Daily Commentary
 | 17/08/2017

FOMC minutes reveal an increasingly cautious Committee

• The minutes of the July FOMC meeting revealed an increasing level of concern among officials over the recent softness in inflation. For starters, more policymakers are now skeptical as to whether low inflation is indeed transitory. Perhaps more importantly, “several” participants indicated that the risks to the inflation outlook could be tilted to the downside, something not seen in the June minutes. Some officials even noted that given this increased uncertainty around inflation, the Committee could afford to be patient with further rate hikes. As for the Fed’s gigantic balance sheet, even though some members wanted to announce a starting date for normalization immediately at that meeting, most preferred to defer that decision until an “upcoming meeting”.

• The dollar declined on the news, as the Committee’s increasing anxiety around inflation probably pushed back expectations regarding the timing of the next rate increase. We think that the currency could remain on the back foot for a few days, given that there are no major data releases or events on the US economic calendar in the near-term to distract investors and alter this negative sentiment.

• EUR/USD rebounded ahead of the minutes, after it found support near the 1.1690 (S2) zone. The dovish tone of the minutes pushed the pair even higher, to break above the resistance (now turned into support) level of 1.1750 (S1). Even though the latest rebound may continue for a while and perhaps aim for another test near 1.1830 (R1), the recent break below the short-term uptrend line taken from the low of the 23rd of June suggests to us that the near-term outlook of the pair has turned neutral. Having said that, despite the near-term outlook turning neutral, as long as EUR/USD continues to trade above the medium-term uptrend line drawn from the low of the 17th of April, we consider the broader picture to still be positive.

Draghi is unlikely to deliver a new message next week; sources

• The euro tumbled somewhat yesterday, after a media report familiar with ECB sources suggested that ECB President Draghi will not deliver a fresh policy message when he speaks at the Jackson Hole economic symposium next week. This probably poured cold water on expectations that Draghi could provide some hints about an eventual exit from QE in his remarks. One source even stated that “expectations that this will be a big monetary policy speech are wrong”, according to the article.

• Indeed, Draghi signaling the next step in ECB policy at a non-monetary policy meeting would be strange, as he would be essentially committing to policy action ahead of time, and without necessarily having the blessings of the Governing Council. At the latest ECB meeting, he clearly stated that a discussion on tweaks to QE should take place in the “autumn”, suggesting we are likely to get some signals on stimulus changes either in September or October. Although a lot will depend on incoming data, we maintain our view that a likely scenario is that the Bank removes its QE easing bias at the September meeting, thereby laying the groundwork for a formal announcement in October that the pace of QE purchases may be reduced by the turn of the year.

• It’s not all bad news for euro bulls though. Since Draghi will probably not deliver major policy signals at the Jackson Hole, that means he is also less likely to use that speech as an opportunity to jawbone the euro, something that seemed quite likely prior to this media report. As such, this development does not change our outlook for the euro. We believe that it could continue to gain overall, though we would prefer to exploit further gains primarily against the weak GBP, which has been bleeding recently amid diminishing expectations for a near-term BoE rate hike and continued uncertainty over the ongoing Brexit negotiations.

• EUR/GBP spiked lower after this report, to hit support near the 0.9080 (S1) hurdle. Nonetheless, the rate rebounded in the following hours to find resistance at the 0.9145 (R1) level. The price structure on the 4-hour chart remains higher peaks and higher troughs above a short-term uptrend line taken from the lows of the 17th of July. Thus, we expect the bulls to seize control again soon and aim for another test near 0.9145 (R1). A clear break above that hurdle could initially aim for the 0.9190 (R2) barrier, marked by levels last seen in late October 2009.

Today’s highlights:

• During the European day, we get the UK retail sales for July and expectations are for both the headline and the core figures to have slowed, which could bring GBP under renewed selling interest. In Eurozone, the minutes of the ECB July meeting will be in focus. Even though this release is usually not a major market mover, we will go through the discussion surrounding the QE program for any clues as to whether the Governing Council is set to announce a reduction in its purchases soon. From the US, we get the Philly Fed business activity index for August and industrial production data for July.

• We have two speakers on the agenda: Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.

EUR/USD

• Support: 1.1750 (S1), 1.1690 (S2), 1.1620 (S3)

• Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)

EUR/GBP

• Support: 0.9080 (S1), 0.9050 (S2), 0.9000 (S3)

• Resistance: 0.9145 (R1), 0.9190 (R2), 0.9240 (R3)