A quiet session for FX overnight with the U.S. Dollar Index closing unchanged as key components of the index, the EURUSD and USDJPY traded within narrow ranges ahead of tomorrow mornings FOMC announcement and the resumption of U.S. - China trade talks. Preventing the trading session from being a complete yawn, was a fall in GBPUSD, following the UK Parliament voting on seven Brexit amendments, five of which were rejected including the Cooper Amendment.
The possibility of the Cooper Amendment passing was the driving force behind much of the recent rally in GBPUSD, because if approved, it would have forced an extension to the current Brexit deadline of March 29, 2019. Cushioning GBPUSD from further falls, was the approval of the Spelman Amendment which will not allow the UK to leave the EU without a deal (few details mentioned on how exactly this deal will be achieved) and the Brady Amendment which requires the contentious backstop to be replaced with “alternative arrangements to avoid a hard border”. The EU has previously ruled out any changes to the backstop and all eyes again turn to Theresa May to see if she can change the hardened minds of those in Brussels.
Not lost on readers who lean on technical and Fibonacci levels, is that this week’s fall in GBPUSD, came from the 1.3200 area, a target mentioned in previous updates as the 38.2% Fibonacci retracement of the entire decline from the 1.4377 high of April 2018, to the recent 1.2456 low. While the market awaits the next instalment of the Brexit saga, near term support resides 1.3050/1.3000 region from the 200-day moving average and uptrend support.
Returning now to the FOMC meeting and the accompanying statement which will be released at 6am, Thursday morning, AEDT. The fed funds rate is expected to remain at 2.25-2.50% and delivered with a message of patience and data dependence. There is also an expectation that forward guidance will be removed from the statement to provide policy makers with more flexibility. This outcome appears largely priced into markets, which suggests the real wild card for FX markets this week will be the outcome of trade talks between China and the U.S. being held in Washington.
Like Brexit, the clock is ticking with March 1 named as the “hard deadline” by U.S. Trade Representative Lighthizer at which point, tariffs placed on US$250 billion of Chinese exports, will rise from 10 per cent to 25 per cent. Given the concerning economic slowdown currently underway in both countries, it would appear to be in the interests of both countries to find a resolution and prevent an escalation of the trade war.
Assuming the trade talks do result in a positive outcome, another round of risk seeking is likely to emerge, which would support equities and result in a lower U.S. dollar. The lower dollar view is one we have held for some time, the target for which is “abc” wave equality, around 94.00, approximately 2% lower.
Source Tradingview. The figures stated are as of the 30th of January 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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