Daily Forex Signals 06.09.2017

EUR/USD: Fed signals caution on rate hikes

Macroeconomic overview: The Federal Reserve is getting more dovish in the face of weak inflation data, reducing the likelihood of a third rate hike this year, which traders already see as very unlikely.

Three Fed policymakers on Tuesday expressed doubts about further rate hikes, with one influential policymaker calling for a delay in raising U.S. interest rates until the Fed is confident inflation will rebound.

A second Fed policymaker blamed the Fed's rate hikes to date not only for weak inflation, but also for undermining the recovery in the labor market that many policymakers including Fed Chair Janet Yellen have cited as they have justified raising rates.

Taken together, the comments from one third of the Fed's current policy-setting panel suggest that months of falling or flat inflation readings could scuttle plans to raise rates once more this year and three times next year. Fed policymakers next meet September 19-20 and are due to release fresh economic forecasts that may envision a flatter path for rate hikes ahead.

In a speech at the Economic Club of New York, Fed Governor Lael Brainard said the U.S. central bank should go so far as to make clear it is comfortable pushing prices modestly above the Fed's 2% target. The Fed's preferred gauge now stands at 1.4%.

Brainard drew a similar line in the sand a year ago, helping delay a policy tightening by a few months. Two weeks ago, the other sitting governor, Jerome Powell, said low inflation allowed the Fed to be patient on a hike.

Speaking later on Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari went even further. "Maybe our rate hikes are actually doing real harm to the economy," Kashkari said in a speech at the University of Minnesota's business school. Kashkari was the only Fed policymaker to dissent on rate hikes this year, though some Fed policymakers who are not voters this year have also expressed disagreement with the current rate hike path.

Robert Kaplan, president of the Dallas Fed, said he believes "we can afford to be patient" on rate hikes because growth is slow and so is inflation.

Investors are skeptical about another rate now and give a December rate hike a 27% probability, and only even odds of a rate hike by next June.

The European Central Bank decision is scheduled for tomorrow. Euro strength is unlikely to derail the euro zone recovery, leaving the ECB on track for a tapering announcement relatively soon. However, currency appreciation makes the ECB nervous because it complicates its job to revive inflation – we expect this to be reflected by slight downward revisions to the central bank’s CPI forecasts next week. All this has two implications. First, it strengthens our conviction that the tapering trajectory in 2018 will be “dovish”, with net asset purchases slowing to EUR 40 bn per month in the first half of 2018 and drawing to a close only at the end of next year. Outright cancellation of tapering plans remains a risk scenario related to further material currency appreciation, probably if the trade-weighted euro rises by a further 3-4%. Second, ECB President Mario Draghi is likely to start verbal intervention next week to try to put a lid on currency appreciation. The time of the formal announcement of the fate of QE remains a close call: as signaled by M. Draghi, it will be either next week or at the 26 October meeting. We think the latter is slightly more likely. Regardless of the exact timing of the announcement, what really matters is the final outcome: expect the ECB to reduce stimulus next year, but in a very gradual and open-ended fashion.

Technical analysis: The EUR/USD stays close to the short-term moving averages that remain positively aligned. A break of last Friday’s 1.1980 peak would concern bears and open the way above 1.2000. Much depends on tomorrow’s ECB statement, that is why we stay cautious.

EURUSD Daily Forex Signals Chart

Short-term signal: Buy at 1.1750

Long-term outlook: Bullish

 

AUD/USD: 0.8000 resistance remains solid

Macroeconomic overview: The AUD/USD backed away from stiff chart resistance around 0.8000 today after a report on domestic economic growth was not as exuberant as bulls had wagered on.

The Australian economy expanded 0.8% in the June quarter of 2017, much stronger than a 0.3% growth in the first quarter and matching market consensus. The solid expansion was mainly supported by strength in domestic demand and net exports.

In the three months to June, household consumption added 0.4 percentage points to growth, government spending contributed 0.2 percentage points to growth and exports added 0.6 percentage points to growth. On the other hand, non-residential construction subtracted 0.4 percentage points from growth and inventories detracted 0.6 percentage points from growth.

Final consumption expenditure rose 0.8%. Household spending increased by 0.7%, and government consumption expenditure increased by 1.2%.

Gross fixed capital formation expanded by 1.5%. Public investment rose 11.9%, driven by state and local general government (25.5%). This included the acquisition of the recently completed Royal Adelaide Hospital from the private sector. Private investment declined by 1.1%, due to non-dwelling construction (-7.7%). Partially offsetting the fall was machinery and equipment (2.9%). Total gross fixed capital formation contributed 0.4 percentage points to GDP growth.

Exports of goods and services grew by 2.7%.  Imports of goods and services rose 1.2%.

The changes in total inventories was a decrease of AUD 419 million in seasonally adjusted terms following a rise of AUD 1.982 million in the prior quarter. The fall was driven by  a rundown in wholesale trade inventories, the largest since June 2010, as grain wholesalers run down stock following the strong grain harvest this year. Offsetting the decrease was an increase in manufacturing inventories.

GDP data has shown no sign of rekindling inflation and, with plenty of spare capacity in the labour market, the Reserve Bank of Australia seems content to leave interest rates at record lows for months to come.

That was very much the view laid out by RBA Governor Philip Lowe in a speech late Tuesday. "It will be some time before we are at what could be considered full employment and before underlying inflation is at the mid-point of the medium-term target range," he declared.

Interbank futures imply virtually no prospect of a move in the 1.5% cash rate this year and around a 50-50 chance of a hike by June 2018.

Although the head of the RBA made it clear there were no plans to raise interest rates anytime soon we expect the AUD/USD to strengthen in the medium term. Prices for iron ore, Australia's single biggest export earner, have been supported by Chinese demand and copper hit its highest in three years this week.

Technical analysis: The AUD/USD broke above 0.8000 resistance yesterday but did not manage to close above that level. But the pair remains above short-term moving averages that are positively aligned. We think that another attempt to break above that key resistance is likely in the coming days.

 AUDUSD Daily Forex Signals Chart

Short-term signal: Long for 0.8150

Long-term outlook: Bullish

 

TRADING STRATEGIES SUMMARY:

FOREX - MAJOR PAIRS:

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FOREX - MAJOR CROSSES:

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PRECIOUS METALS:

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How to read these tables?

1. Support/Resistance - three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL - It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT - It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In - Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor - green "*" means high level of confidence (low level of uncertainty), grey "**" means medium level of confidence, red "***" means low level of confidence (high level of uncertainty)
5. Position Size (forex)- position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) - position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) - is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) - is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.

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