November was marked by an appreciation of the EUR/USD pair.
In its first day, FED confirmed that Federal Fund Rate will not change and stated that the economic activity is growing steadily, which had a negative impact on the pair. In the following days, the release of US Unemployment Rate showed that labor market maintains a favorable progress, leading the USD to appreciate again. This trend was maintained until November 7th when the pair reached 1,1586 due to the released of lowest value of German Industrial Production since January. On the 14th, German Preliminary GDP q/q data was announced at 0.8%, 0.2pp higher than forecasted, appreciating the pair to 1,1797 that day. In the following ones, the pair registered a depreciation trend, particularly on the 20th, with German Liberal Party stating that the political coalition with Christian Democrats couldn’t be fulfilled, creating the idea that the only solution would be a Snap Election. Moreover, eight days later, Jerome Powell, new FED Chair nominee, announced that he would continue to normalization of Monetary Policy, and that expects interest rates to continue to rise, which depreciated the pair that closed the month at the value of 1.1902.
In November, EUR/USD started at 1.1631 and has registered a bullish movement.
On the 3rd, the MACD crossed down the signal line confirming the beginning of a downtrend, which led the pair to decrease until reaching the support line marking of 1.1555 on the 7th - the lowest value of the month. In the following days, the EUR/USD climb was consistent, even breaking the resistance of 1.1712, on the 14th. At the same time, the difference between SMA 100 and SMA 50 was smaller and smaller, prospecting a nearby cross, as MACD was already above signal line confirming the strength of the upward momentum. The spot rate then floated between the new support of 1.1712 and the resistance 1.1847 until occurring an increase movement that broke the resistance and defined a new one of 1.1940 on the 24th; the pair then bounced between the new support (previous resistance) of about 1.1847 and the new resistance not breaking any of them, ending the month at 1.1902.
Fed Chair Nomination
On November 2nd Donald Trump made an important, if yet predictable, decision. He has nominated Jerome Powell to be the next Chair of the Federal Reserve. If his nomination is confirmed, Jerome Powell will be the sixteenth Chair of the Fed, following the incumbent Janet Yellen. Although the nomination was expected, and will probably be passed without major hiccups by the senate, the President of the US broke a precedent that goes back many years by not keeping Yellen for a second mandate. Source: The NY Times
There was much speculation about what Trump would do and who were the possible candidates to the position but, as the day of the nomination closed by the field, it narrowed to three possibilities. The names most heard in the press were Jerome Powell and John Taylor, even if Trump insisted that renominating Yellen was still a possibility. Taylor is a Stanford economist and has previously served as Treasury undersecretary for international affairs; he has been an outspoken critic of Yellen’s mandate and his nomination would mark a stark change in the Fed’s Monetary Policy and could be severely disrupt to the financial markets. Powell, on the other hand, would not be as disruptive. He, a law school graduate, has served as a Fed governor since 2012 and has voted in favor of every Fed policy during his tenure. Source: The NY Times
Powell, despite being a Republican and not an economist like Yellen, is not expected to noticeably change the current Monetary Policy that has been carried out by its incumbent until this moment. As governor he was a centrist voice in Yellen’s majority, calling for the end of the stimulus campaign at a cautious but steady pace. Where he could be different than Yellen is in his stance on bank regulation, an area where the President has been quite vocal on his preference for looser regulation. And, albeit the transition is expected to be smooth with Yellen stating that she was “confident in his deep commitment to carrying out the vital public mission of the Federal Reserve”, it has its opponents with Paul Ashworth, chief US economist at forecasting firm Capital Economics referring that Powell’s resume is subpar for a Fed Chair nominee and that, under his mandate, there is a higher risk of a serious policy mistake. Source: The NY Times, CNBC
The nomination had little effect on the US financial markets. The nomination came out on the same day as the details of a big tax reform bill that Senate Republicans have been announcing for quite some time, hence it is challenging to distinguish between the effects of the two facts. The 10-year Treasury Bonds had their yield at 2.35%, lowering from the 2.4% value that was crossed in the week before when John Taylor was still a potential candidate, a more hawkish one. The idea of Powell being more dovish on Monetary Policy caused the dollar to trade slightly lower on the days leading up to his nomination as it was expected. After the nomination the Dollar Index fell 0.1% to 94.7, although it was higher than the five-session low of 94.41 hit previously on the same day. Source: FT
Jerome Powell’s confirmation hearing was held on November 28th. One of the questions he answered concerned regulation, a topic in which he is seen as posing a significant change from his future predecessor. Questioned about the Dodd-Frank act (a law made in 2010 after the banking crisis that has made big changes to bank regulation), he asserted that the law was successful in strengthening the financial system but could use some improvement. Praising the reforms as successful in assuring that no bank is too big to fail, he claimed that they also imposed some burdens on banks that weren’t necessary. By taking this mid of the road, a moderate approach, he didn’t completely satisfied neither of the sides of the aisle, leaving Elizabeth Warren, a senate Democrat, stating that she was worried about his opinion of a lack of need to have stricter regulation. About the economy, he showed himself optimistic saying he expects his country’s GDP to grow at 2.5% this year and the next, which are better numbers than the economy has had for several years now. With also a low unemployment rate, at 4.1%, he thinks that all the conditions are met to normalize the interest rates and to reduce the size of the balance sheet, which has grown quite much as the Fed responded to the recent crisis. Questioned about it, Powell also affirmed he was “strongly committed to an independent Federal Reserve”, responding to Democrats’ worries of pressure from the White House. Source: BBC, abc News
There are still some steps between Powell and his appointment as the Chair of Federal Reserve. He now must deliver written responses to follow-up questions made by the committee, who will then vote on his nomination. Passing the committee, which is expected, Powell will then stand before the full Senate before he is appointed to the job. Though expected to be appointed before the end of Yellen’s mandate in February of 2018, he will have to succeed a mandate in which Yellen came as close to achieving its mandate as at any time in history by controlling inflation at the same time unemployment was sharply reduced. Source: The Wall Street Journal, The NY Times