Daily Market Pulse

USD lower ahead of FOMC meeting


The USD opens the week a bit lower against the EUR, GBP, and CAD as traders focus on the FOMC meeting which takes place tomorrow and Wednesday. The main question will be whether policymakers will try to make their new ‘inflation overshooting’ framework more credible by hinting at new measures to boost inflation, or whether they think they have done enough for now. Expectations based on the minutes of the July meeting are that the Fed will most likely remain on the sidelines for the moment. The minutes implied there is no rush to strengthen the forward guidance, a view echoed by a few officials lately, who hinted they would like some more clarity on the economy’s path before committing to anything new. US equity market futures were higher this morning after last week’s tech sell-off created the first back to back weekly decline in months. Dow Futures were pointing towards an opening of 200 points higher and S&P and NASDAQ futures were also looking at a positive opening. There seems to be less hope of lawmakers coming up with a deal on new fiscal stimulus as there continue to be major differences on both sides. There is also some concern over the fact that coronavirus cases have risen by 5% or more in 11 states, according to Johns Hopkins University data. U.S. Treasury yields are trading lower this morning, investors keep an eye on potential virus vaccines. According to Pfizer CEO Albert Bourla, a vaccine could be distributed in the US before the end of the year. AstraZeneca also resumed their phase three trials over the weekend. The 10-year note is trading lower this morning at 0.6658%, while the 30-year bond is trading at 1.4142%. Traders will be on the lookout today for any hints regarding the FOMC meeting.


The EUR/USD is trading close to overnight highs this morning, as the single currency has moved above the moving averages, as the 50 and 100-day moving averages have crossed the 200-day moving average. The EUR is trading near some strong resistance levels and a break could see a major move higher. RSI has been rising throughout the overnight session and is currently trading at 61. Several members of the ECB have repeated the comments that the central bank “does not target the exchange rate” over the weekend. While some officials such as Chief Economist Philip Lane remain concerned that the Euro’s value impacts inflation, the comments following the ECB meeting last week are seen by some traders as a “license to rise”. ECB President Christine Lagarde said in a speech on Sunday that global “recovery is incomplete because there is still much ground to recover and as for the Eurozone, a similar assessment applies as “incoming data shows a strong recovery, but also one that is uneven, uncertain and incomplete.” These comments have seen no reaction in the direction of the EUR. Traders also seem to be shrugging off the rise in coronavirus infections in Europe, as Spain, France, and Austria have seen a spike according to recent reports. Cases are increasing, but deaths remain at a low level.


GBP/USD is trading close to overnight highs, rising amid market optimism and ahead of a critical debate in parliament. MPs will discuss a controversial deal that violates the Brexit accord with the EU. Technically, the GBP is trading above the 50-day moving average and is close to topping the 100-day moving average. RSI has been moving higher overnight and is currently at 64. The BoE meets on Thursday, but it might not be a major driver for the pound. While policymakers continue to downplay the prospect of negative rates, markets will be on the lookout for any signals about the QE program being expanded in November. Rates will remain unchanged. The House of Commons will debate the Internal Markets bill, legislation which violated the Withdrawal Agreement, as ministers openly admit. MPs will begin their debate on Monday, with several members of the PM's Conservative Party saying they will vote against it or abstain. The House of Commons is set to vote on amendments and the entire bill before it goes to a committee. Discussions will last all week and form part of the never-ending Brexit saga. Besides the latest Brexit news, there is some good karma due to the renewal of the Phase 3 coronavirus vaccine trial by AstraZeneca and the University of Oxford. The project, which is considered one of the world's most advanced, was halted last week after a participant fell ill. UK coronavirus cases continue rising as new restrictions are introduced. Gatherings are limited to six people and some areas are under more substantial limitations. 


USD/JPY is trading near overnight lows as we begin the week, below the moving averages. A break of near-term support levels could see further selling of USD/JPY and RSI levels are now breaking through the 30-level having moved lower throughout the overnight trading session. The Bank of Japan is set to meet on Thursday, but no action is expected, though some reports say the comments following the rate decision may offer a slightly brighter view of the economy. Yoshihide Suga has won his party’s election and is set to become the next prime minister of Japan. He is an interesting choice as he is not from an elite political family, is not regarded for his “charisma”, and is older than his predecessor. PM Shinzo Abe announced last month he was resigning due to ill health. Mr. Suga has been the longtime chief cabinet secretary to Mr. Abe and has vowed to continue with the policies set by PM Abe. In Japan, where stability often outweighs ideology, Mr. Suga appealed to a tradition-bound political establishment that resists change. 


USD/CAD is trading in the middle of its overnight range this morning, above the moving averages like the 50 and 100-day moving averages have converged with the 50 about to break through the 100-day level. The RSI level which had been trading around the 40-level overnight has suddenly jumped to the 50-level in the last hour. The currency pair has broken through some tougher resistance levels overnight and the move higher this morning could be attributed to some short covering. The loonie remains under pressure although oil prices have moved higher this morning. Brent crude futures rose $0.09 to $39.92 per barrel, while U.S. West Texas Intermediate crude rose $0.19 to $37.51 per barrel. Both oil contracts ended last week lower, which was a second consecutive week of declines. Tropical Storm Sally, gained strength in the Gulf of Mexico forcing companies to evacuate rigs and halt production. Excess supply and falling demand continue to be a concern for the oil industry. 


Mexico’s foreign exchange commission announced on Friday two currency auctions totaling $7.5 billion using a swap line with the U.S. Federal Reserve, the finance ministry and central bank said in a joint statement. Mexico’s central bank said on July 29 that it extended the duration of a Fed swap line of up to $60 billion until at least March 31, 2021, from a prior expiration date of September 30. In late March, Mexican financial authorities said they would activate the Fed swap mechanism to support liquidity in the market as the peso currency suffered sharp losses against the dollar. 


Chinese President Xi Jinping is due to hold a virtual summit with the EU leaders on Monday. The leaders will discuss EU-China relations and touch on topics including climate change, economic relations, and trade issues. Responses to the COVID-19 pandemic will also be high on the agenda, as cases and hospitalizations in Europe spike again. Analysts believe it is "time to try to move the relationship forward" both in economic terms and with cooperation on COVID-19. According to the Chinese publication, Global Times increasing tensions between China and the EU could be seen as "a political position which is expressed in the form of security concerns about China." Speaking on China-UK relations, the publication added that Beijing could look into the long run regarding the tensions over Huawei and other disagreements. 


Services activity in Brazil rose in July for a second straight month, figures showed on Friday, but the pace of growth was slower than forecast, suggesting the economy’s rebound from the worst of the COVID-19 may not be quite so entrenched. The sector expanded by a seasonally-adjusted 2.6% from the previous month, government statistics agency IBGE said, less than the 3.1% rate of growth economists in a Reuters poll had forecast. Services sector output in July was down 11.9% from a year ago, IBGE said, more than the 10.4% decline forecast in the Reuters poll. Four of the five sectors surveyed by IBGE showed increases in activity from the previous month, most notably a 2.2% rise in information and communications services, and a 2.3% increase in transport and transport-related services, IBGE said. After surging 12.2% in June, services provided to families fell 3.9% in July, IBGE said. June’s rate of expansion in the services sector was revised up slightly to 5.2% from 5.0%. The figures mean that in the first seven months of the year, services sector activity in Latin America’s largest economy fell 8.9% from the same period in 2019, IBGE said. The level of service sector activity is still 22.2% lower than the peak in November 2014, IBGE said.


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