Fed Hike Hype Growing, USD Gains
Forex News and Events
Yellens comments support hike but watch data
This will be a big week for enforcing expectations for a Fed summer rate hike, even providing granularity of either June or July. Speaking on Friday, Fed Chair Yellen sounded significantly less cautious on the possibility of a rate hike in the near terms. In our view, the market perception that is the FOMC is closer to a 25bp rate hike as long as the economic data maintains its steady strength. However, Yellen’s lack of clarity on timing and cautious assessment of the economy makes us wary of jumping on the rate hike bandwagon. On the state of the US recovery Yellen stated that the “economy is continuing to improve, we saw weak growth in first quarter of year. It looks to be picking up from data we monitor.” In regards to the policy path "I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate." However, this vagueness of “coming months” could also easily suggest Q4 2016. Despite, the growing hype we retain our expectations for a Nov/Dec rate hike based on the weak international demand weighing on the domestic conditions. We stress that similar healthy economic data and hawkish comments were made last September, yet the Fed held off (opting for a cautious December increase). The burden-of-proof now falls squarely on incoming data.
Globally, the Fed would like to see further recovery in China as a critical engine of growth. China PMI will deliver indications on the trend of economic activity. The soft in regional Asian activity suggests that both NBS and Caixin PMI risk weakening, which could easily spook investors worried about the stabilization of the Chinese economy (triggering broader risk aversion trading). In the US, following last week’s soft reads, manufacturing ISM, is likely to cross below the critical 50 level as external demand contracts. The US employment report on Friday, will be critical as the last major data point prior to Yellen’s 6th June speech. Following the last NFP read which decelerated to 160k, deeper deterioration in labor markets could signal incoming slowdown (NFP consensus 170k) and keep the Fed sidelined. Yet, a strong read will reintroduce further repricing of a hawkish Yellen and June hike. G10 volatility has been creeping higher as event risks such as Brexit and Fed tightening come into view. We suspect that softer data will decrease Fed rate hike expectations and allow USD bear to reposition shorts.
Gold slides lower to $1200 (Yann Quelenn)
Yellen's comments before this weekend had an important impact on gold after she declared that the Fed may raise interest rates within the next months. The price of gold subsequently declined below $1200 an ounce for the first time in three months as the cost of owning gold may increase. Despite the uncertainties of the Fed rate hike path, investors are ready to unload their gold positions knowing that the yellow metal will not pay interest. Silver is also taking a dive since it reached $18 an ounce at the beginning of May and is now below $16.
From our vantage point, while we remain very skeptical regarding a raise of US rates, we also think that the era of low interest rates may push emerging markets to shift their reserves into gold from dollars. Indeed, US bonds have limited upside as the US economy has already massive debt while gold has better potential. This is also a reason why we remain bullish on gold and silver and we rather see the ongoing bearish retracement as a market overreaction to the Fed's monetary policy.
The Risk Today
EUR/USD is heading towards 1.1100 within the downtrend channel. Hourly resistance is located at 1.1227 (24/05/2016 high) and 1.1349 (17/05/2016 high). Hourly support can be found at 1.1058 (16/03/2016 low). The technical structure suggests further downside moves within the downtrend channel. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD is still bouncing back from 1.4700. The pair has failed to reach hourly resistance at 1.4770 (03/05/2016 high). Hourly support is given by the lower bound of the uptrend channel and by 1.4404 (15/05/2016 low). Expected to show renewed bullish momentum toward resistance at 1.4770. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY is going higher. The pair has broken hourly support at 110.59 (20/05/2016 high) and hourly support at 108.72 (18/05/2016 low). Expected to show further weakening towards 108.72 as the medium term momentum is oriented downwards and the technical structure suggests a further strong bearish move as the medium-term momentum should prevail. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is trading higher within the symmetrical triangle. Hourly resistance can be found 1.000 (phychological level) while hourly support is given at 0.9872 (26/05/2016 low). Expected to show a continued bullish move. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias since last December.