The session ahead of the FOMC is usually a quiet affair, but as we mentioned through the week, the release of the latest inflation stats as well as retail sales would add some fresh colour on the accompanying statement, allied to what many still see as an opportunity for the Fed to further normalise rates despite the fade in US data.
This was highlighted in the core yoy CPI miss, which fell 0.2% short of the consensus 1.9% read, but in light of the inflation weakness in the other major economies around the globe, and not least of all Europe, the soft number has to be taken into context. Rather we look to the 0.3% fall in retail sales in May as a notable detractor to the growth stats for Q2, and as such, the dovish expectations on the rate path beyond tonight have been underpinned, but has the market overreacted?
This is something which may be levelled at the likes of GBP and AUD at first hand, and focusing on the former, weak wage growth in the UK employment report this morning widens the gap with core inflation, reported yesterday, but the softer Brexit expectations saw a more modest dip than one would have expected in its own right.
The BoE meeting tomorrow may see the market given further direction on this, but key to our view that we will struggle to see 1.3000 again in the near term is the complete uncertainty over how the talks with the EU play out – and this with no government ‘agreement’ in place yet. This has been delayed by the horrendous fire at Grenfell Tower in central London.
For AUD, it is the ongoing concerns over demand out of China and the impact on raw materials prices which led to the bearish tones in May, but June is shaping up to be a strong month. Copper in particular has recovered well after trading back off range lows below USD2.50, but the softer USD has been the main factor here. Looking past the Fed announcement tonight, we have the May employment report to revert focus back to domestic matters, but AUD/USD has outperformed in breaching 0.7600, taking out stops through the figure level to trade 35 ticks beyond this.
Data out of NZ is just as significant overnight, as we get the Q1 GDP release in the part of the session, so NZD/USD will have a choppy session past 19.00 and midnight London time. However, after the government announced the budget surpluses last month, it has been one way traffic for NZD, so today’s gains vs the USD have been somewhat vindicated by the domestic backdrop, which has also see the currency outperform its AUD counterpart, putting the latter in different light to that of spot rate. AUD/NZD is back probing the low 1.0400’s again, and key support below here – notably 1.0370-50 is one we are watching as it represents a rising base line on the weekly charts.
Further CAD gains against the greenback have taken the spot rate to within 15 ticks of the 1.3150 level, the lower end of the support zone we noted lately, but which could yet be retested later tonight. The DoE report showed a smaller draw than forecast, so allied to the surprise build in the API report, has pressured WTI and Brent again to the detriment of CAD and NOK. That said, reluctance on the downside should have been anticipated with 1.3000 not too far lower from here, with the RSI indicators showing oversold levels on the shorter term time frames.
So back to EUR/USD and USD/JPY, where resistance at 1.1300 is still keeping the former in check, while the breach of 109.00 is a minor scalp when considering the 2017 lows ahead of 108.00 which will prove a tougher challenge should Fed chair Yellen sound a dovish note on the rate path, and/or balance sheet reduction prospects ahead.
As we asked above, the inflation miss can be absorbed by comparative levels, but consumer weakness will not sit well with the Fed. Conflicting fundamental forces to note in the lead USD pairs above, notably EUR proponents citing QE tapering later in the year, while JPY bears will point furiously at the BoJ and their accommodative stance which stretches far into the horizon.