All Eyes On The Fed

All eyes on the Fed

  • No change is expected in the policy rate from the 30-31 January FOMC meeting. Currently the market seems to have priced in the probability of the FOMC to remain on hold, at 95.0% as implied by the Feds Funds Futures (FFF). Thus market focus is expected to shift to the accompanying statement. We see the case for an upbeat assessment of the economy, despite the recent slowdown of the GDP growth rate. It could be the case, that a more hawkish tone will dominate the statement in order for the Fed to accommodate a possible rate hike in March. At this point, please be advised that the FFF currently imply a probability of 82% for a rate hike in March. Overall the US Dollar could strengthen, especially should the tone support the forward guidance of three rate hikes in 2018. Finally, please note that this will be Chair Janet Yellen’s last FOMC meeting. Also a number of the FOMC members will change as part of the Feds rotating system. It could be the case that the FOMC will have a more hawkish tone from now on as a result of that switch.
  • The EUR/USD moved in a sideways manner yesterday, staying well within the range set by the 1.2355 (S1) support line and the 1.2495 (R1) resistance line. The pair could continue to trade in a sideways manner over the short term, however there could be some selling pressures as the US dollar may strengthen with the release of various financial data and the FOMC rate decision. Also the EUR side of the pair could weaken as financial data, due out today could weaken the EUR. Should the pair come under selling interest we could see it breaking the 1.2355 (S1) support level and aim for the 1.2230 (S2) support barrier. Should it come under buying interest, we could see it breaking the 1.2495 (R1) resistance level and aim for the 1.2600 (R2) resistance hurdle.

Is Brexit going to hurt the UK economy?

  • A report prepared by the UK government showing that the UK economy will be hit in any Brexit scenario leaked yesterday. Government ministers tried to play down the importance of the report, however media persisted on the issue. The issue seems to be confirmed as U.K. banks may have limited access to the EU single market after Brexit as reported by various media sources, hence confirming EU’s chief Brexit negotiator Barnier’s recent statement. On the inner political front, Theresa May, may be facing a small rebellion within the Tory party. 48 votes are required to trigger a leadership contest within the Tory party. These should not be good news about the GBP as political instability may increase and should the negative headlines continue, the GBP could be weaken.
  • In contrast to yesterday’s forecast for a bearish market, cable posted some gains, testing the 1.4175 (R1) resistance line. We see the case for cable to trade in a sideways manner. Despite yesterday’s rise, we see the case for the pair to enter a slightly bearish market as the greenback side of the pair may strengthen by today’s fundamentals and financial data. Should the bulls take the reins of the pair’s direction we could see it breaking the 1.4175 (R1) resistance level and test the 1.4325 (R2) resistance barrier. Should the bears have the upper hand, we could see the pair breaking the 1.4040 (S1) support line and hover slightly below it.

As for today’s other economic highlights:

  • During the European morning we get France’s preliminary CPI rate for January, Germany’s unemployment rate for January, Eurozone’s preliminary inflation rate for January as well as Eurozone’s unemployment rate for December. We see the case for the negative effect of the inflation slowdown, of both France and the Eurozone to overshadow any positive impact of the German and Eurozone unemployment rates release. Later on we get Canada’s GDP data for November and the US ADP National Employment indicators which could support the greenback. Also, we get the US Crude Oil inventories figure which is expected to carry a positive sign for the first time in a long period. Last but not least as mentioned in the analysis before, we get the FOMC’s interest rate decision. As for speakers, Riksbank Governor Ingves speaks.

GBP/USD

GBP/USD 31 JAN 2018

Support: 1.4040(S1), 1.3875(S2), 1.3785(S3) Resistance: 1.4175(R1), 1.4325(R2), 1.4460(R3)

EUR/USD

EUR/USD 31 JAN 2018

Support: 1.2355(S1), 1.2230(S2), 1.2100(S3) Resistance: 1.2495(R1), 1.2600(R2), 1.2770(R3)

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