Dovish Fed Weakens Dollar

August 18, 2016

The minutes for the FOMC meeting, released yesterday, resulted in the dollar weakening across the board. The Fed objectives are to maintain price stability and maximise employment. Despite the robust growth in the job market in June and July, household spending and business investment remains weak.

Inflation is still below the Fed’s 2% target, due to the earlier drop in energy prices and lower prices for imported goods. Exports have declined as foreign demand subdued. The global economy has been subject to vulnerability and growth is still sluggish.

The Fed anticipates gradual rate hikes, yet the recent economic indicators have given mixed signals. Despite some FOMC voters concern that a long term low interest rate level may have an adverse effect on financial stability, the Fed takes a cautious stance on a rate hike by watching carefully the job market, inflation, and global economic growth.

The Fed anticipates the job market to strengthen further and the US economy to expand at a moderate pace over the next few years. However, the global economy and the corresponding measures are both uncertain at present, therefore, it is not impossible that rates be cut to zero in response to future large aftershocks.

As long as economic data remains mixed, we can expect patience from some Fed members before voting for further rate hikes.

The Dollar Index (DXY)

In the first five minutes after the FOMC announcement, the dollar index surged to 95.06 from 94.86, then pulled back sharply after testing the significant resistance at 95.00. Hitting the intra-day low of 94.47, a 0.62% fall. The downtrend support line was broken.

This morning the bearish momentum continued, by opening low, plunging to a lower low of 94.335. It is currently testing the major support level at 94.35. The next support level is at 94.20 followed by 94.06. The resistance is the 50% Fibonacci retracement level at 94.73, followed by the significant level at 95.00.

GBPUSD

The UK Retail Sales (YoY and MoM) and Core Retail Sales figures (YoY and MoM) will be released shortly, at 09:30 GMT+1 on Thursday 18th August. The last figures of the first post referendum economic data to be released this week.

The Confederation of British Industry (CBI) reported at the end of July, the first post-Brexit survey on retail sales, for the period 28th June to 14th July. UK retail sales plunged most rapidly since January 2012, as a result of a decrease of orders, at the post financial crisis low, placed with suppliers by retailers. The CBI’s retail sales volume index fell to -14 in July from +4 in June, as retailers expected sales in August to be weak.

The better than expected UK labour market figures released yesterday, helped GBPUSD hold above the significant support line at 1.3000. After the FOMC announcement released later on, GBPUSD broke the resistance at 1.3050 and 1.3070, with strong bullish momentum, further testing the next resistance level at 1.3080, forming a new uptrend line.

Keep an eye on the upcoming UK retail sales figures. With positive readings, GBPUSD will likely test the major resistance level at 1.3100. While lower-than-expected figures, will likely pull the price back and test the downside uptrend support line and the level at 1.3050 again, followed by 1.3030, and 1.3000.

Also keep an eye on the Eurozone CPI (YoY and MoM) and Core CPI (YoY and MoM) to be released shortly at 10:00 GMT+1 on Thursday 18th August.

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