Mid-Day Report: Dollar Mildly Lower after Weak CPI, FOMC Awaited

Dollar drops mildly in early US session after weaker than expected inflation data. But loss is so far limited as markets await FOMC policy decision. Headline CPI slowed to 1.7% yoy in August versus expectation of 1.9% Yoy. Core CPI also slowed to 1.7% yoy, versus expectation o 1.9% yoy. Later today, FOMC is expected to reduce a further USD 10b in the QE program, leaving a final USD 15b which will be removed at the October meeting. We expect to see the statement modified to signal clearly that the QE would end in October. The biggest question is whether FOMC would change the language in the accompanying statement to reflect that rate hike is nearing. To be specific, Fed noted that rates would stay near zero for a “considerable time” after QE ends. And markets are wondering if Fed would drop “considerable time” and vote pattern for such change or not. Fed will also release updated economic projections. There could be upward revision in GDP forecast and downward revision in unemployment rate.

Sterling is generally higher today after BoE minutes but the move is relatively limited as traders remain cautious ahead of the Scottish independence referendum. The BoE minutes for the September meeting showed a 7-2 vote to keep the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. Same as the August meeting, Martin Weale and Ian McCafferty dissented the policy decision and voted for a 25-bps hike to 0.75%. The staff revised higher their forecast for 3Q14 growth to 0.9%, whilst noting downside risks in 4Q14. The central bank only touched the September 18 Scottish referendum briefly, noting the uncertainty of the outcome has raised the volatility in the foreign exchange market. More in BOE Minutes Show Another Month Of 7-2 Split Of Monetary Decision.

Separately, the latest employment report showed further improvement in UK’s job market. The headline ILO-harmonized unemployment rate (3-month) dropped to 6.2%, the lowest in more than 5 years, in July from 6.4% in the prior month. Meanwhile, the claimant count jobless rate fell to 2.9%, the lowest since September 2008, in August from 3% in July with the total claimant level dropping for the 22nd straight month, by -37.2K, to 966.5K in August. This was the first time that the figure fell below 1m since September 2008. The July reading was revised to a -37.4K drop from the previous estimate of -33.6K.

Released elsewhere from Europe, Eurozone CPI was finalized at 0.3% yoy in August, revised up from initial estimate of 0.3% yoy. Core CPI rose 0.9% yoy in August, unchanged from prior reading. Swiss ZEW expectation deteriorated sharply to -7.7 in September.

The China’s PBoC is injecting CNY 500b, or USD 81b into the five major state-owned banks. The intention is to boost liquidity to channel through to public housing and private businesses. The massive size of injection is seen as equivalent to 50 bps cuts in the so called reserve ration requirements for the whole banking system. Such expansion of monetary base was also seen as “printing money” and a form of quantitative easing. Economists noted that such a move was the first time in response to recent weak economic data and there could be additional steps ahead including fiscal spending.

Daily Pivots: (S1) 1.6186; (P) 1.6249; (R1) 1.6336; More

GBP/USD rises to as high as 1.6350 so far today as the recovery from 1.6051 continues. Outlook remains unchanged though as such recovery is viewed as a correction only. While further rise cannot be ruled out, we’d expect upside to be limited by 1.6534 support turned resistance and bring fall resumption. Below 1.6161 minor support will turn bias back to the downside for 1.6051 first. Break will extend the decline from 1.7190 through 50% retracement of 1.4813 to 1.7190 at 1.6002 to 61.8% retracement at 1.5721.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. The firm break of 55 weeks EMA affirmed this bearish case and GBP/USD is now heading back to 1.4813 key support level.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
22:45
NZD
Current Account Balance Q2
-1.07B
-1.04B
1.41B
1.47B
00:30
AUD
Westpac Leading Index M/M Aug
-0.10%

-0.10%

08:30
GBP
BoE Minutes

08:30
GBP
BoE Official Bank Rate Votes
2–0–7
2–0–7
2–0–7

08:30
GBP
BoE Asset Purachse Facility Votes
0–0–9
0–0–9
0–0–9

08:30
GBP
Jobless Claims Change Aug
-37.2K
-29.7K
-33.6K
-37.4K
08:30
GBP
Claimant Count Rate Aug
2.90%

3.00%

08:30
GBP
ILO Unemployment Rate (3M) Jul
6.20%
6.30%
6.40%

09:00
CHF
ZEW (Expectations) Sep
-7.7

2.5

09:00
EUR
Eurozone CPI M/M Aug
0.10%
0.10%
-0.70%

09:00
EUR
Eurozone CPI Y/Y Aug F
0.40%
0.30%
0.30%

09:00
EUR
Eurozone CPI – Core Y/Y Aug F
0.90%
0.90%
0.90%

12:30
USD
CPI M/M Aug
-0.20%
0.00%
0.10%

12:30
USD
CPI Y/Y Aug
1.70%
1.90%
2.00%

12:30
USD
CPI Core M/M Aug
0.00%
0.20%
0.10%

12:30
USD
CPI Core Y/Y Aug
1.70%
1.90%
1.90%

12:30
USD
Current Account Balance Q2
-99.5B
-$115.0B
-$111.2B
-102.1B
14:00
USD
NAHB Housing Market Index Sep

56
55

14:30
USD
Crude Oil Inventories

-1.0M

18:00
USD
FOMC Rate Decision

0.25%
0.25%

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