Major Currencies Forecasts - page 5
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EUR/USD Is A Fed Call For Now
In our ECB preview, we argued that the EUR risks from the ECB meeting were to the upside if Draghi was too vague and could not commit to any new policies, which turned out to be the case.
We do not expect a sustained EUR move higher, as markets know that the ECB will eventually extend QE beyond March 2017. However, the days when the ECB was able to weaken the Euro are over. QE does not come across as open-ended any more. It seems that Draghi has to fight for the continuation of the current policy framework step-by-step, which weakens its effectiveness with markets.
For now, EURUSD is a Fed call, as we have recently argued. Looking ahead, the ECB is becoming an upside risk for EUR/USD, and the central bank could even be heading towards BoJ-like challenges in the medium term, with EUR/USD on an upward trend despite QE.
If the US data remains mixed, this could suggest upside risks for our EUR/USD projections-currently at 1.05 by end-2016 and 1.10 by end-2017.
EUR/USD Pushes Lower Confirming Bearish Elliott Wave Structure
The most recent Elliott Wave Count published on Tuesday indicated that circle wave B completed at 1.1327 highs, and that the pair was ready turned lower in circle wave C and the broader downtrend that started at 1.1366 on August 18 was ready to continue. The pair was seen extending lower today following US data, confirming a three wave bearish structure from circle wave B highs.
Inflation data out of the United States today came in above expectations across the board, triggering broad-based US Dollar strength. The monthly figure rose 0.2% against an expected rise of 0.1% in August, while the core figure printed at 0.3% against an expected 0.2% and a prior reading of 0.1%. The annual figure was reported to rise 1.1% above the expected rise of 1.0%, while the core figure rose 2.3%, above the analyst expectations of a 2.2% rise. Inflation data has become increasingly important as labor data has now shown steady figures in the past few readings. Stronger inflation will put the Fed in a better position not only for the next rate hike, but there also has been some speculation that if inflation were to rise rapidly, the central bank would be forced to ramp up its timeline for normalization.
The prior wave count update indicated that the EUR/USD wave structure continues to point to a lack of bearish sentiment, and conviction of a continuation lower, as often seen in the early stages of a new cycle. With the bearish cycle expected to have resumed on August 18, the deep retracement in circle wave B showed that markets are not entirely convinced of a broader bullish cycle in the US Dollar, essentially indicating some scepticism in the US path of normalization, as a rate hike continues to be the most likely catalyst for the next leg lower in the pair. The price action today builds towards a higher conviction of US Dollar strength in the medium-term, as the exchange rate approaches circle wave A lows at 1.1131. A break of the low would set up a chart formation that provides a clear succession of lower highs and lower lows, and is likely to shift sentiment in the markets abruptly.
While the current wave count shows a higher probability of a downside break following today’s price action, traditional technical analysis, as well as fundamentals, point to a range in the early upcoming week.
The EUR/USD daily chart shows strong support at 1.1142, with the pair currently trading at 1.1152. The support zone held the decline in late August, triggering a subsequent recovery above the 1.1300 handle. The horizontal level also confluences with a 200-period daily moving average, strengthening the level. With the Fed meeting scheduled on Wednesday, a catalyst is lacking for a downside break of the major support area, and a range ahead of the meeting carries higher probability.
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British Pound Stronger v Euro and US Dollar BUT Forecast to Ultimately Turn Lower
The UK's Pound Sterling has bounced higher against the Euro and Dollar - looking ahead - can we expect further advances or will the 2016 grind lower extend?
Global stock and commodity markets start the new week stronger suggesting traders are hungry for risk.
These days, Sterling falls into the bracket of financial assets that can be considered risky and the currency is higher as a result.
The gains on global stock markets comes as traders continue to discount the prospect of a Federal Reserve interest rate rise being delivered on Wednesday, for now markets continue to favour December for that interest rate rise.
Nevertheless, we can already see where the potential shock factor of the week ahead lies - expect stocks to be sold, the Dollar to rise and the Pound to fall were the Fed to raise rates.
“The main thrust of this morning’s momentum likely arises from the low chances of a US rate rise on Wednesday evening. Fears that the Fed may be gearing up for a September hike sent the markets lower last week, so the growing suspicion that at the very most Yellen and co. will signal a pre-Christmas increase seems to have caused a wave of relief to envelop investors,” says Connor Campbell at Spreadex in London.
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Sep BoJ: Risks Now Firmly Skewed In The Direction of Disappointment And A Stronger JPY - Deutsche Bank
Past price action supports the idea that IF the BOJ were to pursue an ‘operation twist’ to steepen the JGB yield curve, via lower 2y yield with higher 10y yields, it will initially work in the direction of a slightly weaker JPY and support the Nikkei, and not contradict the BOJ’s other objectives to support Japan’s financial sector.
Twist operations however should not be directed at FX goals. Since 2009, an average week where the curve twists steeper is 3bps for 10y - 2yr JGBs, and this has only been associated with a 0.12% depreciation in the JPY TWI. Curve manipulation should get filed in the ‘fiddling around the edges’ folder, since the overall impact on the price of money will be negligible and will not change Japan’s growth and inflation profile meaningfully.
The intra-week response of a weaker yen in the face of an engineered steeper curve would almost certainly wear off quickly with the currency soon dominated by other factors.
The BOJ policy assessment is bound to provide at least a few intriguing insights, but all of this should get filed in the ‘fiddling around the edges’ folder, since the overall impact on the price of money will be negligible and will not change Japan’s growth and inflation profile meaningfully.
For all the earlier hope that the Fed and BOJ were both going to support USD/JPY, the risks are now firmly skewed in the direction of disappointment and a stronger yen.
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Forecasts for British Pound Against Euro, Dollar Upgraded as ABN Amro Admit to Being too Negative on UK Economy Following Brexit Vote
Pound Sterling is forecast to move higher from current levels against the Euro and Dollar by ABN Amro who have also nudged up their forecasts for the UK economy in light of recent data.
Pound Sterling is looking to test the next psychologically important level of 1.17 having recovered from its brief dip below 1.16 earlier in the week.
The bounce from these lows fits with our observation that the pair is likely to be bought on any forays below 1.16 as the pair appears to be settling into a sideways-orientated trading pattern.
Whether or not the Pound can stage a meaningful recovery from here remains to be seen, but one analyst says further upside is indeed likely.
Dutch bank ABN Amro have this week told clients they are upping their forecast targets on both GBP/USD and GBP/EUR.
Economists have also nudged up their forecasts for the UK economy.
ABN Amro’s decision to raise their forecasts were the result of stronger than expected economic data being delivered by the UK economy.
“The improved outlook on the economy and the fact that we no longer expect a BoE rate cut meant that we made significant upward revisions to our sterling view,” says analyst Georgette Boele at ABN Amro in Amsterdam.
Financial markets have also become less bearish on sterling.
The latest data of the Commitment of Traders report (futures market) show that speculators partially cut back net short sterling positions.
However, these net short positions are still extremely large and still show one of the largest short positions since these data were introduced in the early nineties.
What does this mean?
Boele explains:
“First of all, speculators have become somewhat less bearish on sterling.
“Second, they remain cautious and are not convinced yet that the UK economy and sterling have turned the corner. With positions being this substantial, other positive surprises in UK macro-economic data will likely result in an enormous squeeze of these net-short sterling positions.”
Such moves are likely to aid a recovery in Sterling.
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EUR: No Major Market Driver Next Week
Next week’s main focus will be on both the German ifo survey and Eurozone CPI.
Unless data surprises considerably, it appears unlikely that there will be any material impact on central bank rate expectations and the currency. If anything, it must still be noted that there is limited appetite for additional policy measures such as cutting the deposit rate further into negative territory. This is especially true as such steps would pressure the already fragile banking sector even further.
In an environment of stable rate expectations the single currency should continue to be driven by external factors such as global risk sentiment, which we believe will turn more unstable in the weeks to come. This is especially true as there is limited room of rising central bank easing expectations to compensate for weaker growth momentum and political risks in the US and Europe.
Could we see further gains for the Euro against Sterling this week? (Tom Holian)
Towards the end of the week Sterling has now hit its lowest level to buy Euros as rumours are rife that the UK is gearing up to start the negotiations to trigger Article 50 early next year.
Last week European Council President Donald Tusk claimed that in a meeting with Theresa May she told him that the UK is ready to start the plans to leave the European Union by February. However, the news story didn’t make too many headlines shorty afterwards which signals to me that perhaps he misunderstood her comments.
On Thursday night our very own Foreign Minister Boris Johnson who was a big catalyst in the campaign for the UK to vote for Brexit has also claimed that the UK will begin formal Brexit talks early next year and leave the EU by 2019. However, Number 10 have stated that ‘the decision to trigger Article 50 is hers alone’ as in Theresa May’s.
Clearly the task is extremely difficult and the uncertainty of when the talks will formally begin are likely to weigh heavily on Sterling Euro exchange rates and Friday’s falls for the Pound demonstrated what may happen to GBPEUR exchange rates if the uncertainty continues.
Next week the UK releases second quarter GDP data on Friday which will be closely viewed to see how the British economy performed in the run up to the vote and any signs of a slowdown could see Sterling fall even further against the single currency.
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The British Pound to Euro Exchange Rate Forecast for the Coming Five Days
The short-term trend lower in GBP/EUR will probably extend as outlook for euro remains positive whilst pound suffers from deteriorating sentiment associated with Brexit.
A now ingrained, short-term down-trend in the GBP/EUR conversion will probably extend lower over coming days our studies suggest.
As can be seen in the four hour chart below, Sterling pair continues channelling lower and basic trend observations suggest we must favour a continuation of the move
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4 Reasons Why USD Risks Remain Range-Bound Or Declines
The Fed provided strong signals in September it would hike rates at its December meeting, in our view, upgrading the balance of risks to "nearly neutral" and saying the case for a hike had strengthened. Market expectations for a December hike remain high at 60%, slightly higher than before the meeting, but the USD sold off over 1% in the aftermath. Importantly, the Fed revised down its "dot plots" for 2016-18, now seeing 1, 2, and 3 hikes, respectively (versus 2, 3, and 3 before, Chart 7). This slower pace calls into question the extent to which the Fed will provide the USD-positive policy divergence that supported the USD in 2014 and 2015.
We are growing more skeptical that significant USD upside will come from the Fed alone, and see risks the USD remains range bound or declines for the following reasons:
Dollar still correlated with rates but no longer pro-cyclical: The immediate response to the FOMC meeting this week was very telling. The USD rallied and the S&P 500 fell on an initial hawkish interpretation of the statement. The divergent price action underlines the shifting relationship between Fed hikes where the USD is no longer trading pro-cyclically. A stronger USD is no longer a sign of US growth, but a Fed tightening too quickly in the absence of strong data. So, while the USD’s correlation with Fed policy expectations remains near its highs at 60% (2m rolling correlation between DXY and USD OIS 6th contract), the failure of equities to follow along suggests any Fed-induced USD strength will be seen as a constraint on financial conditions. As such, Fed hikes will be slower, providing less upside impetus for the USD
Fed is sensitivity to USD moves: The Fed’s increased sensitivity since March 2015 also makes it likely they will shift their policy stance if any USD rally is not backed up by strong data. Governor Brainard has argued that USD strength was a key reason they dialed back hike expectations in 2015. She believes the over 20% rise in the tradeweighted USD is equivalent to a significant 200bps of Fed Funds rate increases.1 While the Fed has only hiked rates once, shadow interest rates have increased 300 basis points since mid-2014 helping to explain the dollar’s rally. However, the fact that much of USD strength was attributed to overseas easing (not better US growth) was something that caught the Fed off guard. Combined with the asymmetric risks the Fed sees in hiking rates too fast, their USD sensitivity will limit significant USD upside.
Policy divergence reduced, and BOJ/ECB facing policy efficacy questions: The downward revision in the dot plots of this week’s FOMC suggest the magnitude of policy divergence is shrinking. Additionally, the BOJ’s decision to focus on policy flexibility highlights the constraints its policy faces. The key for success will be generating inflation and lower real yields. We are skeptical of the BOJ or ECB’s ability to generate inflation and lower real yields, therefore, think this could also hinder the impact of the policy divergence theme, and potentially push the USD lower if it intensifies.
US data is too weak to justify consistent pace of hikes: The cumulative improvement in the labor market continues to underpin the case for Fed hikes. Importantly, despite payrolls growth of 232,000 on a 3m basis, the labor market is not forcing the Fed to hike with the unemployment rate stable and the labor force participation rate rising. Additionally, despite the pickup in core CPI, the Fed may argue that the moves have been driven by large increases in medical costs, which may not reflect stronger aggregate demand (Chart 9). Consistent with the Fed’s risk management approach to policy at the zero lower bound, this is one more factor that will make policy normalization extremely gradual. Stronger US data is a necessary condition for a significantly higher USD. With the market only pricing 32 basis points of hikes through end-2017, there’s room to re-price amidst relatively neutral USD positioning, but Fed caution could yet outweigh better data given the increasing divergence of views on the FOMC.
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