Will Fed stage a surprise or hold interest rate as expected?
Bank of England held interest rate and monetary policy unchanged. After they slashed interest rate to historical low and expanded their asset purchase program in the last meeting, the result has been encouraging so far. The central bank is adopting a “wait and see” approach for the time being. The impact of Brexit cannot be assessed unless Article 50 is invoked. Brexit headlines hit the sterling last Friday saying Brexit talks could start early next year and UK is ready to accept the terms where their banks have to give up access to clients in Europe. If the above comes true, the impact on UK economy would be significant. From now until the actual Brexit talks, we believe data and headline news will continue to create short-term volatility in the sterling.
We have a couple of central banks announcement this week. Reserve Bank of Australia will release the meeting minutes of their last meeting. Their last statement was pretty neutral. We expect little surprise from the meeting minutes. Bank of Japan is still facing challenges in hitting their inflation target, despite continuous stimulus and negative rate policy. Unless they take drastic actions, it would be difficult not to disappoint investors again. Reserve Bank of New Zealand cut interest rate last round. Diary prices have been rising recently and Kiwi has retraced back to around 0.73. We do not expect a back-to-back rate cut, but RBNZ is likely to remain dovish in their statement.
The main highlight of this week should be none other than the FOMC and Fed interest rate decision. The US has been releasing inconsistent data, which fuelled speculations on the next rate hike. Although the recent non-farm underperformed, the previous figure was revised upwards by 20k. The employment data (comprising non-farm, unemployment rate, unemployment claims and average hourly earnings) in recent months can be considered decent for a rate hike. Recent retails sales; manufacturing and non-manufacturing PMIs were disappointing, all fell short of expectations. Core retail sales (excluding automobiles) dropped 0.1% instead of rising by 0.3%. Manufacturing PMI came in at 49.4, representing a contraction, after 4 months of expansion. Non-manufacturing PMI came in at 51.4 versus the consensus at 55.4. However, last Friday’s inflation data CPI was encouraging. Core CPI (excluding food and energy) rose 0.3%, better than expected. As you can see, the data did not present a consistent picture. With the major US presidential election in November, we do not expect Fed to change their monetary policy this week. If Fed provides arguments to justify a rate hike by end of the year, the dollar bull could start to run.
Our Picks
GBP/JPY – Slightly bearish. A disappointing BOJ monetary policy announcement could possibly force this pair to break the 61.8 Fibonacci level.
XAU/USD (Gold) – Slightly bearish. The level 1309 is holding well. A hawkish FOMC could be the catalyst to break the support. If Fed does not show any rate hike determination, 1309 could hold on well.
NAS/USD (Nasdaq) – Slightly bearish. Price is near key resistance 4835. We expect the resistance to hold. The upside risk is a dovish FOMC.
Top News This Week (GMT+8 time zone)
US: Federal Funds Rate. Thursday 22nd September, 2am.
We expect figures to come in at 0.5% (previous figure was 0.5%).
New Zealand: Official Cash Rate. Thursday 22nd September, 5am.
We expect figures to come in at 2.0% (previous figure was 2.0%).
Canada: Core CPI. Friday 23rd September, 8.30pm.
We expect figures to come in at 0.3% (previous figure was 0.0%).
Fullerton Markets Research Team
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