FxWirePro: A tour on Fed/BoE/ECB/BoJ/RBA - Dollar futures trade positive amid monetary policy season but weakness on cards

Majority of the dollar pairs are trading little positive momentarily ahead of monetary policy season. Front-end month contracts of US dollar futures are trading at $97.050 levels. But the intermediate trend seems to be quite edgy at 97.995 levels. Technically, we witness constant slumps after shooting star formation at 23.6% Fibonacci levels, on an intermediate trend of dollar weaker and the downtrend appears to be on the cards as the current price slides below EMAs with the intensified momentum (refer weekly plotting).

Responding to a deteriorating global economic outlook and rising event risks (largely from US trade policy), the key Fed/ECB/BOJ/RBA officials have lately spoken of their readiness and the room to step up on monetary accommodation.

ECB: The ECB’s two-day Sintra conference gets underway this morning with a speech by ECB President Draghi. He will also appear in a panel later in the day alongside BoE Governor Carney. The theme of the conference is the first 25 years of EMU. That means that neither central bank head will probably say anything about the near-term outlook for interest rates. 

Fed: For the market a rate cut is imminent. Whether the US central bank takes action next month or only in the autumn is less relevant in this context for the US dollar. More important than the “when” is likely to be the “why”. At present several reasons can be found which the Fed could use to justify easing its monetary policy. First of all a deteriorating economic outlook as a result of an escalating trade war between the US and China. The latter is increasingly reflected in the sentiment indicators as was illustrated by the dramatic collapse of the Empire Index (PMI for the manufacturing trade in New York State) only yesterday. Or the central bankers could point to the continued lack of inflationary pressure; also in this area recent data disappointed. The Fed’s preferred inflation measure, the PCE core rate, has been falling since the beginning of the year and is currently languishing at 1.5%-1.6%. And last but not least there is also the US President who has stepped up his pressure on the central bankers to cut interest rates considerably recently. The latter is the biggest issue from the market’s point of view and therefore for the dollar. 

BoE: We do not expect the BoE to adjust actual monetary policy or its guidance at the meeting on Thursday. The macro picture has on average been fairly stable recently, while inflation is close to the target. Brexit uncertainty has probably increased somewhat, as Boris Johnson seems likely to become the new PM. In our view, the BoE will continue its guidance of limited and gradual hikes, even if no hike seems likely at present.

RBA: Was the rate cut by the Reserve Bank of Australia (RBA) a one-off? According to the minutes of the last meeting, it doesn't look that way as they confirmed what RBA Governor Philip Lowe had already indicated, namely that a further rate cut will follow in the near future. Specifically, board members are concerned that inflation expectations may no longer remain anchored, given that inflation (measured by the RBA's preferred inflation measure, the Trimmed Mean) has been below its target for three years. The central bankers hope that price pressure will increase in the near future, partly due to a weaker exchange rate. And this indeed looks promising at the moment. The AUD has recently lost significant ground against the USD. The AUD depreciation trend may come to an abrupt end as soon as the Fed begins to actively turn the interest rate wheel down, not least because the Americans have much more room to turn – due to a higher interest rate level – compared to their Australian counterparts.

Overall, the short-term USD gains on a hawkish surprise are likely to generate further long-term USD pain over time. A stronger USD is a headwind to global growth and trade volumes, which should eventually feed back into the US growth outlook. It also tightens financial conditions and creates headwinds to US risk assets. Courtesy: Commerzbank & Tradingview

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 89 levels (which is bullish) while articulating (at 11:34 GMT). 

For more details on the index, please refer below weblink:

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