After FOMC, Politics Comes Into Play

Thu, 21 Sep 2017 11:52

Even if US President's first appearance at UN and renewed threat of US hurricanes curbed USD's up-moves during early-week, hawkish outcome of the FOMC meeting propelled the greenback to register noticeable gains at the end of Wednesday. However, the completion of Fed meeting isn't an assurance for a peaceful rest of the week as Theresa May's Brexit guidelines and elections at Germany & New Zealand are still left to entertain market moves. Additionally, EU Flash PMIs & Canadian consumer-centric data-points can offer some intermediate trade opportunities to investors.

Let us quickly analyze fundamental aspects of such critical events.

Last Week's Recap

During last week, upbeat US CPI & US President's diplomatic response to North Korean threats, coupled with receding tensions from hurricane Irma, helped the US Dollar Index (I.USDX) to overcome sluggish Retail Sales and Consumer Sentiment. Though, the star of the week was GBP which rallied heavily after the Bank of England (BoE) praised the idea of tighter monetary policy following a decade-long favor for loose stand and rising inflation. Further, the EUR refrained from registering gains due to absence of major economics while JPY and Gold plunged on strong USD and risk-on market sentiment. Additionally, Dollars of Australia and Canada declined with slack in Chinese details and weaker commodity basket but the NZD strengthened after latest polls showed ruling party's win in September 23 election of the New Zealand. At the end, the Crude prices maintained prior advances with resumption of US refineries and a dip in rig count numbers.

The Tale Of Present Week So Far

To restate the introductory paragraph, early-week market sentiment remained mostly against the US Dollar due to Trump's harsh words at UN and renewed threat of hurricanes but the FOMC's assurance for another rate-hike by 2017-end, coupled with signals to start trimming its $4.5 trillion balance-sheet as soon as next month, favored the US Dollar Index (I.USDX) to portray gains. On the other hand, the GBP initially lost some ground when BoE Governor refrained to share any more details on his last-week's optimistic statement but strong Retail Sales rejuvenated the Pound Bulls.

Moving on, the EUR recovered some of its latest losses after welcome ZEW Economic sentiment figures whereas NZD maintained its strength with latest forecast continue posing a victory for the ruling party. Furthermore, AUD and CAD were hurt by USD's gains wheras Crude gained on depleting inventory figures and concerns favoring global production-cut agreement to get extended beyond the previously discussed deadline. With all these, JPY and Gold continued trading southwards as Japanese PM's inclination for snap-election as early as next-month, no change in BoJ monetary policy and rising USD damaged these safe-havens.

What's Next?

Having observed outcome of some important events scheduled during the week, including FOMC, BoJ, US President's UN appearance and BoE Governor's speech, investors are almost done with economic-side. Though, political plays stand ready to offer another round of volatility to traders. Amongst them, Theresa May's Brexit guidelines on Friday and the elections at New Zealand and Germany during the weekend are likely key events to observe. Further, Thursday's US Philly Fed Manufacturing Index, Friday's EU Flash Manufacturing & Services PMI and Canadian CPI & Retail Sales can provide additional information that analysts might want to check.

Starting with some second-tier details, namely from US, EU and Canada, Philly Fed Manufacturing Index bears the consensus of posting lowest reading in ten months, to 17.2 from 18.9, whereas EU Flash Manufacturing PMI is expected to register 57.2 mark from 57.4 earlier and Services PMI may flash 54.8 figure compared to 54.7 previous. Further, Canadian CPI is expected to justify the BoC's latest rate-hike with 0.2% mark against 0.0% prior but a dip in Core CPI, to 0.4% from 0.7%, may disappoint CAD buyers while the Retail Sales bears the consensus of remaining unchanged at 0.1%.

While USD might keep bearing the fruits of FOMC and early-week housing market numbers, disappointing Manufacturing details might trim some of its latest gains. In case of the EUR, the regional currency initially enjoyed the ZEW figures and upbeat PMIs, coupled with Angela Merkel's easy victory, could further escalate its recovery. Furthermore, Canadian data-points have been strong off-late but the BoC has already announced a rate-hike and hence unless registering drastic changes into the consumer-centric figures, the CAD isn't likely to witness any further strong up-moves

Moving towards the political front, the Theresa May's Brexit guidelines on Friday become the first of such events. Off-late speculations concerning exit by some of the May's important party-members, like Boris Johnson, have triggered a tick in GBP but those rumors were later denied and restored Pound's strength. Hence, the speech from May will be closely observe to seek details of any progress on the Brexit's deal with EU, coupled with Britain's readiness to pay the separation payment, would be closely observed.

With the upbeat UK data-points and BoE's hawkish outlook helping the GBP, guidelines indicating easy Brexit could help the UK currency to remain strong for some more time. However, questions relating to separation payment and migration laws would be important.

The German election is more likely to become a non-event due to strong polls signaling Angela Merket's ruling Christian Democratic Union party's fourth successive victory over its nearest rivals of Social Democrats (SPD) as Germans do like the reform and command of Merkel over the EU. However, being the largest economy of Europe, any disappointments might have severe impact on the Euro.

Looking at the New Zealand election, the thing has been interesting recently as some polls showed a close margin between the ruling National Party and Labour Party. Even if eight straight years of expansion is what likely to help the ruling party to remain in power, some of the promises from Labour Party, like tax hike and infrastructure spending, make the election results more uncertain. However, none of the parties have gained outright majority since 1996 and hence need of taking supports from small parties become crucial for both the leaders even if they win the election. Due to this, how the winner acquires the residual support from other parties and on what conditions should be watched closely.

Should there be a clear victory of ruling party, even with tie-ups with some minor parties, NZD become capable enough to rally further as the New Zealand fundamentals have already been good and might force the RBNZ to drop its dovish stand.

Technical Outlook

The 1.1860-55 ascending trend-line continue being a strong support for the EURUSD, breaking which it can drop to 1.1680 while GBPUSD needs to clear the 1.3655 broader TL in order to flash 1.3710 else chances of its pullback to 1.3330 trend-line support can't be denied. Further, USDJPY's break of 200-day SMA might support it to challenge the 113.00 trend-line, breaking which it can rally to 113.50 and 114.35 but a break of 111.50 can again drag it to 110.30-35 region. Moreover, AUDUSD struggles with 50-day SMA level of 0.7940, clearing which it can re-test 0.7875 and 0.7830 with 0.8100 continue acting as strong resistance whereas NZDUSD is likely heading to 0.7460 with 0.7200 being important support. At the end, USDCAD must clear 1.2420-30 on a daily closing basis to flash 1.2580 on the chart but a dip below 1.2200 can again increases the importance of 1.2000 round-figure.

Cheers and Safe Trading,
Anil Panchal