With the major central banks quickly approaching their last interest rate decisions for 2017, fresh remarks from monetary policy officials may impact the FX market.
Reserve Bank of Australia (RBA)
The Reserve Bank is Australia (RBA) looks poised to carry the record-low cash rate into 2018 as ‘inflation remains low, with both CPI and underlying inflation running a little below 2 per cent,’ but it seems as though the central bank will gradually change its tune over the coming months as Governor Philip Lowe notes that ‘it is more likely that the next move in interest rates will be up, rather than down.’
The minor uptick in Australia’s 3Q Wage Price Index (WPI) is like to keep the RBA on the sidelines as ‘growth in housing debt has been outpacing the slow growth in household income for some time,’ and it seems as though the central bank is in no rush to start normalizing monetary policy as officials are ‘prepared to be patient.’ With that said, the RBA may continue to tame expectations for an imminent rate-hike, but the recent comments from Governor Lowe suggest that the board will switch gears in 2018 as the central bank head senses ‘wage growth has stabilized at a low level and it’s not going to fall further.’
As a result, the lack of urgency to normalize monetary policy keeps the broader outlook for AUD/USD tilted to the downside, but the pair may stage a larger correction over the coming days as the RBA prepares to move away from the record-low cash rate.
AUD/USD Weekly Chart
- A critical support barrier at 7476 represents the bullish invalidation level for the broader uptrend off the 2016 lows. A break below this threshold would shift the focus back towards 2017 open at 7200. That said, the immediate short-bias is at risk while above this mark with a breach / close back above 7730 needed to alleviate further downside pressure.
- Bottom line: We’ll be looking to fade weakness while above this key support confluence with a breach above the November range highs needed to get things going.
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Bank of Canada (BoC)
Even though the Bank of Canada (BoC) appears to be on course to keep the benchmark interest rate on hold in December, the central bank may continue to normalize monetary policy over the coming months as officials project‘inflation will rise to 2 per cent in the second half of 2018.’
After delivering two rate hikes in 2017, the BoC appears to be in no rush to implement higher borrowing-costs as ‘wage and other data indicate that there is still slack in the labour market.’ In turn, Governor Stephen Poloz and Co. may reiterate that the ‘Governing Council will be cautious in making future adjustments to the policy rate,’ but the central bank may unveil a more detailing hiking-cycle in 2018 as ‘less monetary policy stimulus will likely be required over time.’
With that said, the BoC may sound more hawkish over the coming months, and the transition in the policy outlook may continue to foster a broader shift in USD/CAD behavior as ‘the Bank estimates that the economy is operating close to its potential.’
USD/CAD Weekly Chart
- The immediate focus range for USDCAD has been 1.2540-1.3020 (200 & 52-week moving averages). We’re looking for a near-term resolution to this range with the broader risk still lower while below confluence slope resistance just below the 1.34-handle (bearish invalidation). A downside break once again targets the median-line (currently ~1.2380s) baked by the yearly low-week close at 1.2156 & 1.2048.
- Bottom line: Expect side-ways to higher price action while within this range with a break to determine the medium-term outlook in USDCAD.
Federal Open Market Committee (FOMC) Rate Decision
The Federal Reserve interest rate decision takes center stage in December as Chair Janet Yellen and Co. are widely expected to deliver another 25bp rate-hike.
With the FOMC on course to implement a December rate-hike, market participants may largely react to the updated projections from Fed officials amid the upcoming rotation within the committee. The FOMC is likely to reiterate that ‘economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,’ and the committee may stick to its current path of three rate-hikes per year asGovernor Jerome Powell is on his way to take the helm in 2018.
However, a growing number of central bank officials may trim the longer-run forecast for the benchmark interest rate as ‘several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already.’ In turn, the FOMC may find itself achieving the normalization cycle ahead of schedule, with the central bank adopting a less hawkish tone over the coming months as ‘a few participants cautioned that further increases in the target range for the federal funds rate while inflation remained persistently below 2 percent could unduly depress inflation expectations or lead the public to question the Committee's commitment to its longer-run inflation objective.’
In turn, the Fed may opt for a dovish rate-hike in December, with the dollar at risk of facing near-term headwinds should the central bank highlight a more shallow path for the benchmark interest rate.
DXY Weekly Chart
- The index reversed off parallel resistance early this month with the reversal attempting to break back below the long-term 200-day moving average at ~93.30s. A weekly close below this threshold would keep focus lower in the greenback with such a scenario targeting 91.93 and 2017 low-week/day close at 91.33. Broader bearish invalidation remains steady at 95.90 into the close of the year.
- Bottom line: The risk remains lower in the Dollar while below the parallel (red) with a break below the yearly close lows needed to mark resumption of the broader down-trend.
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Bank of England (BoE)
After delivering a dovish rate-hike in November, the Bank of England (BoE) may continue to prepare U.K. households and businesses for higher borrowing-costs as the central bank’s recent assessment ‘was conditioned on a market path that implied two additional 25 basis point increases in Bank Rate over the three-year forecast period.’
During the first stage of the normalization cycle, the Monetary Policy Committee (MPC) may follow a similar path to its U.S. counterpart as ‘a majority of MPC members had judged that, if the economy continued to follow a path broadly consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure, some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target.’ Despite the 7 to 2 split to remove the record-low interest rate, Governor Mark Carney and Co. stay on course to implement one rate-hike per year as ‘spare capacity appeared to have eroded, if anything, a little more rapidly than the Committee had anticipated in its August projections.’
With that said, the British Pound may continue to benefit from the shift in monetary policy, but the U.K.’s departure from the European Union (EU) clouds the broader outlook for the exchange rate as ‘Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.’
GBP/USD Weekly Chart
- Sterling broke above basic trendline resistance extending off the 2014 highs back in September before reversing off the 2016 high-week close at 1.3675. Price has continued to trade within this ascending pitchfork formation dating back to last year with cable rebounding off slope support this month. The focus remains higher while above the lower parallel (blue) / 1.3036 with a breach above the yearly high needed to mark resumption of the broader uptrend. Key support & broader bullish invalidation rests with the 52-week moving average / former slope resistance at ~1.28.
- Bottom line: Looking higher in British Pound while within this formation.
European Central Bank (ECB)
The European Central Bank’s (ECB) December meeting may generate limited interest as the ‘net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary.’
The decision to carry the quantitative-easing program into 2018 suggests President Mario Draghi and Co. will preserve the zero-interest rate policy (ZIRP) for the foreseeable futureas ‘measures of underlying inflation have ticked up moderately since early 2017, but have yet to show more convincing signs of a sustained upward trend.’ In turn, the central bank may continue to strike a dovish tone at the December meeting, with officials largely reiterating that ‘there was broad agreement among members that a very substantial degree of monetary accommodation was still needed for inflation pressures to build up and support headline inflation over the medium term.’
More of the same from the ECB may produce near-term headwinds for EUR/USD, but the narrowing threat of a euro-area breakup may fuel the broader shift in the EUR/USD behavior as the central bank starts to move away from its easing-cycle.
EUR/USD Weekly Chart
- Euro has continued to trade within this broad ascending pitchfork extending off the 2015 lows with price turning from parallel resistance back in September. The break below the 50-line initially had me looking for a deeper pullback towards the median-line, but price held above the 2016 high at 1.1616 this month and the subsequent rebound through the 50-line again has me inclined to look higher.
- Bottom line: Euro remains constructive while above the median-line / 1.1423 with a move higher targeting 1.2042 backed by the 50% retracement of the 2014 decline at 1.2167.
Bank of Japan (BoJ)
The Bank of Japan (BoJ) interest rate decision is likely to generate the least amount of attention as Governor Haruhiko Kuroda & Co. continue to embark on the Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.
The BoJ may merely attempt to buy more time in December as the central bank pledges to endorse ‘a wait-and-see stance for the time being until the policy effects materialize under the current framework,’ and it seems as though the board will continue to expand the balance sheet as ‘the Bank will be late in heading toward an exit, given that it started its monetary easing later’ than its major counterparts.
In turn, USD/JPY may continue to track the broad range from earlier this year, with the Federal Open Market Committee (FOMC) meeting like to have a greater influence on the near-term outlook for the exchange rate.
USD/JPY Weekly Chart
- USDJPY has continued to trade within a range after the initial January decline between 108-114.33. Price broke below the 100/200 day moving averages this week and keeps the focus on this broader range. A topside breach targets the yearly open at 116.98 backed by critical resistance at 120.18-121.12.
- Bottom line: a close above 114.33 or below 107.83 is needed to validate the broader directional bias here. This week’s break leaves the near-term focus weighted to the downside again targeting 108.73 and the range lows.
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--- Written by Michael Boutros and David Song, Currency Strategists