Dovish Tone a Possibility from Bank of England Decision
The spotlight on today’s event calendar illuminates two meetings from the Bank of England and the Federal Open Market Committee in the UK and US, respectively. Important information to be gleaned from each is the direction of monetary policy given slow economic progression in the UK and the impetus behind the FOMC’s recent decision to hold off on a hike to interest rates.
The influx to commodity risk currencies has made the Australian and New Zealand dollars the winners in the past few trading days, each exhibiting growth in contrast to traditionally safer peer currencies such as the Yen and the Swiss Franc. The rally in the Aussie and Kiwi dollars has led up to the latest session that saw gains in each of 1.82% and 2.43%, respectively. The suffering safe-haven currencies may get a break soon, with commodities touching off a slow recovery from the lows witnessed last week. Before a retrenchment in crude oil sent WTI down -1.84%, prices of the asset hit a multi-month high of $49.67 yesterday before the release of a report that showed growing stockpiles. Gold has also been slow to post growth, with near-term support levels of $1142 being tested after falling from rally highs of above $1150.
Alcoa will headline the beginning of the quarterly US corporate earnings season later today, with many investors speculating that remaining weakness in China and a strong US dollar will keep earnings from bouncing upwards this quarter, after August’s exodus from stocks. While the S&P 500 has recovered somewhat from this period, the difficult psychological resistance level of 2000 approaches, though the rebound off of lows around 1873 came quickly. Market participants expect that prices will remain within the range between current levels and 2000, with sentiment only considered bullish should prices break through the ceiling and show that they can float there. Potential hindrances to a price boom have come from the end of quantitative easing by the Federal Reserve and the Bank of Japan’s latest decision to hold off on expanded easing measures.
In the UK, stubborn economic metrics like inflation and GDP have been slow to show signs of growth under current policy. Today’s meeting between Bank of England voting members will be closely watched to see if Ian McCafferty, the only person supporting a rate hike, will be joined by any of his peers. The interest rate has stood at 0.50% for a significant amount of time, and the eight voting members besides McCafferty do not expect that altering this number will improve important figures like GDP, which is expected to illustrate continuing weakness in the fourth quarter. Third quarter GDP was disappointing after good second quarter numbers revealed 0.70% growth, yet a favourable industrial and manufacturing report has recently driven the Pound up. If the potential for newly dovish policy unearths itself in today’s meeting notes, the highs at 1.5300 in the Pound may give way to a downward slide.
USDCHF Equidistant Channel Trading Opportunity
Safe haven currencies have not benefited from the recent dollar softness against commodity currencies with the Swiss Franc in particular only experiencing slight gains versus the dollar since the payroll announcement the previous week. The combination of extreme monetary policies and economic protectionism has prevented the massive speculative inflows that marked the previous crisis. The downward trending equidistant channel formation currently emerging in the USDCHF pair has a predominantly bearish bias with ideal short positions taken at the upper channel line targeting the lower channel line for an exit. Should prices rise above the upper channel line it could be indicative of a channel-based breakout higher to be accompanied by renewed momentum and confirmed by higher trading volume.