On a technical basis, the pair broke out of an 8-day long consolidation but Thursday’s rally stopped right at the 100-day and 20-week SMAs, which are natural areas of resistance. Shorter-term charts show the possibility of continued gains but that’s predicated on Friday’s U.S. retail sales report. Producer and consumer prices surprised to the downside this week with year-over-year US CPI growth slowing to its weakest pace in 4 months. While neither one of these reports will stop the Federal Reserve from tightening this month, they increase the chance that it’ll be the last hike of the year. If retail sales also surprises to the downside like economists anticipate, it would reinforce the EUR/USD’s positive bias and take the pair to 1.18. However if consumer spending improves – and we think it could given the acceleration in wage growth – the record-breaking moves in U.S. stocks and stronger spending reported by Johnson Redbook, EUR/USD could sink back down to support near 1.1610.
Sterling also traded higher on Thursday but not as a result of the Bank of England’s monetary policy announcement. GBP/USD actually weakened slightly after the central bank voted unanimously to leave interest rates unchanged. Its decision wasn’t a surprise considering that BoE just raised interest rates in August. The central bank expects inflation to ease next year due to an energy price cap but pay could be stronger due to a healthy labor market. Ongoing tightening will be needed according to the central bank but future rate hikes will be limited and gradual. It wasn’t until the release of U.S. CPI that GBP/USD started to strengthen. The pair eventually broke above 1.31 on the back of the ECB’s optimism and general USD weakness. Looking ahead, Brexit negotiations continue to go well and we think that they will carry GBP/USD to 1.32.
The Australian and New Zealand dollars stretched higher while the Canadian dollar held back. AUD and NZD benefitted from the general improvement in risk appetite and Wednesday night’s stronger-than-expected labor-market report. A total of 44K jobs were created in August, the majority of which were full time. The Australian economy has held up remarkably well despite slower Chinese growth and China’s troubles with the U.S. but eventually the challenges faced by Australia’s largest trading partner could come back to haunt the currency. The Canadian dollar failed to participate in Thursday’s rally because there haven’t been any breakthroughs in trade talks between the U.S. and Canada. Apparently there were reports on Thursday that Trump told donors he would drop Canada from the U.S.-Mexico-Canada pact if they don’t agree to his terms. The talks haven’t broken down completely but Canadian Foreign Minister Freeland was the first to admit that plenty of work still needs to be done.
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