FTSE +24 points at 7353
DAX +20 points at 12457
CAC +6 points at 5155
Euro Stoxx +8 points at 3472
The US investors’ sentiment was hit by news that President Donald Trump’s son exchanged e-mails with Russians and may have a finger in his father’s victory in 2016 election. Political squeezes interfere with the government’s agenda and the fading hopes for Trump's fiscal reforms dent the appetite in the US markets. The US dollar is softer across the board, the U.S. 10-Year yields retreat to 2.35% and the US stocks lack momentum.
The Federal Reserve (Fed) Chair Janet Yellen delivers her semiannual testimony in front of the Congress today and Thursday. In her speech, Yellen is expected to keep her policy outlook unchanged, which involves one more rate hike before the end of the year and the balance sheet normalisation. Yesterday, Fed’s Brainard said that the Fed should start reducing the size of its balance sheet ‘soon’. The term ‘soon’ is a source of confusion and provides a window of opportunity for speculation. Lack of further detail on the size and the timing of the Fed’s portfolio unwind could keep the US dollar under pressure.
In fact, the Fed's balance sheet normalisation is expected have an impact comparable to less than 25 basis points raise in interest rates. Yet, the message that will be delivered to the market, combined with speculations that the European Central Bank (ECB) will also start considering a form of tapering, should keep the sovereign yields sustained across the G10 money markets.
The EUR/USD advanced to 1.1489 on broad-based USD sell-off. Call options are supportive of the positive trend above the 1.1400/1.1425 region at today’s expiry. There are no option barriers at 1.15, stops are eyed above. Surpassing the 1.15 level should pave the way toward 1.1616 (2016 high).
The GBP/USD extended losses to 1.2830 on Tuesday as the Bank of England (BoE) chief economist Andy Haldane and the Deputy Governor Ben Broadbent disappointed the BoE-hawks by keeping silence on the BoE’s interest rate outlook. Broadbent told Press and Journal Newspaper that he is not ready to support a rate hike. Cable stepped in the short-term bearish consolidation zone and the reversal could encourage a further downside correction toward the 100-day moving average (1.2765).
The key support stands at 1.2687 (major 38.2% retracement on March - May rise). The UK labour data is due today. The wages growth will be the main highlight. According to the consensus, the UK wages may have grown at a slower pace of 1.8% (3m/y) in May versus 2.1% printed a month earlier. Softer wages growth should ease worries about the UK’s rising inflation, hence keep the BoE hawks on the sidelines and further weigh on the pound.
Cheaper pound failed to bring the buyers back in the UK stocks on Tuesday. The FTSE 100 closed the session 40 points lower at 7329.76p. The FTSE is set for a positive open on the back of firmer oil and commodity prices. Downside risks prevail. Top sellers are touted at 7370-7430p, which stand for the 100 and 50-day moving averages respectively.
The USD/JPY traded at 114.50 on Tuesday, before the US yields and the dollar came under pressure. The USD/JPY gave back gains in Tokyo mainly due to the decline in the US dollar. On the flip side, the Japanese yields were again in demand. The Bank of Japan announced to increase its 3-5 year maturity bond purchases in an attempt to halt the rise in yields. The 115.00 level is still on radar, as the BoJ decidedly fights back to maintain the yen and the Japanese yields at lower levels. The support to the June-July positive trend is seen at 113.15 (minor 23.6% retracement), 112.80 (200-day moving average) and 112.33 (major 38.2% retrace).
Gold recovered to $1,220. Softer US yields could encourage a further correction to $1,226/1,230 (minor 23.6% retracement on June-July decline / 200-day moving average). Support is eyed at $1,200/1,195 area.
The WTI crude traded past $45 as the American Petroleum Institute (API) announced that the US crude inventories fell by 8.13 million barrel last week. The more official EIA data is due today and analysts expect a decline of 3.2 million barrels in inventories last week. Lower US stockpiles and a softer USD could underpin a temporary positive development toward $46.50/46.55 (50-dma & major 38.2% retrace on April-June decline) and $48.05 (50% retrace). Yet the medium term view remains comfortably bearish due to difficulties to drain the global supply glut. In this respect, Saudi said to have surpassed its production limit.
The Bank of Canada (BoC) is expected to increase the overnight rate by 25 basis points to 0.75%. Governor Poloz has been signaling the move since at least a month and the USD/CAD trades at its lowest levels since September 2016. The BoC's accompanying statement should reveal whether or not this would be the beginning of a gradual rate normalisation process in Canada. Any dovish disappointment could send the USD back to the 1.30 level against the loonie.