Fed Meeting
The Fed decided not to raise interest rates. According to the FOMC statement, they’re optimistic about how much the labor market strengthened and the economy grew in spire of previous rate hikes. In order to keep inflation within their 2% target, they’ll likely need to raise the base rate in September. At this point it seems only radical changes in the global economy could steer the Fed away from their ongoing interest rate policy. It seems the Fed feels that the US labor market has reached its upper limit, a state economists call full employment. In the end, the meeting gave the USD a powerful price boost.
Asia’s Descent
After a brief rising period, Asian indices are once again heading south. A combination of the trade war’s lingering effects and a series of mixed flash reports resulted in a powerful downwards trend. This was especially the case for the Shanghai and Hong Kong exchanges, both of which fell by abour 2% today. South Korea and Japan also experienced a decline of 1.6% and 1% respectively. Their only remaning companies that could improve on this market sentiment are Cognizant, Activision Blizzard and Kellogg, whose reports have not yet been released.
EURGBP
Of the many central bank events this week, today’s Bank of England (BoE) meeting is especially siginifcant, since it’ll likely end in a rate hike. Analysts expect a raise of 25 basis points, meaning a 0.75% increase of the base interest rate. On the other hand very few expect to see changes in the BoE’s quantitative easing program. Most likely they’ll keep their 425 million pound budget for purchasing treasuries. Although the inflation rate decreasing from 3% in 2017 to 2.4% in 2018 would suggest otherwise, a rate hike is more likely since this threshold still exceeds the base rate by a large margin. The main issue is that GDP decreased alongside inflation, meaning a rate hike would place an additional burden on the UK economy.
The pound has been steadily weakening against the euro since mid June. The pair’s most recent peak price was 0.8956 on June 20. From there price rebounded and found support at the 0.8866, reaching the upwards trendline. Since then, the 0.8897 resistance line and the 25% Fibonacci retracement level halted any upwards movement, while the upwards trendline prevented it from going lower. Price has been confined to this narrow area for approximately two weeks, however, today’s BoE meeting will likely cause a break-out. A rate hike would give the pound enough strength and momentum to break the trendline and reach the 0.8838 support line or possibly even lower. The euro on the other hand does not have much to gain from this interest rate meeting.
USDCAD
The USDCAD currency pair shows little reaction to yesterday’s Fed meeting. While the US dollar strengthened against most other major currencies the Canadian dollar not only held its ground, but even outperformed it. The CAD started showing signs of strengthening immediately after the interest rate meeting. Although the USD seems to be on the rise now, with both the previous trendline and the 200-period moving average broken on July 25, we can confidently state that we’re dealing with a downwards trend.
Now that price is below the 1.30 line and has tested the 1.2996 line three times in the past few days, a donwards trend seems more likely. In this scenario, the next potential stopping point is the 1.2918 line. The minimum requirement for an upwards trend is breaking the 1.3047 line. IN that case the 200-period moving average would become the new upper limit instead of any fixed resistance line.
Sincerely,
Laszlo | Market Analyst
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