US CPIs in Focus Amid Fed Cut Bets, GBP Gains After Jobs Data

Risk appetite eased yesterday, after US President Trump said that he is the one holding up a deal with China. As for today, amid elevated bets with regards to lower Fed rates, investors are likely to lock their gaze on the US CPIs for May. The pound was yesterday’s main winner among the G10s, coming under buying interest after the better-than-expected UK employment data. Tonight, during the Asian morning Thursday, it’s the turn of Australia to release its jobs report. Given the RBA’s emphasis on the labor market, the report could well shape expectations around the Bank’s future course of action.

Risk Appetite Eases, Investors Lock Gaze on US CPIs

The dollar traded mixed against the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained against NZD, SEK, CAD, CHF and AUD in that order, while it underperformed versus GBP, NOK, EUR and JPY.

The somewhat stronger yen and the underperformance of the commodity-linked currencies suggests that risk appetite eased at some point yesterday. Indeed, although major EU indices traded in the green, the US ones finished their session virtually unchanged. The softer sentiment was reflected in Asian bourses as well, with Japan’s Nikkei 225 and China’s Shanghai Composite sliding 0.30% and 0.56% respectively.

The reason behind the pause in the recent equity rally may have been remarks by US President Trump that China wants to make a deal very badly and that he is the one holding up the deal. He also added that unless China goes back to the deal that was previously on the table, he is not interested in moving ahead. These comments come just a day after Trump threatened to immediately impose tariffs on the remaining imports from China if China’s President Xi Jinping does not attend the G20 summit later this month.

With China saying that they will fight to the end if the US wants to escalate tensions, we see it hard to get a deal at the G20 summit. Yesterday, US Commerce Secretary Wilbur Ross said that we may get some sort of agreement on a path forward, but certainly it’s not going to be a definite agreement. However, we believe that the market reaction after the summit will not depend on whether we get a deal or not. After all, the tumble we saw in equity markets during May suggests that investors have already dampened hopes over an imminent accord. Just positive language may be enough for boosting risk sentiment again. On the other hand, anything pointing to further conflicts may prompt investors to hit the risk-off button.

Having said all that, apart from headlines surrounding global trade, market participants are likely to keep their gaze locked on data and news regarding the Fed’s future course of action. Remember that last week, several Fed officials, including Chair Powell, hinted that they could reduce interest rates in order to avert a steep economic downturn, which alongside the US-Mexico deal have been the catalysts behind the latest recovery in market morale.

In this respect, today, the focus is likely to be on the US CPIs for May. The headline rate is forecast to have ticked down to +1.9% yoy from +2.0%, while the core one is anticipated to have held steady at +2.1% yoy. That said, bearing in mind that the headline PPI slowed by more than expected yesterday, and that the core PPI rate slid as well, we see the risks surrounding the CPI forecasts as tilted to the downside.

Following Friday’s disappointing NFPs, slowing CPIs may prompt investors to add to their already elevated bets with regards to lower US rates by year end. According to the Fed funds futures, market participants are nearly pricing in a 25bps rate decrease for August, while the probability for something like that happening as early as in July is 67%. Another cut is almost factored in for November. The dollar could come under renewed selling interest if this is the case, and once again the big question is how equity markets will respond. On Friday, when the US jobs data disappointed, Wall Street closed in the green, perhaps due to the logic that softer data strengthen the case for Fed cuts, which in turn are hoped to prevent a possible economic recession. Therefore, lower CPI rates could result in the same reaction.

USD/CAD — Technical Outlook

After breaking its long-term upwards moving trendline drawn from the low of February 1 stof 2018, USD/CAD drifted lower. The pair does occasionally show a few outbursts to the upside, but all of them are still maintained below the 1.3309 zone. Even though we might see a small push higher, as long as the rate remains below the above-mentioned long-term trendline, we will class any move higher as a temporary correction and stay bearish for a while more.

Looking at our oscillators, the RSI and the MACD, both support the idea of some further correction to the upside. If USD/CAD struggles to overcome the 1.3309 barrier, this could be a sign for the bears to step in again and drive the rate back down. This is when we will target the 1.3250 obstacle, marked by yesterday’s low, a break of which could send the pair slightly lower, to test the 1.3238 area. That area provided good support to USD/CAD on June 9 th.

On the upside, a break of the previously-mentioned long-term upwards moving trendline and a push above the 1.3366 barrier, marked by the high of June 7 th, could invite more bulls into the field and send the rate to its next potential resistance obstacle, at 1.3395. Another break, above 1.3395, could push USD/CAD further north. This is when we will aim for the 1.3430 level, marked by the high of June 5 th.

GBP Gains on UK Jobs Data, AU’s Employment Report Takes Turn

The pound was yesterday’s main gainer, coming under buying interest after the better-than-expected UK employment report for April. The unemployment rate held steady at its 45-year low of 3.8%, while average earnings including bonuses slowed by less than expected. Specifically, the yoy rate slid to +3.1% from +3.3%, while the forecast was for a decline to +2.9%. The excluding bonuses rate ticked up to +3.4% from +3.3%, instead of sliding to +3.1% as expectations suggested.

Under normal circumstances, this would make us confident that the BoE may hike sooner than previously thought. After all, this Bank appears to be the second most hawkish G10 central bank behind the Norges Bank. However, with the Brexit riddle still unresolved and the prolonged uncertainty leaving marks on the economy (as Monday’s data showed), we stick to our guns that the Bank will likely refrain from acting before the 31 stof October, the deadline of the extension the UK was granted in order to decide whether and how to exit the EU.

Yesterday, we noted that Monday’s disappointing data may have triggered a resumption in the pound’s prevailing downtrend, but the employment report came to save the day. It seems that the British currency could correct a bit higher, but we remain reluctant to trust any long-lasting recovery. Boris Johnson is still the frontrunner for replacing Theresa May, which keeps the probability for a no-deal Brexit well on the table we believe, while Monday’s disappointing data may have been just a taste of how things could turn out for the UK economy in case of such an exit.

As for today, UK MPs are likely to vote on a motion tabled by the Labour Party that will give them parliamentary control on June 25 th.Labour said that if the motion passes, MPs will be able to introduce legislation in order to prevent a no-deal outcome on October 31 st. If the motion passes, the pound may continue correcting north, but again, the likelihood of a chaotic divorce is unlikely to vanish in our view. Lawmakers have voted several times in the past against such an outcome and yet, the chances are still there. Remember that, apart from Boris Johnson, there are several other of May’s potential replacements who would leave the EU without a deal if needed.

Flying from the UK to Australia, tonight during the Asian morning Thursday, Australia’s employment report for May is due to be released. The unemployment rate is expected to have declined to 5.1% from 5.2%, but the net change in employment is anticipated to show that the economy gained 16.0k jobs, less than April’s 28.4k. When they last met, RBA policymakers decided to cut rates by 25bps, to +1.25% from +1.50%, and noted that they will continue monitoring developments in the labor market and adjust policy accordingly in order to support growth and the achievement of the inflation target over time.

Thus, investors may pay extra attention to this data set as they try to figure out whether and when the RBA will likely hit the cut button again. According to the ASX 30-day interbank cash rate futures implied yield curve, another rate cut is almost fully priced in for August. In our view, if the employment numbers come close to their forecasts, we doubt that this would change. We believe that for investors to push back that timing, a tick down in the unemployment rate should be accompanied by a stellar gain in jobs. On the other hand, a disappointment could have the opposite effect, bringing expectations over a cut forward to July.

GBP/AUD — Technical Outlook

Yesterday, we saw GBP/AUD finally breaking its short-term tentative downside resistance line drawn from the high of May 6 th. This morning, the pair also broke above its barrier, at 1.8310, which previously provided some resistance for the rate on May 29 th. It seems that GBP/AUD might continue drifting north and this is why we will remain somewhat bullish for now.

Given that GBP/AUD had already broken above its key resistance barrier at 1.8310, the next potential obstacle on the pair’s way might be at 1.8340. That hurdle marks the intraday swing high of May 27 th, which also coincides with the 200 EMA. If that area is seen just as a temporary pit-stop for the bulls, a break of it may lead the rate to the 1.8385 zone, marked by the high of May 27 th, which could stall the pair temporarily. GBP/AUD might even retrace back down a bit from there, but if it remains above its 200 EMA, this may allow the bulls to take advantage of the lower rate and push it to the upside. Such a move might bring GBP/AUD above the 1.8385 barrier and lead the rate to the 1.8422 level, which is the high of May 24 th.

Alternatively, a drop back below the 1.8250 hurdle, marked near the intraday swing highs of June 7 thand 10 th, could spook the bulls from the field and allow the bears to take control of the steering wheel again. Such a move might bring the rate lower, to test the 1.8175 support zone, which is the low of June 10 th, a break of which could send GBP/AUD lower. This is when we will target the next possible strong area of support at 1.8130, which held the pair from falling from the beginning of June.

As for the Rest of Today’s Events

In the US, apart from the CPIs, we also get the EIA (Energy Information Administration) report on crude inventories for the week ended on June 7th. Expectations are for a 1.138mn barrels increase, following a gain of 4.572mn. That said, bearing in mind that the API report revealed a 4.850mn inventory build, we see the risks surrounding the EIA report as tilted to the upside.

We also have four speakers on the agenda: ECB President Mario Draghi, ECB Vice President Luis de Guindos, ECB Executive Board member Benoit Coeure, and RBA Assistant Governor Luci Ellis.

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Originally published at https://www.jfdbank.com on June 12, 2019.