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US Interest Rates are Expected to Rise this Wednesday after the FOMC Meetings

By OFX

This week’s big event is Wednesday night’s interest rate decision from the Federal Reserve in the States with a hike in interest rates all but guaranteed. The current economic situation in America undoubtedly justifies the move higher however markets will be keen to see if Fed Chairman, Jerome Powell echoes the market sentiment about the possibility of a slowdown in growth from next year. The US economy has so far been impervious to President Donald Trump’s trade war with China. However, there is growing concern that the aggressive measures implemented by Trump will come back to haunt the world’s biggest economy.

Beijing and Washington continue to retaliate against one, and another Washington has imposed $200 billion in duties while China has tariffs of $60 billion worth of US goods. Talks have broken down, and some believe China is willing to hold off until after the November 6th elections with polls favoring the Democrats, this may present a less harsh environment for negotiations.

Oil trades higher after OPEC and company signal that production need not be added to help supply, despite calls from Trump to increase supply to curb demand. Market participants are placings bets for crude to trade higher in the coming months citing 100 dollars a barrel as a target. Brent Crude traded at $80.93 its highest level since November 2014.

The Canadian Dollar opens this morning at 1.2933 vs. the greenback and has held its head just above the 1.29 handle for now. The pair moved within a 50-pip range on Friday as we saw the release of Canadian CPI and Retails Sales data. CPI reportedly dipped to 2.8% in August as expected and it remains above the Bank of Canada’s target for the seventh consecutive month. The higher stable reading has boosted expectations the Bank of Canada will again raise rates in October. Core-inflation prices rose in a range from +2.0% to +2.2%, based on the three preferred gauges used by the BoC. Market expectations of an interest rate hike in October, as reflected in the overnight index swaps market, rose to 88.74 percent from 84.46 percent before the release of the inflation data. The Bank has raised rates four times since July 2017 and maintained a 2% target for inflation.

Meanwhile, Retail Sales climbed 0.3 percent in July following a decline in June, led by demand for food and higher gas prices. Today sees the release of Wholesale Sales which was expected at 0.4%, printed better at 1.5% a solid print.

NAFTA continues to make headlines with President Trump having an agreement in place with Mexico, the White House is putting pressure on its Northern neighbor for a deal by the end of this month. Talks are expected to resume in New York as both Canada and the US are speaking at the United Nations National Assembly both US Trade Representative Lighthizer and Canadian Foreign Minister Freeland are scheduled to attend.

The Euro continued its upward trajectory into Friday after hitting a weekly high of 1.1802 and its highest level since June 14th. Trading higher following a bout of greenback weakness, risk appetite continued to improve as US trade war tensions eased. EUR/USD rallies stalled at the 1.18 handle following softer than expected headlines on Flash Manufacturing services in the Eurozone along with output growth in France, softening to a 21-month low in September.

This week’s drivers for the pair will be this month’s Federal Reserve meeting on Thursday whereby it is widely expected that a further interest rate hike of 0.25% is on the cards. ECB President Mario Draghi speaks at 9 am EST before the European Parliament economic and monetary affairs committee in Brussels. Further clues could be seen in Draghi’s speech over potential rate hikes in 2019 as ECB is on course to unwind QE in December 2018.

The Euro settled at the close on Friday at 1.1750 and opened this morning at 1.1752.

The cable started the week strongly last week as we saw strong domestic inflation numbers and retail sales come in above market expectations and markets remaining calm on the US-China trade war. The positive sentiment was short-lived though as the sterling plummeted during Friday’s European session after comments from British Prime Minister Theresa May proclaimed the European Union must supply an alternative Brexit proposal after a continued lack of progress during the Salzburg Summit. The pound shed 1.5% against the greenback to touch 1.3070, representing its biggest daily loss since June 2017.

It is shaping up as a busy week for the Sterling, with Brexit to remain front and Centre with negotiations between the EU’s Michel Barnier and the UK Brexit Secretary Dominic Raab set to continue. We also have further data due out of the domestic economy in the form of UK Q2 GDP with markets expecting 0.4$ QoQ and 1.3% YoY growth. This read will be closely watched after last week’s strong inflation and retail sales data. We also have commentary from the Bank of England due throughout the week with the bank unlikely to release rates in the near term despite rising inflation and upbeat economic indicators.

On the technical front, we see new GBP/USD supports at 1.3114 before 1.3072 with topside resistance firstly at 1.3157 and 1.3201.

The Australian Dollar posted a 3-week high on Friday against its US counterpart defying all odds the pair would tumble in an environment of escalating trade war tensions between the United States and China. The local unit has seen its biggest weekly advance in 14 months and moved 2.26% higher from lows of 0.7141 to a high of 0.7303.

There were no local economic data releases overnight however Standard and Poors upgraded its outlook in Australia AAA credit rating to “stable” from negative on Friday, providing the Aussie with a further lift. The move comes on the back of an earlier than expected return to surplus, record employment growth, spending restraint and an "orderly unwind" of the Sydney and Melbourne housing market.

Looking ahead, it’s a quiet week locally for macroeconomic releases, and therefore the Aussie will take directions from offshore events including further trade developments.

On Friday, the New Zealand dollar traded in a tight trading range, meeting some resistance just shy of 0.67, and closing the week around 0.6680. On the data front, last week visitor arrivals were up 12,700 to 246,700. The biggest changes were in arrivals from: Australia (up 3,100) China (up 2,300) Malaysia (up 1,200). Credit Card Spending rose 7.7%.

The start of the week looks very quiet on the macroeconomic calendar. All kicking off on Wednesday with the release of Trade Balance and ANZ Business Confidence. On Thursday, all eyes will be on the Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement which is expected to leave interest rates on hold at 1.75%.

From a technical perspective, the NZD/USD pair is currently trading at 0.6663. We continue to expect support to hold on moves approaching 0.6644 while now any upward push will likely meet resistance around 0.6727.