Central Bank Meetings Ahead, Forex Outlook Cloudy

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Central Bank Meetings Ahead, Forex Outlook Cloudy

An important round of central bank meetings is at hand. Important because there is some expectation one or more bank will indicate policy tightening is near and with it a subtle shift in the balance of powers. Until recently the FOMC has been the only bank on a path of policy tightening. Now, expectations for the FOMC to ramp up the pace of tightening has dimmed while that for other banks to begin tightening, the ECB in particular, has begun to pick up.

The Bank of Canada has already released their statement and the first of a string of banks to report over the next 3 weeks. In their statement they make note of increasing economic momentum among the major world powers, the USA specifically, along with an expectation for growth to continue in Canada as well. Growth is expected to slow a bit in 2020, down to about 1.8%, before rebounding in 2020 and 2020. Slowing may be related to NAFTA uncertainty, what is a certainty is that a successful conclusion to renegotiations will be a boon for the nations economy.

The ECB is the bank traders really need to watch. The bank recently released minutes from the last meeting. In them the bank let slip the committee’s readiness to begin altering public perception about policy trajectory, an end result they have achieved with the minutes themselves. The news sent the euro spiking higher to break through a key resistance level and set new multiyear highs. Now traders are looking for confirmation of the change and that could come next week. If they don’t, or if they fail to meet the markets expectations, the euro could see a big decline versus the dollar.

The BOJ meets the next week, releasing their statement on Tuesday, time to be determined. The bank recently made an adjusted to their bond purchase program that the market took as a sign of tightening. The trouble is that the bank has made this type of adjustment before and is really not expected to embark on any kind of quantifiable policy shift in the near to short term. This has left the yen elevated versus the dollar and in danger of correction. Adding to risk is a general risk-on attitude among global market participants that is driving the riskier assets.

The FOMC’s January policy meeting is scheduled the very next day and could be another major mover for the market. The bank is expected to raise rates 3 times this year and possibly at the next meeting so any indication of hesitation or urgency will be taken very seriously. Recent data suggests the US economy is still progressing at the same steady month to month clip it has for some time, the difference now is that YOY gains are starting to add up and forward outlook is good if not robust. While underlying inflation is still below the target rate there are signs it is picking up and if that gets mentioned you can be sure the dollar will strengthen.

Forex Outlook ahead of Key Central Bank Meetings

Updated 12:50PM 20/01/2020

SEK and USD are the top G10 FX gainers today while GBP and NZD are the top losers, down -0.3% and -0.17% vs the dollar. The dollar was firm around 4-week highs versus major currencies on the back of data last week which confirmed that the U.S. economy is doing well, while Yuan hit a new six-month peak.Overall the FX market was quiet ahead of the key central bank meetings, the BoJ and ECB will announce its rate decisions on Tuesday, and Thursday, respectively. There are not many expectations in terms of surprises and we expect currency moves to be a little more pronounce post ECB meeting.The Aussie and Kiwi were both poised ahead of Australian employment data and New Zealand CPI later in the week. An improvement in these metrics may halt market expectations of further interest rate cuts from the RBA and RBNZ. In the Asian equities space, the Nikkei 225 closed up 0.18% at 24,083.51, Hang Seng closed -0.9% at 28795.91 and Kospi ended 0.54% at 2262.64. The European equities were trading weaker with the FTSE down -0.22% at 7657.47, DAX down -0.14% at 13507.05, and CAC down -0.33% at 6080.57. In the rates market, global yields were trading mixed; the US 10-year yield was trading at nan% and the Bund 10-year yield trading at -0.213%. In the energy space, the Brent (front month) is trading up (0.54%) for the day at $65.2.

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Forex Chart and Technical Analysis

EURUSD Chart (Two-week)

Strategy: Support at 1.1068 for 1.1136
Short-term view: EUR/USD support at 1.1068, MACD and RSI are oversold. Hence, we see a move to 1.1136, likely 1.1170. Below 1.1068 to open 1.1037.

GBPUSD Chart (Two-week)

Strategy: Support at 1.2950, for 1.3050
Short-term view: GBP/USD support at 1.2950, MACD and RSI are overextended. Hence, we expect a bounce to 1.3050. Below 1.2950 to open 1.2900.

USDJPY Chart (Two-week)

Strategy: Resistance at 110.67 for 109.40
Short-term view: USD/JPY resistance at 110.67, RSI and MACD are topping out. A move lower to 109.40 is likely. Above 110.67 to open 111.12.

AUDUSD Chart (Two-week)

Strategy: Support at 0.6836 for 0.6920
Short-term view: AUD/USD MACD and RSI are flat and support at 0.6836. A move towards 0.6920 is likely. Below 0.6836 to open 0.6780.

FOREX-Euro struggles ahead of Fed meeting

* Euro floats around last week’s 26-month low vs dollar

* British pound remains the biggest mover in fx

* Yen gains vs dollar after BoJ meeting

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

LONDON, July 30 (Reuters) – The euro hovered on Tuesday around the 26-month low it reached last week against the dollar as investors awaited to see whether the Federal Reserve would signal the start of an interest rate-cutting cycle.

Although the Fed is expected to lower rates in the United States when its two-day policy meeting ends on Wednesday, U.S. yields will remain above those in the euro zone, making the dollar a more attractive investment for yield-seeking traders, analysts say.

Money markets are convinced the central bank will cut the key benchmark rate by 25 basis points to between 2% and 2.25% on Wednesday, but it remains to be seen whether this is going to be a one-off cut or whether more cuts will follow.

Analysts from Bank of America Merrill Lynch expect the Fed to guide on Wednesday towards more “insurance cuts” in the coming meetings, which essentially means taking preventive measures by cutting rates “in the face of high uncertainties and a cloudy outlook,” they said in a note to clients.

Nearly three cuts are priced in the money markets by the end of this year.

The euro was flat at $1.1144, unmoved by lower regional German inflation data and weaker euro area economic sentiment gauges, but not far from the low of $1.1101 it reached last week.

The consumer price index declined across most key regions in Germany in July. Traders are waiting for the preliminary harmonized German inflation data at 1200 GMT, which according to the economists polled by Reuters could show a fall in inflation to 1.5% in July from 1.6% in June, on a year by year basis.

So far this month, the common currency has shed nearly 2% against the greenback. Building expectations that the European Central Bank may turn out to be more aggressive than the Fed in easing monetary policy contributed to euro falls.

The pound was the biggest mover in the foreign exchange market, plunging to a new 28-month low of $1.2120 in Asian trading on growing concerns that Britain could crash out of the European Union without a transition agreement on Oct. 31.

Sterling was last down 0.3% at $1.2183. It was also weaker against the euro by 0.4% at 91.52 pence, having touched earlier a two-year low of 91.88 pence.

The Japanese yen was last up by 0.2% at 108.55 yen per dollar versus the dollar after the Bank of Japan as expected maintained on Tuesday a pledge to keep short-term interest rates at a negative 0.1% via aggressive bond purchases.

The BoJ also said it would ramp up stimulus “without hesitation” if needed, but traders have repeatedly said that compared with other major central banks the BoJ has limited options left.

Elsewhere, the Australian dollar reached a six-week high of $0.6887 against the U.S. dollar, but otherwise the rest of the forex market was relatively quiet.

The Swiss franc has stabilised after its recent run to two-year highs and was last up 0.1% at 1.1038 versus the euro . (Reporting by Olga Cotaga, Editing by Angus MacSwan)

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