FTSE -10 points at 7490
DAX +22 points at 12787
CAC +16 points at 5277
Euro Stoxx +4 points at 3561
The Federal Reserve (Fed) is expected to raise the interest rates by 25 basis point today. The US dollar and the US yields are calm before the Fed decision, the markets are almost fully prepared for the US rate hike. The Fed’s balance sheet normalisation plans and the future outlook of the US rate policy should determine the short-term direction in the USD markets.
The U.S. 10-Year yields are steady near the 2.20% level.
The Dow Jones traded at a fresh all-time high yesterday, the S&P 500 gained 10 points. As we mentioned in our yesterday’s report ‘any Fed outcome could be positive for the US stocks’. A hawkish Fed would underpin enthusiasm on solid US recovery and lift the stock prices, while a dovish Fed would suggest a longer period of softer yields and cheap liquidity and encourage increased allocation in the stock markets. As a result, if stock traders are willing to seek reasons to stay invested in stocks, there will be plenty of them.
Gold found buyers prior to the 50-day moving average ($1,260) yesterday. The market reaction to the Fed’s decision should give a clearer view on the short-term appetite. The key support stands at $1,255 (50% level on May-June rise), if broken, should encourage a further fall to $1,245 (major 61.8% retrace & 100-day moving average) and $1,240 (200-day moving average). On the upside, offers are touted at $1,276.50 (minor 76.4% retrace), if surpassed, should gather a stronger momentum toward the $1,295/1,300 mid-term resistance.
The pound recovered more than a figure on strong inflation data released on Tuesday. Asian traders lifted the GBP/USD to 1.2756, the EUR/GBP traded below the 0.8800 mark during the majority of the overnight session.
Rising inflationary pressures have become a serious threat to the Bank of England’s (BoE) loose monetary policy as the country moves into a tense period of Brexit negotiations with the EU. The latest news suggest that the EU would move the euro clearing from England, which would be a first step in compromising London’s financial position at the heart of the continent. Banks could open under pressure in London.
Besides, the UK releases its labour data today. The UK unemployment rate is seen steady at 4.6% and the average weekly earnings are expected to have grown at the steady pace of 2.4% year-on-year. Solid earnings data should revive the BoE-haws before the BoE’s monetary policy meeting due on Thursday. Still, a slower wages growth combined with a fast rising inflation means gradually lower purchasing power for British households. This is why, the gap between the wage and price inflation should translate into a slowdown in inflationary pressures. The question is when.
The BoE is expected to maintain the bank rate and its asset purchases target unchanged at this week’s meeting. The balance between the hawkish and the dovish MPC members will be the main highlight for the pound traders. Following Tuesday’s inflation print, certain MPC members may choose to move to the hawkish camp and favour a monetary tightening sooner rather than later. The expectation is a 7-0-1 vote in favour of the status quo. If more members shift to the hawkish camp, the pound could make a renewed attempt to $1.30. Still, the market assesses no more than 11.1% probability for a BoE rate hike before the end of this year.
In China, the industrial production performed slightly better than expected in May: 6.7% year-on-year versus 6.6% expected by analysts. Copper and iron ore traded lower despite encouraging Chinese data.
The Crude Oil WTI (-1.01%) is having a poor session, even after Saudi’s decision to limit exports to the US and Asia. Later in the session, the EIA data could halt bleeding. Analysts expect 2.3 million barrel contraction in US crude inventories last week. However, a slower contraction or larger inventories in the US stockpiles could compromise the $45/barrel support following data release.
The FTSE rolling index remained offered below the 200-day moving average (7525p) on stronger pound and softer energy and commodity markets.
The AUD/USD held the ground above its 200-day moving average (0.7515) in Sydney. The pair remains rangebound between 0.7515 and 0.7565 (200-dma and June double top). Appetite in the US dollar should give a positive or a negative spin to the pair before Thursday’s labour data in Australia.
A positive breakout could push for a rise to 0.7588/0.7600 and build a basis for mid-term extension toward 0.7650 (minor 76.4% retrace on March-May decline) and 0.7750/0.7800 mid-term resistance. A negative breakout could trigger a sell-off to 0.7488 (38.2% retrace), 0.7465 (50-dma) and pave the way for a further deprecation toward 0.7370 (support to the latest rebound) on weekly basis.
Quick glance at technicals on LCG Trader:
GBP/JPY intraday: upside prevails. Long positions above 139.45 (pivot) with targets at 140.80 & 141.20 in extension. Below 139.45, downside potential to 139.00 & 138.60.
GBP/USD intraday: upside prevails. Long positions above 1.2680 (pivot) with targets at 1.2770 & 1.2825 in extension. Below 1.2680, downside potential to 1.2635 & 1.2600.
S&P500 (CME) (U7) intraday: upside prevails. Long positions above 2433.00 (pivot) with targets at 2440.00 & 2443.00 in extension. Below 2433.00, downside potential to 2429.00 & 2425.00.