What are we looking at today:
- USD easing back after huge gains: There is an early kickback against recent USD strength this morning. This is only a minor move compared to what has been seen over recent sessions. Markets may turn increasingly cautious as the session approaches the Fed decision.
- EUR rebounds on emergency ECB meeting: The EUR has been under pressure due to widening core/periphery spreads since the ECB’s monetary policy meeting last week.
- Indices finding some support: After big selling pressure there is an early rebound today. However, the movie is very much counter to established trends and is at risk of further selling if the Fed goes ahead with 75bps of hikes.
- Data trading: Eurozone Industrial Production may not move EUR too much, being fairly historic data from April. However, May's US retail sales could induce some near-term interest. Despite all this though, the Fed is the main event later in the US session. A rate hike, but will it be by 50 basis points or as much as 75bps? Markets will be jumpy whichever way, due to uncertainty surrounding the decision.
Major markets are looking a little more stable this morning, but this may not last long. It could be the calm before the storm, with a crucial Fed meeting later today. In this morning’s price action there has been a slight unwinding of recent USD strength as US Treasury yields drop slightly, also allowing indices a degree of support. There is also a rebound on the EUR coming from the announcement of an emergency ECB meeting today that will discuss the issues created from widening core/periphery yield spreads. It will be interesting to see if this is a turning point for EUR performance, if not against the USD, but against other major currencies.
All eyes will be on the Fed meeting later today. Until last week this could have been a reasonably predictable meeting of the FOMC. However, this has all changed following the jump in US inflation. Markets have quickly priced for a potential +75 basis points increase and it means there is significant uncertainty over just how hawkish the Fed will be. There is a room for disappointment at a 50bps hike which would weaken the USD and rally Wall Street. But any hawkish lean in the dot plots could leave any such move being short-lived. Whatever the decision, the uncertainty will lead to volatility across major markets.
The Fed dominates the economic calendar today, however, it is not the only important announcement. US Retail Sales will also be keenly watched in the afternoon, with slight monthly growth expected in May, whilst a recovery in the regional Fed survey, the Empire State Manufacturing is also expected. Earlier in the day, Eurozone Industrial Production is expected to show a month-on-month improvement in April.
Market sentiment improves ahead of the Fed: USD unwinding some gains, indices are higher. The question is whether this recovery can last through the Fed meeting later today. It would at least need the Fed to disappoint the hawks looking for 75 basis points.
Treasury yields slipping back slightly: Early moves lower yesterday turned sharply higher into the close, so traders will be cautious to call a turning point. The Fed meeting will be key, at least near term.
China data better than expected: Retail Sales were less bad, at -6.7% YoY (-7.1% exp); whilst Industrial Production moved back into positive territory YoY to +0.7% (-0.7% exp)
Emergency ECB meeting supports EUR: The EUR has been under pressure due to widening core/periphery spreads since the ECB’s monetary policy meeting last week. The ECB will meet today to discuss “current market conditions”. Markets are taking this as a signal for action on the widening spreads. This has helped to support EUR today.
Cryptocurrencies remain under pressure: The big sell-off shows little sign of turning around. Bitcoin is down again, by -4% on the day and is around $21,000.
- Eurozone Industrial Production (1000BST) Consensus is looking for a monthly gain of +0.5% in April (after a decline of -1.8% in March)
- US Retail Sales (1330BST) Consensus is forecasting core sales (ex-autos) to grow by +0.8% in May (after +0.6% in April).
- New York Fed Manufacturing (1330BST) A recovery back above zero to +3.0 is expected in June (from -11.6 in May)
- FOMC monetary policy (1900BST) A hike of +50bps is expected by analysts to 1.50% (+1.00% in May)
Major markets outlook
Broad outlook: I rebounding ahead of the Fed. However, this may not last and markets may become increasingly cautious approaching the crucial meeting later.
Forex: USD is giving back gains some of its gains this morning. The EUR and AUD are outperformers.
- EUR/USD has found some support in the last couple of sessions which has eased the significant selling pressure. A bounce off 1.0396 keeps the 1.0350 key May low intact, for now. However, resistance is still intact around 1.0485/1.0495 and there is still risk of a downside break of 1.0350. With bear trends intact and negative configuration on momentum, near-term rallies are a chance to sell.
- GBP/USD has turned into a strong bearish outlook having broken the crucial May low at 1.2155. Closing below 1.2000 means there is no meaningful support until 1.1410. A bull failure in yesterday’s session now leaves initial resistance at 1.2155/1.2210.
- AUD/USD has seen a sharp sell-off rebounding from just above the key May low at 0.6830. However, near-term rallies will still be seen as a chance to sell for further pressure on 0.6830. Initial resistance is at 0.6950/0.6970, with more considerable resistance at 0.7030.
Commodities: The outlook for precious metals has turned more corrective in recent sessions. Oil is having another look at the support from the trend channel again.
- Gold broke the trading range support at $1828/$1837 and a bull failure in this new resistance favours selling into strength. The market is now looking increasingly set up for pressure on the May low at $1787. Resistance at $1879 looks to be a key lower high.
- Silver has broken below the $21.28/$21.42 support and this now becomes a basis of resistance. This is being tested today but there is still a run of lower highs which has formed a mini downtrend (c. $21.75 today) meaning that near-term rallies look to be a chance to sell. This is shaping up for a retest of the May low at $20.45. Resistance at $22.00 is now a key lower high.
- Brent Crude oil continues to be choppy higher and lower in recent sessions, but the one-month uptrend channel remains intact following yesterday’s rebound from$120.25. However, daily momentum is looking less assured for the trend channel now, and a close below $120.25 would open for a near-term unwind back towards $115/$116. Resistance is at $126.00/$126.60.
Indices: Markets are struggling to form a recovery.
- S&P 500 futures tried to rebound yesterday but posted a bull failure just shy of the old key May low of 3807. This suggests that there is a big struggle to form any kind of recovery for now. There is a gap still open at 3895 leaving a resistance band 3807/3895. Reaction to the Fed later will be key. A hike of 50bps (now a disappointment for the hawks) might be enough to induce recovery.
- German DAX posted another negative candle yesterday and continues to trade around the support of the key May low at 13,270. A tick higher today is only a minor rebound for now, but the reaction to the Fed will be key. There is the resistance between 13,650/13,735 that needs to be overcome for any serious improvement in outlook. A close below 13,210 would re-open the March lows at 12,435 once more.
- FTSE 100 has ticked higher this morning but the test of the support of the May low at 7155 continues. A move above resistance at 7292/7364 is needed to engage a serious recovery. The Fed meeting today could be key.
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