BRL Gains On Good Carry Appetite, USD Quiet

Traders hold their breath before the FOMC verdict

The two-day FOMC meeting starts today. The US stocks and global foreign exchange markets trade in wait-and-see mode before the Federal Reserve (April 29th) verdict; it is all about the US Dollar this week. Nasdaq Composite Index gap opened the session in New York, extended to a new record high (5119.828) before pulling back to 5060.246 at session close (-0.63%). The S&P 500 and Dow retreated by 0.41%, 0.23% respectively. The US equity futures traded flat-to-negative despite surprising Apple (NASDAQ:AAPL) results after the US market close. Apple beat market estimates, announced to increase its capital return plan to 200 billion dollars by the end of 2017 and raised capital purchases from 90 to 140 billion USD.

On the wire: Ford (NYSE:F), Merck (NYSE:MRK), United Parcel Service Inc (NYSE:UPS), Whirlpool (NYSE:WHR), Bristol-Myers (NYSE:BMY) (Tue), Mastercard (NYSE:MA), Goodyear (NASDAQ:GT), Noble (NYSE:NE)(Wed), Colgate-Palmolive (NYSE:CL), Exxon Mobil Corporation (NYSE:XOM), Coca-Cola Company (NYSE:KO), American International Group Inc (NYSE:AIG) (Thu), Chevron (NYSE:CVX), Moody's (NYSE:MCO), CVS Health (NYSE:CVS) (Fri).

As the US earnings continue to flow in, the impact of company results will be gradually lessened this week by the expectations, discussions and adjustments around the FOMC verdict. The implied volatilities extracted from the sovereign bond markets currently price in the first Fed rate hike by December (vs Jun/Sep formerly). This gives room for hawkish readjustment in Fed expectations, should the Fed sound optimistic regarding the US economic recovery at this week’s meeting. The technical indicators on USD crosses are muddled. The market might be overpricing the Fed dovishness.

EUR/USD holds ground above 1.0775/1.0839 (region including the 21-dma, Fibonacci 50.0% and 61.8% on April 6-13 sell-off). The uncertainties regarding the Greek situation are being left aside as the attention is fully on the Fed meeting. A hawkish surprise from the Fed should revive EUR/USD-shorts and trigger fresh sales. In any other scenario, the EUR/USD should extend recovery with the additional support of positive short-term technical indicators. Strong supply is eyed at 1.1080/1.1100.

UK GDP misses estimates heading into the “Big Day”

The UK economy missed the first quarter growth estimates. According to advance data, the UK GDP grew 0.3% q/q in Q1 versus 0.5% expected and 0.6% last. This is clearly not good news for PM Cameron’s Conservative party just a week before the general elections. The tight competition between the Tories and the main opposition LP suggests that the undecided voters may shift towards the Labour camp, which is considered to be a GBP-positive scenario given that the BoE would then need to consider an earlier-than-otherwise policy tightening in the anticipation of a looser fiscal policy under a Labour-led government.

The knee-jerk GBP sell-off has bottomed at 55-hour MA (1.5178), which has been acting as good short-term support over the past two-week rally. The bearish view below 1.5200/25 being invalidated, the bias turns neutral between 1.5310/45 and 1.5165/1.5100. The FOMC will likely stay the main driver on the USD-crosses; however the GBP/USD will be , sooner or later, facing downside risks on next week’s general elections. We keep our cautious stance on the upside attempts above 1.5200/25 former resistance.

BRL extends gains before BCB verdict

Brazil’s central bank gives verdict on April 29th and is expected to increase the Selic rate by an additional 50 basis points to counter the overheating inflation and the sharp depreciation in Real. The combination of dovish Fed expectations, the anticipation of tighter BCB rates and the relief rally amid Petrobras results reinforce the downside momentum in USD/BRL, sending the pair below the Fibonacci 50% on January-March rally. The pre-FOMC conditions are favourable for the short-term carry long positions. There is potential for deeper downside correction to 2.8155/2.8417 area (Feb support / Fib 38.2%).