Daily Analysis | 01 November 2017
Today, the FOMC rate decision will take center stage and the forecast is for no change in policy. The consensus is supported by market pricing as well, with the implied probability for a hike at this gathering resting at a mere 2%. This is one of the “smaller” meetings that is not accompanied by updated forecasts or a press conference and as such, all of the action will probably come from the statement accompanying the decision.
The last time the Committee met, it surprised market participants by keeping its “dot plot” unchanged to signal one more rate hike in 2017, despite the recent soft patch in inflation. Since then, the headline CPI rate rose in September, but the core rate remained unchanged for the 5th straight month. Meanwhile, although the NFP print for the same month was negative, that may be seen as a transitory effect that mainly reflects the effects of the recent hurricanes.
Given these mixed developments, we don’t expect any significant change in tone from the Committee. Instead, we expect a more or less unchanged statement, which keeps the door wide open for a rate hike in December. However, that does not necessarily imply a stronger dollar in the aftermath. At the time of writing, the probability for a hike in December is already at 97%. This suggests that any potential signals that a December hike may not be a done-deal as the market currently expects, could even work against the dollar.
EUR/USD traded in a consolidative manner yesterday, staying slightly below the key resistance territory of 1.1660 (R1). Even though the pair rebounded this week from near 1.1585 (S1), the price structure still suggests a cautiously negative short-term outlook. Nevertheless, the direction of the forthcoming wave may be primarily determined by the FOMC decision tonight. We expect the rate to continue oscillating near 1.1660 (R1), waiting for the decision and if Fed officials provide any hints that a December rate hike is anything less than a done-deal, the rate could trade north. A break back above 1.1660 (R1) could open the way for our next resistance of 1.1730 (R2). On the other hand, if policymakers confirm market expectations, EUR/USD could slide again and perhaps aim for another test near 1.1585 (S1).
Zooming out to the daily chart, we see that the dip below 1.1660 (R1) may have signaled the completion of a head and shoulders top formation. That’s why we believe that the medium-term outlook may be somewhat negative as well. What’s more, even if the rate trades higher on the FOMC decision tonight, there is a decent probability for a lower high and thus, we would treat such a recovery as a corrective move.
- Support: 1.1585 (S1), 1.1490 (S2), 1.1380 (S3)
- Resistance: 1.1660 (R1), 1.1730 (R2), 1.1795 (R3)
Kiwi recovers as labour market tightens
The Kiwi dollar spiked higher overnight following the release of New Zealand’s employment data for Q3, recovering some of the losses it posted in recent weeks. The unemployment rate declined by more than expected, while the labor force participation rate rose by more than anticipated. Wage growth accelerated in line with expectations. Needless to say, these are likely to be very pleasant news for the RBNZ, which will announce its policy decision next week. In our view, the NZD could remain in recovery-mode on the back of these robust data, perhaps until the aforementioned policy meeting.
NZD/USD edged north overnight after New Zealand’s jobs data. The rate continues to trade within the downward sloping channel that has been containing the price action since the 18th of September. However, the fact that the rebound came from near 0.6830 (S2), the lower bound of the broader sideways range that’s been in place since the beginning of June 2016 makes us believe that the recovery may continue for a while. At the time of writing, NZD/USD looks to be headed towards the 0.6930 (R1) resistance barrier, where a decisive break could set the stage for more upside extensions, perhaps towards the round figure of 0.7000 (R2).
- Support: 0.6880 (S1), 0.6830 (S2), 0.6775 (S3)
- Resistance: 0.6930 (R1), 0.7000 (R2), 0.7050 (R3)
As for today’s economic data:
In the UK, the manufacturing PMI for October is due out and expectations are for the index to tick down. Although that could weigh slightly on GBP, the currency’s near-term direction may be decided primarily by the BoE signals tomorrow.
From the US, we will get the ADP employment change as well as the ISM manufacturing PMI, both for October. However, as is often the case, these releases may be overshadowed by the FOMC outcome later in the day, barring any major surprise in these prints.
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