London Session: The Fed stays cautious – should the ECB do the same?
By Kathleen Brooks | February 1, 2013 1:07 AM EST
The Fed did as expected yesterday, there was no policy change and the tone to the statement remained cautious. The statement made reference to the weak Q4 growth figures and the pause in economic growth; however it noted that the disruption to growth in Q4 may have been due to weather-related disruptions and transitory factors. While housing and business investment are doing well, employment and inflation are the key concerns, and since these are the Fed's duel mandates the persistent disappoint in employment and threat of inflation falling below 2% in the long-term should keep monetary policy lose for some time yet.
Watch initial jobless data
The Fed has directly tied its latest round of QE to the employment rate, saying yesterday that if the labour market does not "improve substantially" then it will continue purchasing its $85bn of mortgage-backed and treasury securities each month. The Fed's target is still a 6.5% unemployment rate; however the Fed will also consider other measures of labour market conditions when it makes policy decisions in future. This could be significant as initial jobless claims have tumbled to their lowest level since 2007, and are looking far healthier than the overall unemployment rate. This is unlikely to sway the Fed at this stage, but if initial jobless claims continue to decline then we could see the Fed start to change its rhetoric in the coming months. Thus, last week's initial jobless data, which is released this afternoon, will be watched closely.
The Fed's cap on Treasury yields
The Fed's dovishness has two implications for traders: 1, it makes the ECB look super hawkish, and 2, it could keep Treasury yields capped. 10-year Treasury yields backed off from 2% - the highest level since April 2012 - after the Fed statement and the dollar continued to decline. This knocked USDJPY, which declined to 90.75 earlier. 91.50 is a major resistance level and looks like it could be a temporary top. We may consolidate from here while we wait for tomorrow's payrolls data. This is by far the most important release of the week and could be the key driver to see if Treasury yields get above 2% or linger below this level, which is a key driver of USDJPY.
Stocks: now it's time for the hangover...
European stocks have opened weaker after declines in the US yesterday. The SPX 500 continues to hold onto the 1,500 level, but only just. Another down day could see it decline to 1,480 then to 1,450. The same is true of the FTSE and the Dax. However, this does not mean that the trend is coming to an end. There is still a lot of demand out there and a desire to shift from bonds to equities, which could power another leg higher in this rally. The problem for stocks is that they have come too far a bit too fast and are looking extremely overbought. Like the partygoer who has had one too many night's out in a row, the markets need to take a rest to clear their hangovers before getting back on it. Thus, a temporary pullback could be on the cards.
The weak tone to economic data is clashing with the better earnings data in the US. However, combined with the view that Q4 economic weakness in the US was caused by temporary factors that could boost growth in Q1, the fundamental back drop may not be too bad for stocks to extend gains either. A pullback has been on the cards ever since a hangman candle pattern in the SPX 500 on 11th Jan. This was not the most accurate signal (the index rose 2% since then) but it was a good warning signal that 1,500 could be a major take profit level for the market.
The ECB - still at the hawkish end of the CB spectrum
Elsewhere, economic data today has been mixed. UK house prices rose, German retail sales tanked in December along with French producer prices and consumer spending. The bright spot was more good news for the German labour market. Unemployment fell 16k in Jan, pushing the unemployment rate down 0.1% to 6.8%. The dichotomy in the Eurozone is making policy decisions even harder for the ECB. While we tend to think that the ECB will remain on the "hawkish" end of the G10 central bank spectrum, the Fed decision has brought into sharp relief the opposing stances of the ECB and the Fed, which is ultimately EURUSD positive. While the Fed is expanding its balance sheet the size of the ECB's balance sheet has declined more than 3% since the start of 2013. This is a fairly rapid pace of decline, which has fuelled some tightening in in the benchmark euro money market rate Euribor. Thus, with German economic signals remaining strong and continued stabilisation in the currency bloc, the euro may continue to extend recent gains. 1.36 is likely to prove a tough level of resistance for EURUSD, and we could see some stickiness at this level, however above here opens the way for a sharper move to 1.38, which then leaves 1.40 on the horizon.
Look out for initial jobless data and PCE inflation data due at 1330GMT. Jobless data out of Japan is also due later tonight.
One to watch: EURUSD
This cross has brushed off the bearish harami pattern from earlier this week, but it still suggests there could be some stickiness in the short term. US Payrolls data is the next driver for this cross. A bearish number could fuel further gains above 1.3600 to 1.38. In the short term, key support is 1.3560 - daily pivot - above to 1.3605. If there is further downside then 1.3520 should act as a strong support zone.
EURUSD hourly chart - hitting the 1.36 brick wall
Kathleen Brooks| Research Director UK EMEA | FOREX.com
23 College Hill | 3rd Floor | London EC4R 2RT
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).
Join the Conversation
- Black Friday 2014 Sale: Top Deals On Game Consoles Xbox One, PS4, Nintendo Wii U And More
- Walmart Pre-Black Friday 2014 Sale On Nov. 21, 2014 Includes Discounts On The 'NBA 2K15' For PS4 And The 'Skylanders Trap Team’ Starter Kit [WATCH VIDEO]
- More Bad News for Android 5.0 Lollipop As Problems Come In for Nexus and Other Devices
- BlackBerry Classic (aka Q20) Keyboard Shortcuts Explained In A Quick Video
- US To Supply Defensive Lethal Weapons To Kiev – A Vey Alarming Signal, Says Russia
- Amazon Black Friday 2014 Deals Start On Nov. 21, 2014 Including Limited-Time Lightning Deals And Deals Of The Day On Clothes, Toys, Jewelry, Watches, Bags, Accessories And Electronics
- Travel Alert: New Delta Air Lines Airbuses Could Be Seen In Australia Soon