FX Daily Strategy: Europe, Jul 29

The FOMC meets on July 29 in a meeting that will see no update to the dots or economic forecasts. With forward guidance now becoming limited all meetings should be seen as live, but after softer than expected June non-farm payroll and more importantly CPI data, a change in policy looks unlikely at this meeting.  The case for tightening will be debated, but no more than two hawkish dissents are likely. 

The last meeting on June 17, the first under incoming Chair Kevin Warsh, saw rates left unchanged at 3.5-3.75% with no dissenting votes, but the dots had a hawkish skew, with nine out of eighteen respondents seeing tightening this year, and only one seeing an ease and eight seeing steady policy. Minutes from the meeting showed two scenarios were discussed. The first saw inflationary pressures dissipating and inflation soon beginning to return to 2%, in which it would be appropriate to maintain or eventually lower the target range for rates. The second saw stable labor market conditions and persistent elevated inflation, under which some policy firming would be needed.

Cautious trade around resistance at 101.50 has given way to a pullback, with prices currently trading around 101.25. Intraday studies are falling, pointing to room for continuation towards support at 101.00. However, mixed/positive daily and weekly readings should limit any initial tests in consolidation. A break, if seen, would add weight to sentiment and extend losses towards strong support at the 100.35 weekly low of 15 July. Meanwhile, resistance remains at 101.50 and extends to critical resistance at the 101.80 current year high of 24 June. This range should cap any immediate tests higher.

The Q2 and June Australian CPI will likely show another moderated but still above target number. Energy price was beginning to go down and should put a lid on inflation, yet it will well remain above 3%. The RBA will read more into the trimmed mean item, which could potentially show a more stubborn figure. Yet, they will be hesitant to hike rates in the coming meeting as the concern of lagged effect and softer domestic demand keep them cautious.

On the chart, prices extend choppy trade within the .6960/.7020 area. Daily studies are mixed and suggest further ranging action around the .7000 level. Would take break above the .7000/20 area to open up room for stronger gains to retrace the May/June losses. Clearance will see scope for extension to strong resistance at the .7070/.7100 area. Meanwhile, support at the .6950 congestion underpin. Would take break here to fade the upside pressure and return focus to the downside for retest of .6912/00 congestion area and .6865 June low.