Fed Was Divided on July Cut, ECB Minutes and EZ PMIs in Focus

9 min readAug 22, 2019

Yesterday, the minutes from the latest FOMC gathering showed that policymakers were more divided on the decision to cut rates than the 8–2 vote suggested. The dollar strengthened somewhat at the release, but the reaction was limited, perhaps as investors prefer to wait for fresh signals by Chair Powell at the Jackson Hole. Today, the spotlight is likely to turn to Eurozone’s PMIs for August, as well as the ECB minutes for clues as to how aggressively the Bank may decide to ease at its upcoming gathering.

FED MINUTES SHOW MEMBERS WERE DIVIDED ON JULY’S 25BPS CUT

The dollar traded higher or unchanged against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed only against SEK and NOK. The greenback gained the most versus NZD, CHF and GBP, while it was found virtually unchanged against CAD and JPY.

Once again, the performance in the FX sphere paints a blurry picture with regards to the broader market sentiment. In the equity world, major EU and US indices rebounded yesterday, recovering Tuesday’s losses and gaining even more. However, risk appetite softened again today, with Asian bourses trading mixed.

It seems that investors are reluctant to assume a clear direction ahead of the Jackson Hole. The Jackson Hole economic symposium is scheduled on an annual basis and is hosted by the Federal Reserve Bank of Kansas City. Participants include central bankers, policymakers, academics and economists from around the world, and there is a different topic each year. This year, the topic is “Challenges for Monetary Policy”. The symposium starts today, but the center of attention may be Fed Chair Jerome Powell’s speech tomorrow, as investors will be looking for clues with regards to the Fed’s future policy plans.

Yesterday, we got the minutes from the latest FOMC gathering, where the Committee decided to cut interest rates by 25bps and Powell noted that this was not the beginning of a long series of cuts, rather a mid-cycle adjustment in policy. The minutes confirmed Powell’s view, but they also showed that officials were more divided on the decision than the 8–2 vote suggested. They revealed that a “couple” of members favored a 50bps cut, while “several” favored no change at all. That said, they agreed that they did not want to give the impression that more cuts are under way.

The dollar strengthened somewhat, perhaps as investors realized that besides the two dissenting votes, there was more support for leaving rates untouched, from the non-voters. However, the reaction remained limited. Yesterday, we noted that we would treat the minutes as outdated as the meeting took place just a day before Trump’s decision to threaten China with fresh tariffs. It seems that market participants, who ramped up their bets with regards to further easing since then, held the same view. Following the latest round of tensions between the world’s two largest economies, but also the better-than-expected US inflation data last week, they may lock their gaze on Powell’s speech to see whether his view has changed or not.

According to the Fed funds futures, investors are fully pricing in another cut in September, while a third one is almost fully factored in for October. Thus, even if Powell appears more dovish than he did at the press conference following the last meeting, his remarks have to well satisfy market expectations in order for equities to extend their recovery and for the dollar to slide. Anything hinting at less easing than what investors are currently pricing in could have the opposite effect, namely, equities could come under selling interest, while the dollar and safe havens could gain.

NZD/USD — TECHNICAL OUTLOOK

NZD/USD has been slowly grinding lower since August 9th, when its short-lasting recovery hit resistance near 0.6500. Today, during the Asian session, the pair managed to hit support fractionally below the 0.6375 barrier, which is marked by the low of August 7th, and then it bounced back above it. The pair has been trading in a downtrend mode below all three of our moving averages since July 25th, and thus we would consider the near-term outlook to be negative.

A clear and decisive dip below 0.6375 would confirm a forthcoming lower low on both the 4-hour and daily charts and would bring the rate into territories last tested in January 2016. The next support could be seen at around 0.6345, which is the low of January 20th, 2016, the break of which may see scope for more downside extensions, perhaps towards the low of September 29th, 2015, near 0.6290.

Shifting attention to our short-term oscillators, we see that the RSI, already below 50, has turned down again and now looks to be heading towards 30, while the MACD lies within its negative zone, slightly below its trigger line. These indicators suggest that the bears may have the necessary momentum for pushing the rate below the key 0.6375 support.

On the upside, a recovery above 0.6425 may signal that sellers are not willing to extend the prevailing downtrend at the moment, and thereby allow another corrective recovery. Such a break could wake up some bulls, who may decide to push the battle towards the 0.6470 zone, the break of which may set the stage for extensions towards the key resistance of 0.6500, slightly above the peak of August 9th.

SPOTLIGHT TURNS TO EUROZONE PMIS AND THE ECB MINUTES

As for today, the main events on the economic agenda are the preliminary PMIs for August from several European nations and the Eurozone as a whole, as well as the minutes from the latest ECB policy meeting. The PMIs are expected to come on the soft side once again, with all three of the Eurozone indices expected to slide. Specifically, the manufacturing PMI is forecast to have declined further into the contractionary territory, to 46.3 from 46.5, while the services one is expected to have slid to 53.0 from 53.2. This would drive the composite PMI down to 51.2 from 51.5.

At its latest gathering, the ECB officially opened the door to lower rates and added that additional measures, such as a potential QE restart, may also be introduced. According to Eurozone money markets, following last week’s comments by ECB member Olli Rehn that “it is important that we come up with a significant and impactful policy package”, investors are now pricing in more than a 10bps cut in the deposit rate for the upcoming gathering. Specifically, they see the rate nearly 15bps lower. Thus, a soft set PMIs, combined dovish minutes, could add to speculation that the ECB would indeed proceed with a strong stimulus introduction in September, and thereby bring the EUR under selling interest.

EUR/JPY — TECHNICAL OUTLOOK

EUR/JPY has been trading in a quiet sideways manner since August 15th, between the 117.60 and 118.50 barriers. That said, in the bigger picture, it is still trading below the short-term downside resistance line drawn from the high of July 1st, as well as below a longer-term one taken from the peak of April 17th. Thus, although we would stand pat for now, we would consider the broader outlook of this pair to be cautiously negative.

In order to get confident on more declines, we would like to see a decisive close below 117.60, a zone that’s been acting as a decent floor since August 5th. Such a dip would not only confirm a forthcoming lower low on both the 4-hour and daily charts, but it would also bring the rate into territories last seen in April 2017. The bears could then get encouraged to drive the battle towards the 117.15 level, marked by the peak of April 21st, 2017, the break of which could carry larger bearish implications, perhaps paving the way towards the low of that day, at around 116.50.

Looking at our short-term oscillators, we see that the RSI turned back below 50 and now points down, which supports the notion for some further declines. However, the MACD lies near both its zero and trigger lines, enhancing our choice to stand pat and wait for a decisive dip below 117.60 before we start examining a downtrend continuation.

On the upside, a move above 118.50 may signal the initiation of a positive correction. We could then see a recovery toward the 119.00 level, which is the high of August 15th, where another break could allow extensions towards the crossroads of the 119.60 area and the aforementioned short-term downside resistance line taken from the high of July 1st.

AS FOR THE REST OF TODAY’S EVENTS

Apart from the Eurozone PMIs, we also get the preliminary Markit ones from the US. The manufacturing index is forecast to have ticked up to 50.5 from 50.4, while the services print is expected to have ticked down to 52.9 from 53.0. Initial jobless claims for the week ended on August 16th are also coming out and the forecast suggests a slide to 216k from 220k.

On the political front, after his visit to Berlin and his meeting with German Chancellor Angela Merkel, UK PM Boris Johnson will meet with French President Emmanuel Macron today, before attending the G7 summit on Saturday. However, we see low chances for this meeting to bear any fruit. Although Merkel suggested that a solution with regards to the Irish backstop can be found in the next 30 days, yesterday, Macron noted that renegotiation “is not an option that exists”.

As for tonight, during the Asian morning Friday, New Zealand’s retail sales for Q2 are due to be released. Expectations are for the headline and core qoq rates to have declined to +0.1% and +0.2% respectively, both from +0.7%. At its latest meeting, the RBNZ cut interest rates by 50bps, surprising the financial community which has been positioned for a 25bps decrease, with officials staying willing to ease further if needed. This was made crystal clear by Governor Adrian Orr at the press conference following the decision, who said that the 50bps cut does not rule out “further action”. Thus, although Assistant Governor Hawkesby said on Tuesday that the big rate cut reduces the chance for unconventional measures, lackluster retail sales are likely to keep the door wide open for more rate cuts in the months to come.

We also get Japan’s National CPIs for July. The headline rate is expected to have declined to +0.5% yoy from _0.7% yoy, while the core one is anticipated to have remained unchanged at +0.6% yoy. The case for a slowing headline inflation and an unchanged core print is supported by the Tokyo CPIs for the month, which moved in a similar fashion. At their latest meeting, BoJ policymakers kept their ultra-lose policy unchanged and maintained the forward guidance that the current extreme low levels of interest rates are likely to stay unchanged “at least through around spring 2020”. They also added that they “will not hesitate to take additional easing measures if there is a greater possibility that the momentum towards achieving the price stability target will be lost”. Thus, further slowdown in inflation, already well below the BoJ’s objective, would increase the chances for additional easing.

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Originally published at https://www.jfdbank.com on August 22, 2019.