The biggest event of this week is undoubtedly September Fed decision and mostly importantly Fedspeak. It is expected that the Fed leaves policy settings unchanged. The fact of transition to the new framework of inflation targeting has already been priced in, but here are possible parts of the meeting where surprises may pop:
- "Operational" details of the framework. Powell, speaking at Jackson Hole, was very sparing of details (in line with the event format), leaving them for monetary policy meetings. Investors will be looking for hints of time limits for low interest rate environment or a possible link to certain economic outcomes (for example, achieving unemployment of 2%). Repeating of vague wordings will be likely bullish for USD.
- Expectations of GDP, inflation, interest rates separately from each participant (so-called dot plots). At the last meeting, only 2 of 17 Fed participants voted in favor of a rate hike in 2022. This is an extreme bearish bias, which more reflects increased uncertainty in the forecasts (due to covid uncertainty) than the weakness of the economy. Now the dust has settled down and it becomes clear what to expect. In my opinion, the updated dot plot has potential to slow down USD slide since risks are skewed to upside surprise due to low-base effect in Fed’s expectations.
On Wednesday and Friday, we will see the data on US retail sales (very important report) and consumer confidence for August. I think that continuing rebound in retail sales can push the stock markets lower, as it will allow Congress to further bargain on the fiscal deal. Given these expectations, it is more likely that USD index will not rush to break through important levels this week. The target for the index contingent on the Fed meeting results and data outcomes is the level of 93.45, so decline below 93 points may be an opportunity to consider some short-term long positions.
The ECB meeting failed to root out Euro strength. The key outcomes of the meeting are an unexpected upward revision of inflation forecasts for 2020 and 2021 and reluctance to immediately stop Euro advance. The case in favor of medium-term upward movement of EURUSD that we discussed last week remains relevant, however, this week tough negotiations on Brexit may stifle Euro gains. A shortage of positive news and waning economic impulse may also limit advance of currencies that respond to global economic recovery (cyclical currencies), including the euro. The target for EURUSD is a correction to the 1.1760-1.181 area.
For the GBP, the likelihood of the costliest economic divorce scenario (no-deal departure from the EU) continues to grow. The UK Parliament is also discussing internal market bill this week that has the potential to heighten Brexit concerns. Considering the expectations of EURUSD consolidation this week, the chances of GBPUSD move towards 1.2650-1.2550 range and 0.96-0.9650 in EURGBP may be in cards. GBPUSD rally above 1.29 could be a good opportunity to consider short positions.
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