We expect the current improvement in risk appetite seen in the weakening yen, rising gold and strengthening equity futures to extend into the U.S. session. Today’s speeches from Federal Reserve officials are likely to be a source of further equity gains as they further increase chances of a 50-basis point rate cut later this month. The fact that the speakers will be Fed’s most hawkish (Plosser) and dovish (Rosengren) officials should have an effect on the market. A 25-bp rate cut is currently cemented in the market. Consistent with this scenario, we expect gold prices to extend from their latest all time high of $875 to $885 per ounce.
At 8:20 am, Philadelphia Fed president Plosser will speak on his economic outlook. Mr. Plosser has sounded the most hawkish Fed official, which means that any notable shift towards dovishness may boost equities and favor Aussie, Kiwi and Loonie.
The 10 am release of the November pending home sales is expected to show a 2.0% decrease after two consecutive monthly gains. This means that a decline may not be badly received as it would suggest a give back of previous gains.
At 10:50 am, Boston Fed President Rosengren will speak and may shed light on why he was the lone dissenter at the December Federal Open Market Committee (FOMC) decision, where he voted for a 50-bp rate cut against the majority of 25-bps.
Aussie Eyes 88.50¢
We expect the Aussie to extend recent gains towards the 88.25¢ target, amid further improvement in risk appetite and emerging expectations of a quarter point rate cut by the RBA next month. A decline in U.S. pending home sales of no more than 3% is likely to prolong the Aussie’s climb to as high as 88.50¢. Recall that the RBA raised rates to a 16-year high 6.75% last November and was expected to follow through in December but the worsening U.S. market turmoil weighed on global credit liquidity, forcing the RBA to hold unchanged. Thus, continued absence of bad news from the write-down front as well as increased expectations of another lifeboat from the Fed should further boost the Aussie towards 88.70 in the medium term. Support climbs to 87.50, backed by 87.20¢. The main downside risk to our bullish Aussie outlook is renewed selling in equities, such as an S&P 500 slide below 1,400.
Similarly, AUD/JPY is seen targeting the 97.60, followed by 98.20.
Yen to Extend Losses
Our short-term (24-hour) outlook calls for further yen weakness, as speeches from the Fed this week will cement a rate cut later this month, making 50-bp easing an 80% to 85% probability. USD/JPY is seen furthering its climb towards 109.80, followed by 110.20. Support stands at 109.20, backed by 109.80.
GBP/JPY seen recapturing the 217 figure, followed by 217.30 and 217.60. Key resistance stands at 218. Support stands at 216.15-20, backed by 215.70.
EUR steady despite weak sales
Euro struggles to hold above 1.47 after November retail sales fell 0.5% following a 0.7% decline in October. A return to risk appetite is normally euro positive, which opens the possibility for seeing 1.4750, but additional gains are not expected. Instead, we see higher 70% odds for EUR/USD breaking below 1.47 towards 1.4680. Key medium-term foundation stands at the 50-day MA of 1.4620.
Sterling capped at 1.9820, but retreat seen ahead of BoE
We mentioned yesterday Cable will be capped at 1.9820. Today, the pair stands a 75% chance of breaching this level and extend gains to as high as 1.9870. Tomorrow’s Bank of England (BoE) decision is expected to hold rates unchanged at 5.50%. The possibility for a surprise 25-bp cut stands at 20%. Today’s release of the HBOX/Halifax price index showed a 1.3% increase last month, which is the first increase in 4 months. Year on year price change was up 5.2%. The outlook for further price declines is very clear, yet we do expect the BoE to stand on hold this Thursday. Support stands at 1.9740, backed by 1.97.
USD/CAD eyes 0.9960
The recent gains in USD/CAD are seen capped at 1.0025-30, as we expect renewed losses below 1.00 to 0.9990. Key target stands at 0.9960. CAD traders await Friday’s employment and trade figure, which will shed fresh light on the growth outlook.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
