Macroeconomic overview
Fed Governor Lael Brainard said that an improving global economy and a solid U.S. recovery mean it will be “appropriate soon” for the Federal Reserve to raise U.S. interest rates, adding an important voice to the chorus of officials signaling rates may rise as soon as mid-March.
“We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time,” Brainard said. “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” “After being an important constraint in the past few years, the external environment currently appears more benign than it has been for some time,” Brainard said, directly addressing the set of risks that led her to become one of the stronger advocates for delaying any rate increase until the global environment improved.
Brainard’s opinions used to be dovish, that is why her hawkish comments are very important and we think are a clear signal that the Fed will not wait until June with a hike.
Coupled with the comments of other Fed officials in recent days and looking ahead to remarks by Fed chair Janet Yellen on Friday, Brainard’s comments will likely help cement sentiment that a rate increase when the Fed meets in two weeks is now the assumed outcome.
Free Reports:
Wednesday brought us some important macroeconomic data from the U.S.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% after rising 0.5%in December. The tepid gain in consumer spending added to weak housing starts, equipment spending and construction data in suggesting economic growth remained moderate early in the first quarter after slowing in the final three months of 2016.
Excluding food and energy, the so-called core PCE price index rose 0.3% in January. That was the biggest increase since January 2012 and followed a 0.1% gain in December. The core PCE price index increased 1.7% yoy after a similar gain in December. The core PCE is the Fed’s preferred inflation measure.
Rising inflation is eroding consumer spending. When adjusted for inflation, consumer spending fell 0.3% in January, the first drop since August and the biggest in three years. It increased 0.3% in December and January’s drop implies consumer spending will probably not provide a big boost to GDP in the first quarter.
Despite the softness on the demand-side of the economy, the manufacturing sector recovery is gaining steam. In a separate report on Wednesday, the Institute for Supply Management said its index of national factory activity increased to a reading of 57.7 last month, the highest since August 2014, from 56.0 in January.
Technical analysis
The situation has not changed a lot from the point of view of technical analysis. The EUR/USD remains below the negatively aligned 7-day exponential moving average, which highlights the overall bearish structure. Given hawkish comments from Brainard we think that current trend will be continued. The nearest support level is 1.0494, but we expect a stronger drop to at least 1.0451 (76.4% fibo of January rise).
Trading strategy
We have placed a sell order at 1.0555, encouraged by the hawkish Brainard’s speech. If the order is filled we will set the target just above January low of 1.0342.
USD/CAD: Bank of Canada keeps rates unchanged, as expected
Macroeconomic overview
The Bank of Canada acknowledged on Wednesday that fourth-quarter growth might have been stronger than anticipated, but it left interest rates unchanged at 0.50% as it focused on the “significant uncertainties” facing the economy.
In an unusually short policy statement, the central bank maintained its cautious stance. It downplayed the fourth-quarter strength by pointing to the large amount of unused capacity in the economy and saying it was looking past the recent rise in inflation as being due to temporary factors.
In contrast to the United States, subdued wage growth and hours worked in Canada also showed persistent economic slack despite recent gains in employment, the central bank said.
The statement keeps the bank’s dovish stance intact after Governor Stephen Poloz said in January that a rate cut remained on the table if the risks to the economy materialize.
Technical analysis
The USD/CAD is testing the resistance at 1.3357 (61.8% fibo of December-January drop). We think that further rise to at least 1.3450 (76.4% fibo) is likely in the coming days. But first the USD/CAD needs to clear January 20 high at 1.3387.
Trading strategy
In our opinion no short-term position is justified from the risk/reward perspective. We keep our bearish long-term outlook, as rising commodities prices should support the loonie.
NZD/USD: We will switch to short if 0.7100 is broken
Macroeconomic overview
The Reserve Bank of New Zealand said risks around future interest rate movements were equally weighted, but warned of uncertainty stemming from U.S. President Donald Trump’s protectionism.
The bank highlighted after its last monetary policy statement in February that its focus had shifted from the domestic economy to international events.
On the domestic front, Wheeler singled out the housing market as the greatest risk, though prices had moderated in recent months.
The RBNZ last month held the official cash rate steady at record lows of 1.75 percent and flagged it could remain there for two years or more.
Technical analysis
Long upper wick on Tuesday’s candlestick and negatively aligned 7-day exponential moving average suggest a downward move in the coming days.
Trading strategy
We will switch our position to short if the NZD/USD breaks below 0.7100. This would open the way to full retracement of December-January move.
TRADING STRATEGIES SUMMARY:
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By GrowthAces.com – Daily Forex Trading Strategies