Risk Currencies Rally on Dovish Commentary From Global Central Banks
In spite of indications of policy normalization, interest rates are set to remain accommodative for the immediate future according to the latest policy decisions from the Bank of England and US Federal Reserve, catalyzing a rally in risk-assets.
While the European Central Bank has not formally announced its intention to expand the existing asset purchase program, the latest monetary policy meeting minutes released yesterday showed that committee members were considering extending the duration of the program. Another potential policy tool that might be employed to fight weak inflation is reducing the key interest rates even further, specifically the deposit rate in an effort to stoke spending. While the ECB is planning to increase asset purchases ahead of the winter months, the stage is set for the Central Bank to expand purchases into other instruments as the supply of sovereign debt for the PSPP program dwindles. Policymakers continue to bet on a rebound in inflation, a measure that lower energy prices have dragged down in recent months.
The Bank of England maintained its current monetary policy measures with the Monetary Policy Committee voting members not changing their stance. Eight members of the committee voted to maintain existing policies with a neutral stance while member Ian McCafferty remained the sole dissenter calling for rate hikes. Similar to other Central Banks, the Bank of England cited the softness in inflation as the rationale for keeping the accommodative policy stance and leaving rates on hold despite rising expectations that liftoff will occur in the first quarter of 2016 for the United Kingdom. The GBPUSD currency pair was volatile throughout the session as the confluence of the Bank of England decision combined with the FOMC meeting minutes and Carney speech through the pair into turmoil. In spite of the turmoil, the Pound ended the session not far from highs versus the dollar.
Minutes from the latest Federal Open Market Committee show that US Federal Reserve members were divided on the outlook and path for interest rates, choosing to defer a decision in light of the weak external situation. Developments in the global economy were cited as the major reason for no shift in language or policy back in September with most members waiting for inflation to rebound in-line with comments from other global Central Banking peers. While optimism surrounding the labor markets continued to prevail amongst policymakers in spite of a weak participation rate, the voting committee remains data dependent in its outlook. Certain members have called for higher rates with some now including the possibility of substantially increased dovish policy in the form of negative interest rates. The FOMC minutes saw the dollar tumble against peers with commodity currencies benefiting most.
EURUSD Ascending Triangle Trading Opportunity
With the latest FOMC Meeting Minutes showing the Central Bank will continue to be dovish in its immediate outlook combined with no change in policy from the European Central Bank, the EURUSD pair continues to rally on the back of Central Bank accommodation. No changes to existing policies are expected in the upcoming decisions unless the global macroeconomic backdrop continues to weaken, providing the momentum for EURUSD to continue climbing in the near-term barring any substantially negative data coming from the Euro Area. The ascending triangle pattern currently emerging in the EURUSD pair has a predominantly bullish bias with any close above 1.1330 considered a triangle-based breakout to be accompanied by renewed momentum and confirmed by higher trading volumes. A move below the uptrend line could signal a reversal lower in the pair.