UPDATE: The US Dollar relinquished a little ground to both the Euro and British Pound into Tuesday's European session but by-and-large the Greenback held relatively firm.
Ahead of Wednesday's Fed releases, US factory order figures are due with the rate of change in the total volume of new purchase orders placed with manufacturers forecast to edge higher to 0.3%, from a previous 0.1%.
Lloyds Banking analyst Rhys Herbert commented ahead of the release that "January factory orders will provide an indication of whether US industrial activity is holding up. We already know that durable goods orders rose by 0.4%, primarily due to a pick up in the volatile aerospace sector. That means the only new information in today’s release will be the outturn for nondurable orders, which are likely to show modest gains." Nevertheless, the main focus for the Greenback remains on Wednesday's FOMC policy meeting and subsequent decision. While the Fed are expected to remain in 'wait and see mode', investors will be keen to assess any further cuts to the 'dot plot' interest rate projections.
Political themes such as Brexit and the trade war are ongoing.
Focus will start to shift to Wednesday’s Fed meeting and the “dot plots” forecasting future rate hikes.
The Fed is expected to cement its dovish shift, but the USD remains strong.
“Risk on” is still the theme for the markets as a new week starts with little advancement in the two big political themes, namely Brexit and the trade war, and central banks signaling dovish and supportive policies. If anything, political uncertainty has increased as a trade deal now looks less imminent and a meeting between Xi and Trump has reportedly been pushed back to April. On the Brexit side, many are still responding to the various implications of last week’s votes and developments, most of which point to long delay of the separation. Here’s Danske Bank with an update on what to expect thiss week.
“In the UK, PM May has been trying to get more support from the Eurosceptics in her party for her deal, which is expected to be put to a vote on Tuesday. However, if she does not have strong chance of getting the deal accepted, then she is not likely to put it to a third vote according to media reports quoting ministers in her government. Otherwise, PM May will go the EU summit on Thursday to seek an extension on the Brexit process. Hence, there will be plenty of uncertainty regarding the Brexit process during the week.”
Yet markets seem unconcerned by the delays and continued uncertainty, perhaps because it means sellers are inactive until deals are announced. The S&P500 is pushing to new 2019 highs, as is the FTSE in the UK. GBP pairs are mostly lower, giving back some of last week’s gains. GBPUSD trades 1.324, and EURGBP 0.857.
Fed in Focus
The Fed meeting on Wednesday will be one of the highlights of the week, if only to make official the Fed’s dovish stance. Enough was said last weekend by Powell to signal the Fed are firmly on pause and even rising inflation won’t get them to act, comments which helped the markets recover strongly to new 2019 highs.
The dot plot will be the main focus. This forecasts the likely path of future rate hikes in is likely to be revised lower from one to two hikes, and even that is data dependent.
Such a dovish shift by the Fed is a negative for the US dollar, but it has managed to stay strong in recent months, mostly because there is no compelling alternative. The US economy is better off than any other in the G10, and rates are relatively high compared to those in the Euro, Yen or GBP, making the USD a high yielder for the carry trade.
However, things are expected to shift slowly in 2019 as some economies stabilize and the US starts to slow. Here’s some commentary from ING to support this view.
“We are starting to see activity currencies in the G10 space perform a little better and there’s a case to be made that this trend continues. China and Europe had been the two key areas of concern at the start of 2019 and even though there is still much uncertainty, targeted fiscal stimulus in China (VAT cut 1 April) and some potential clarity emerging on Brexit over coming weeks could improve sentiment - particularly in the traded goods space... Today’s release of US industrial production for January may support this slightly more optimistic view of the world. We continue to favour: (i) the US dollar staying bid against the Japanese yen, (ii) high yield in general, but (iii) are wary of a modest positive re-rating in European FX. Expect DXY to remain trapped in a 96-97 range.”
One theme to watch out for over the next few weeks is of data bottoming in the eurozone. If this happens, EURUSD should continue to hold the important 1.12 support and push the dollar slightly lower. Even still, data would need to surprise to the upside for any sustained move higher in the Euro.