Rate Liftoff Around the Corner

Daily Analysis - 25/05/2015

Interest Rate Policy Normalization Coming in 2015 According to Fed Chair Yellen

Janet Yellen once more confirmed that liftoff for key interest rates is expected for 2015 despite the raft of bad data that has caused the Fed to pause and reconsider policy strategies. Weaker consumer prices, slower growth, and unemployment still not at preferred levels have caused some concern amongst policymakers trying to figure out the timing for higher rates.

Yellen Confirms 2015 Liftoff

In remarks on Friday, Federal Reserve Chairwoman Janet Yellen highlighted the rate outlook in comments focused on the state of the US economy. While the Federal Reserve is monitoring certain metrics like employment, prices, and GDP, many of these indicators are not trending at the conditions sought for interest rate normalization. Yellen was very dismissive of first quarter GDP figures, noting the factors subduing growth were likely transitory. The second reading of first quarter GDP due later in the week is expected to show a substantial contraction from the prior figure with economists estimating -0.80% contraction versus the prior number which displayed 0.20% expansion. Core consumer prices rose at the fastest pace in years just as annualized CPI fell into negative territory, highlighting the headwinds to hiking rates. Equities retreated slightly on the comments while the dollar momentum higher continued on expectations of more hawkish monetary policies.

Greece Talks Breakdown

Talks on the sidelines of the latest Summit in Riga for European Union leaders saw negotiations between Greece’s Alexis Tsipras and Germany’s Angela Merkel break down after an earlier ultimatum from French and German leaders stating that Greece must reach an aid deal by the end of the month. Greece is now trying to convince creditors to compromise after stating that the nation could not implement further austerity measures. Room to maneuver is quickly disappearing as Greece faces payments to pensions and public salaries by Friday and also repay EUR 300 million to the IMF on June 7^th, notwithstanding the EUR 650 drawn from IMF strategic drawing rights earlier this month. The idea of a parallel currency system with IOU’s pitched by German Finance Minister Wolfgang Schaeuble was not greeted with optimism with the Euro tumbling on the remarks. EURUSD continues to give up ground trading -0.33% lower.

Commodities Retreat

The recent ascension in the dollar has cooled the rally in commodities with gold largely reversing last week’s gains on the persistent weakness in the dollar. A rise in speculative net long positions according to the most recent CFTC numbers showed long positions rose to 122.6K versus 77.4K in the prior week amid the swift rally higher in prices. However, the rebound in the dollar cut the rally short with prices currently trending back towards the important $1200 per troy ounce level. WTI crude oil prices are also vulnerable, remaining under the key $60 per barrel technical level. Brent prices also continue to correct lower, presently trading beneath the $65 handle as the spread between the two major benchmarks narrows to $5.50. Action in commodities will likely be limited during today’s session owing to the Memorial Day holiday in the United States and bank holiday in the United Kingdom which will see abbreviated trading hours.

EURCAD Head and Shoulders Technical Pattern

The Euro continues to weaken broadly against peers as the next looming deadline for Greece rapidly approaches, overshadowing positive economic data and creating a skittish environment for traders. However, the recent weakening might be on the verge of reversing as upcoming data from Canada is likely to show the economy continued to slow despite no imminent forecasted changes to monetary policy. However, should GDP underperform expectations by a wide margin, it could fuel more upside in the EURCAD pair just as it ebbs near the neckline of a head and shoulders bullish technical pattern. The formation has a bias to the upside with the right shoulder currently in the process of materializing and a target of 1.3770 on the upside. Any move below support at 1.3442 would be indicative of a breakdown in the pattern, paving the way towards further downside in the EURCAD pair.