D-Day?: FOMC Monetary Policy Decision

The big event of the day will be when the Federal Open Market Committee (FOMC) announces its decision on monetary policy and then Fed Chairman Bernanke meets the press to clarify any misunderstandings. And misunderstandings galore there are. When will they begin “tapering off” their quantitative easing? What will the pace be? Will they shut off the taps all at once, or simply supply fewer funds to the market? And while they’re busy roiling the long end of the fixed income market, what will they be doing at the short end? All markets have been fixated on this issue over recent weeks, ever since Mr. Bernanke conceded that they could start tapering off in the next few meetings. His explanation of the timing, pace and method of tapering will be crucial for the development of new trends.

The summary of the Fed’s new economic projections, with forecasts from FOMC members for unemployment, growth, inflation and interest rates, will also be closely examined. The Fed is forecasting GDP growth of 2.55% for this year (2.3%-2.8% range) and 3.15% next year, above the consensus of 1.9% this year and 2.7% next year (using Bloomberg’s data). It also forecasts that unemployment will average 7.4% this year (7.3%-7.5% range) and 6.85% next year, a bit more optimistic than the consensus of 7.5% and 7.0% respectively. How the Fed revises these numbers will be critical for projecting how they are likely to change their quantitative easing. The forecasts are not so far out of line as to be untenable, so they might not be revised much. The one place where they may be out of line is with regards to core PCE deflator, where the range of their forecasts for this year was 1.5%-1.6%, whereas the measure is currently running at 1.1%. They may well lower their forecast for the 2013 inflation as a result.

The CPI data reported yesterday in the U.S. do show that inflationary pressures are low despite the relentless asset-purchases by the Fed, with the MoM figure for May missing a forecasted inflation rise of 0.2%, by increasing 0.1% as the fuel oil CPI component saw a 2.9% decrease. The headline YoY metric, however, and the one excluding food and energy both were reported in line with forecasts, as 1.4% and 1.7% price increases were seen relative to last year. The building permits and housing starts data for May also came in softer than expected, with the former deteriorating and the latter coming in lower than the 6-month average, tarnishing somewhat the seeming recovery in the housing market.

The Market

EUR/USD
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• The mixed ZEW Survey for June hardly moved EUR/USD, as the improved German and Eurozone economic sentiment was counterbalanced by Germans’ less optimistic outlook with regard to the current situation. The overall weaker than anticipated U.S. data was followed by a 75 pip increase in EUR/USD, ahead of today’s much awaited conclusion to the FOMC meeting.

• Trading is likely to be limited to short timeframe technical trading ahead of Bernanke’s press conference. Resistance is seen yet again just below 1.3400 with 1.3425 – 1.3440 being a likely resistance area, with the latter level seeing weak trendline resistance, which extends from the two most recent EUR/USD peaks the past couple of years. Weaker resistance levels are seen thereafter at 1.3470, 1.3510 and 1.3575. Weak support comes at 1.3375 with Fibonacci and tested trendline support seen at 1.3340. The 1.3320 and 1.3300 support levels still hold with Fibonacci support thereafter at 1.3230.

USD/JPY
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• Japanese equities are trading higher today, albeit on low volumes in light of the FOMC meeting, boosted by a surge in exports in May on the weaker yen. The 10.1% increase in YoY Japanese exports beat estimates of a 6.5% increase, leading to a lower than expected, albeit the third largest ever, trade deficit,.

• Support is currently seen at 95.30 and 94.90 with strong Fibonacci support at 94.40. Resistance comes at 95.90, 96.40 and 97.05.

GBP/USD
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• Cable was a major loser yesterday as the much higher-than expected U.K. CPI of 2.7% for May, which is thrice the rate of basic pay growth, gives the BoE less room to manoeuvre by stimulating the economy with further stimulus should it be warranted.

• Strong support is seen at 1.5610 with further tested support in the 1.5550 – 1.5570 area and thereafter significantly lower at 1.5500. Resistance comes at 1.5665, 1.5690, which sees the 200-day MA and a notable Fibonacci level, and 1.5730. Although we have confirmed bearish crossovers on both the RSI and the Stochastic oscillator, the significance of the news that will come out of Bernanke’s mouth today diminishes the significance of these technical signals.

Gold

• Gold tumbled despite the dollar’s depreciation as the lower than expected U.S. MoM CPI data and the fairly low inflationary pressures reduced the appeal of holding an inflation hedge. Selling pressure for the precious metals, though, also occurred on the possibility the Fed will announce today a tapering of its stimulus on account of economic recovery that reduces the need to hold a zero coupon haven asset.

• Having broken down from the shorter term pennant, support is now seen at $1363 and the $1348 - $1353 area, with the latter area seeing pennant support that extends from the April low. Resistance comes at $1375, $1387 and $1395.

Oil

• WTI reached its nine-month high on decreasing stockpiles, with the EIA expected to report today a decline by 0.5m barrels.

• Resistance is seen at $98.50, $99.35 and just below $100, with weak support at $98.10, Fibonacci support at $97.75 and trendline support at $96.95 and $96.25.

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MARKETS SUMMARY