Macroeconomic overview

The Federal Reserve kept interest rates unchanged on Wednesday and painted a relatively upbeat picture of the U.S. economy that suggested it was on track to tighten monetary policy this year.

The central bank said job gains remained solid, inflation had increased and economic confidence was rising, although it gave no firm signal on the timing of its next rate move.

The Fed said in its statement it still expects inflation to rise to its 2% target in the medium term, although it noted that market-based measures of inflation compensation are still low and survey-based measures of long-term inflation expectations are little changed.

On Monday, the Commerce Department reported an uptick in inflation to 1.7%.

Money markets had shown a 20% chance of a rise in U.S. rates next month but that slipped to as little as 15% after yesterday’s statement. Yellen may give a clearer signal on the Fed’s thinking when she provides semi-annual testimony to Congress in mid-February.

The ADP National Employment Report showed private employers added 246k jobs in January, up from 151k in December. The report came ahead of the Labor Department’s more comprehensive employment report on Friday, which includes both public and private sector payrolls.

The Institute for Supply Management (ISM) said its index of national factory activity increased 1.5 points to a reading of 56.0 last month, the highest since November 2014. The ISM’s production sub-index increased 2.0 points and a gauge of new orders edged up 0.1 point, reaching its highest level in just over two years. A measure of factory employment jumped 3.3 points to its highest level since August 2014, suggesting factory payrolls likely rose in January for a second straight month. Manufacturers reported paying more for raw materials. That was the 11th consecutive monthly increase, indicating inflation pressures at the factory gate could be building up. The ISM’s prices index jumped 3.5 points in January to its highest level since May 2011.

Technical analysis

The EUR/USD dropped yesterday after strong data from U.S. economy but recovered soon in reaction to Fed statement. As a result a candlestick with long lower shadow was formed. The upward move is continued today and the rate is testing a key resistance level at 1.0815 (50% fibo of November-December fall). A close above that level will open the way to further gains.

Trading strategy

Our long-term view remains bullish. We also opened a long EUR/USD position in the speculative part of our portfolio with the target at 1.0920, slightly below 61.8% fibo of November-December drop.

EUR/GBP: BOE Super Thursday without changes in monetary policy

Today the Bank of England will simultaneously publish the February Inflation Report, the MPC policy decision and the MPC minutes. We expect the Committee to vote unanimously to keep the stance of monetary policy unchanged.

In the minutes of its December meeting, the MPC said, “Monetary policy could respond, in either direction, to changes in the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.” This wait-and-see stance has arisen because of stronger-than-expected economic data since the referendum on the one hand, and a continued expectation for a slowdown ahead on the other amid Brexit-related uncertainty. There has been little news over the last month to change this.

Business surveys of economic activity continue to point to robust growth around the turn of the year. Consequently, BoE staff members are likely to revise up slightly their projections for near-term growth, while leaving the medium-term growth outlook broadly unchanged. The rise in global commodity prices, particularly crude oil, coupled with a surprisingly large 0.4 percentage point jump in inflation to 1.6% yoy in December, will likely lead to a higher path for inflation in the near term than expected in the BoE’s November Report. The almost 3% appreciation of the effective sterling index over the past three months could result in a slightly smaller overshoot of inflation at the two-year horizon.

Governor Mark Carney, in a speech on 16 January, cautioned that developments since the Brexit vote may require a more hawkish monetary policy. We think the central bank will probably try to avoid adding to speculation about a first interest rate hike in nearly a decade, even as it acknowledges the resilience of Britain’s economy since last year’s vote to leave the European Union, which may stop recent GBP rally.

Technical analysis

The technical analysis does not show a clear signal for the EUR/GBP. The rate remains below 7-day exponential moving average, but failed to break below the support level of 0.8489 (January 31 low) and now can see a recovery move. Today’s BOE decision will be probably more important for the EUR/GBP than technical analysis suggestions.

Trading strategy

We opened EUR/GBP long at 0.8580, but the corrective move was even stronger than we had anticipated. We hope that today’s comments from BOE will help the EUR/GBP break above 7-day exponential moving average, which would be an important bullish signal and good news for our strategy.

AUD/USD: Aussie jumped on record trade surplus

Macroeconomic overview

Thursday’s data from the Australian Bureau of Statistics showed a trade surplus of AUD 3.51 billion in December, handily outpacing market forecasts of AUD 2.2 billion. The previous month was also revised up sharply to AUD 2.0 billion.

Exports jumped by 5.3% to a record AUD 32.6 billion, led by double-digit gains in coal and iron ore, while imports edged up only 0.7%.

China was the standout customer as exports surged 28% to top AUD 10 billion for the first time ever.

For the December quarter as a whole, the country notched up a surplus of AUD 4.8 billion in a startling turnaround from the previous quarter’s AUD 3.8 billion shortfall.

The rush of export earnings will ripple through the economy via higher profits, incomes and tax receipts, likely ensuring a rebound in gross domestic product after a shock 0.5% contraction in the third quarter. That should eliminate any fears out there that Australia was at risk of recording a technical recession.

Technical analysis

The AUD/USD broke above 76.4% fibo of November-December fall today. If the rate closes above this level, the way to November high (0.7777) will be widely open. The nearest support level is January 24 high at 0.7608.

Trading strategy

The AUD/USD is getting closer to our long-term strategy target at 0.7750. Our short-term strategy is to buy the AUD/USD on dips – we have raised our bid to 0.7575.

TRADING STRATEGIES SUMMARY:

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