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US dollar slides on Fed statement

Investors continued to exude positivity as markets in Europe closed higher yesterday, boosted by more gains in commodity prices. 

Copper prices hitting two-year highs, while crude oil touched their highest levels in eight weeks after US inventories saw a draw of 7.5m barrels, the fourth week in succession that stocks have declined by more than 4m barrels.

While the gains over the past few days are a welcome sight for oil producers, prices back above $50 could well prompt more US shale production, which could limit further upside, particularly since we are trading in sight of, and below the long term 200 day MA.

US markets again managed to post new record highs yesterday, as earnings announcements broadly tended to beat expectations, as investors once again continue to ignore the political goings on in Washington DC.

While the US administration continues to be dysfunctional with no imminent prospect of any type of reform or stimulus package, markets appear to be taking comfort in the fact that the US dollar has declined over 8% thus far year to date, and in the process helped boost the earnings potential of those companies who conduct huge amounts of their business overseas.

While the weaker US dollar appears to be helping US companies, the stronger euro is having the opposite effect on European companies who are finding that their export competitiveness is starting to erode which may help explain why we could see a slightly lower open in Europe today with the euro moving back towards levels last seen at the beginning of 2015.

As expected last nights Fed meeting came and went without much fanfare, and without any surprises. The only changes of note were in relation to the wording with respect to the timing of when officials would look to begin the task of paring back the balance sheet. Instead of making reference to sometime this year the wording was altered to “relatively soon” though this had the important caveat of as long as the economy evolves as expected.

This would appear to suggest that the Fed might be looking at September to announce a possible start date, though given the dysfunctional state of US politics this date could slip given recent comments from President Trump that a debt ceiling spat and a government shutdown might be on the cards, at around that time.

Before that we do have the annual Jackson Hole central bank symposium at the end of August where we may well be able to glean some extra insight into the Fed’s thinking about inflation and wage growth, as well as the labour market.

The weakness of the US dollar has helped push the euro to its highest levels in two years, while the pound is close to levels last seen back in September last year. Yesterday’s UK Q2 GDP number was encouraging in that it was an improvement on Q1, however the data appeared to understate or contradict what the PMI data was telling us with respect to the manufacturing sector at the beginning of the quarter, while the services sector showed evidence of a pickup from a subdued Q1.

Today’s CBI retail sales data for July are expected to show a slight moderation to 10 from June’s number of 12.

On the US data front durable goods for June are expected to rise 0.4%, up from 0.3%, while weekly jobless claims are expected to rise to 240k from 233k.

Forex snapshot

EUR/USD – the euro continues to push up towards the 1.1800 level and 200 week MA. Support remains back at the 1.1610 level, while below that support at the 1.1480 area. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.

GBP/USD – has had another attempt at this month’s high at 1.3125, as we look to head towards the 1.3300 level. Currently finding support just above the 1.3000 level for now, with a drop below potential opening up a retest of the 1.2900 level. A move below 1.2900 opens up the 1.2700 area.

EUR/GBP – a brief dip to 0.8904 has seen the euro rebound, as the impetus for a move back to the 0.9000 starts to run out of steam. Last year’s high at 0.9300 remains possible, however a break below 0.8900 could well open up a move back to the support at 0.8870/80 in the short term.

USD/JPY – having found some support at the 110.60 area, the inability to move above the 112.30 area could keep us range bound. A move through 112.30 could look at a retest of the 113.20 area, while below 110.60 targets 109.80.


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