections remain a chance to buy. The three week uptrend is now supportive at 107.80 which is above the recent key breakout support band 106.75/107.50.

 

Gold

Gold is under increasing pressure following the FOMC decision last night. A recent consolidation between $1481/$1517 is still intact, however, a negative candlestick from last night’s decision has now breached the support of the four month uptrend. This move now opens pressure on the key support at $1481, which the bulls should certainly be concerned about. This support being breached would complete a big six week top pattern that would imply that the bulls had lost control of the market on a medium term basis. It would also suggest a target of around -$75 to the downside. This is a market in neutral configuration but the loss of several of the bullish technical signals is a worry. RSI is now hovering a shade below 50, whilst MACD lines are slipping back towards neutral. The stochastics are settled around 20. Trading between $1481/$1517 the market remains neutral, but there needs to be a positive response back above $1500 to help give the bulls some confidence back today.

 

WTI Oil

Oil continues to slide back following the huge spike higher on Monday. The retracement has been guided by yesterday’s surprise, albeit small, EIA inventory build. The market is now closing back inside the support band of the $57.45/$58.80 breakout which is now a gauge. A continued retracement back below this breakout would be a disappointment for the bulls and suggest that a move back towards the gap fill at $55.70. The 50% Fib level at $59.60 is now a basis of resistance too.

 

Dow Jones Industrial Average

Considering the initial reaction to the Fed decision was for Wall Street to slip, the strong reaction of the bulls into the close will give them added confidence into today. Posting a bull hammer candle that is also a bullish engulfing suggests the market has left some good support at yesterday’s low of 26,899. The bulls will look to use this move as a swing higher for a move to retest the recent high of 27,306 before the all-time high of 27,399 comes into play. It is interesting to see that during the slide back of recent sessions, there has only been one negative candle. This shows how the bulls have still got good control of the market and weakness is a chance to buy. Closing the gap at 27,193 today would further improve the outlook for renewed upside.