July 27, 2016

IronFX FOMC Review: Is a more Optimistic Tone Warranted?

This article is originally referred from IronFX Fundamental Analysis.

• FOMC preview: Is a more optimistic tone warranted? All eyes will be on the FOMC policy meeting today, where the Committee is almost certain to keep the Federal funds rate unchanged. Given that there is no press conference and no updated forecasts to be released at this meeting, market participants are likely to focus on the meeting statement, which we expect to reflect a more hawkish bias than the one in June. At the June meeting officials expressed their concerns over the softness in the May employment data and noted that the outcome of the UK referendum could delay their hiking plans. However, the “Brexit” vote has so far not caused the market chaos that many expected, while US data were resilient, suggesting a pick-up in Q2 GDP. Jobs growth recovered in June while retail sales firmed, and financial conditions have calmed considerably with the SnP 500 recently reaching a new all-time high. We expect Fed members to acknowledge this in their statement, something that could support the dollar somewhat on the decision. Nevertheless, we believe that some members in Yellen’s squad will still be nervous that the referendum outcome may have more serious effects in the future, perhaps when the UK PM Theresa May decides to invoke the Article 50. According to the Fed fund futures, the market has brought well forth its expectations for the next rate hike, which it now prices fully in August 2017 from January 2019 ahead of the release of the May employment report. Yet, we stick to our guns and we view the market as more pessimistic than the economic environment currently suggests. We believe that September and December are the most likely candidates for the Fed to act, but we assign a higher probability to a potential hike in December. We believe that the two months left until the September meeting may be too soon for the FOMC to conclude that the US remained unaffected by the “Brexit” vote, while the November gathering is just a week before the US election, a period that could be marked by heightened volatility.

• Abe says stimulus package to exceed 28 trillion yen Overnight, there were fresh reports that Japan’s PM Abe will announce the details of a 27 trillion yen fiscal package that would also include the issuance of 50 year bonds. This came in contrast to yesterday’s story, which suggested that the measures would account to a mere 6 trillion yen. The yen slid on these news, but quickly recovered after the Ministry of Finance stated that it is not considering issuing 50 year bonds. Thereafter, PM Abe confirmed that the size of the package will exceed 28 trillion yen, causing JPY to tumble once again. Given Abe’s confirmation that the size of the package will be significant and considering the elevated expectations for BoJ easing on Friday, we believe that JPY’s short-term bias is to the downside. Additionally, an optimistic tone from the FOMC tonight could cause USD/JPY to spike higher.

• Aussie tumbles on lackluster Q2 inflation data The Australian dollar rose briefly overnight, ahead of the nation’s Q2 CPI data. However, after the figures were out, the currency reversed its gains almost immediately to trade even lower against its US counterpart. The headline CPI print slowed by more than expected, while the trimmed mean rate remained unchanged, exceeding expectations of a decline. Given that the data were rather mixed and that inflation remains subdued overall, it appears that investors have raised their bets regarding further RBA easing, possibly as early as next week.

• As for today’s indicators, during the European day, the UK’s 1st estimate of Q2 GDP is coming out. The forecast is for the nation’s growth rate to have remained unchanged from the previous quarter at +0.4% qoq. Nonetheless, we view the risks around that forecast as tilted to the downside. We believe that the uncertainty that dominated the pre-referendum era may have caused firms to delay some of their spending and investment plans, something that may have weighed on growth. Indeed, according to the Markit service-sector PMI reports, the service sector, which accounts for almost 80% of the nation’s GDP, suffered its worst quarter for more than three years in the three months from April to June. Even though pre-referendum data may attract less attention than usual, a potential slowdown in Q2 GDP could signify that Brexit-related uncertainties were already affecting the economy prior to the vote. Something like that could bring GBP under renewed selling interest.

• Sweden’s consumer and manufacturing confidence indices, both for July, are coming out. In Germany, the Gfk consumer sentiment index for August is already out and the print was slightly higher than expected.

• In the US, durable goods orders for June are coming out and expectations are for the headline figure to have fallen, while the core rate is forecast to have risen following a minor decline in May. Considering the mixed expectations and the FOMC meeting later in the day, the reaction in USD may remain limited. We also get the nation’s pending home sales for June.

• We have no speakers scheduled for today.

The Market

EUR/USD trades somewhat lower ahead of the FOMC gathering

EURUSD trades somewhat lower ahead of the FOMC gathering

• EUR/USD traded lower yesterday after it hit resistance slightly above the 1.1020 (R1) resistance line. Nevertheless, the decline was stopped by the 1.0980 (S1) support level. The price structure on the 4-hour chart still suggests a short-term downtrend and therefore, I would expect the bears to seize control again at some point. Today, the FOMC concludes its two-day policy meeting and although expectations are for the Committee to stand pat, we expect the statement to reflect a more hawkish bias than the one in June. This could be the catalyst for a dip below 1.0980 (S1), something that could initially aim for the 1.0950 (S2) support level. Another dip below 1.0950 (S2) is likely to open the way for the 1.0900 (S3) territory. As for the bigger picture, as long as the pair is trading within the sideways range between 1.0800 and 1.1500, I would maintain my flat stance as far as the longer-term trend is concerned.

• Support: 1.0980 (S1), 1.0950 (S2), 1.0900 (S3)

• Resistance: 1.1020 (R1), 1.1050 (R2), 1.1090 (R3)

USD/JPY spikes on reports of a 27 tln yen fiscal package

USDJPY spikes on reports of a 27 tln yen fiscal package

• USD/JPY spiked higher during the Asian morning Wednesday on reports that Japanese Prime Minister Shinzo Abe will announce details of a 27tln yen fiscal package. Nevertheless, the rate hit resistance near the 106.60 (R2) obstacle and pulled back below 105.65 (R1). Although the short-term outlook remains somewhat negative, I prefer to take the sidelines for now, as I see the likelihood for another positive move in the short run. A hawkish Fed today could encourage the bulls to push the rate back above 105.65 (R1), perhaps for another test near 106.60 (R2). Our short-term oscillators corroborate that view as well. The RSI rebounded from its 30 line and now looks ready to challenge its 50 line, while the MACD, although negative, has bottomed and could cross above its trigger line soon. As for the bigger picture, the longer-term trend still looks negative. Therefore, I would treat the 8th – 21st of July recovery, or any possible near-term extensions of it, as a corrective phase.

• Support: 104.60 (S1), 103.85 (S2), 103.30 (S3)

• Resistance: 105.65 (R1), 106.60 (R2), 107.30 (R3)

AUD/USD spikes up but gives back all the gains

AUDUSD spikes up but gives back all the gains

• AUD/USD spiked higher during the Asian morning Wednesday, but hit resistance slightly below 0.7570 (R3) and retreated to trade back below 0.7500 (R1). The rate now looks to be headed towards the 0.7450 (S1) support hurdle, where a decisive dip would confirm a forthcoming lower low and perhaps open the way for the 0.7400 (S2) zone. Our short-term oscillators detect negative momentum and corroborate my view for further declines. The RSI fell below its 50 line and is pointing down, while the MACD has topped near zero and could fall back below its trigger line soon. As for the bigger picture, with no clear trending structure on the longer-term timeframes, I prefer to adopt a neutral stance.

• Support: 0.7450 (S1), 0.7400 (S2), 0.7370 (S3)

• Resistance: 0.7500 (R1), 0.7535 (R2), 0.7570 (R3)

Gold continues quietly

Gold continues quietly

• Gold continued trading in a quiet manner on Tuesday, staying between the support of 1313 (S1) and the resistance of 1323 (R1). Given the inability of the bears to overcome the 1313 (S1) and that the price is trading very close to the upside support line taken from back at the low of the 30th of May, I maintain my flat stance with regards to the short-term outlook. A break back above 1323 (R1) is likely to be an early sign that the prevailing short-term downtrend is over, and is possible to open the way for the 1340 (R2) resistance territory. Our short-term oscillators stand below their equilibrium levels, but they lie above their respective upside support lines, supporting the case that the prevailing short-term downtrend may be experiencing its last stages. Switching to the daily chart, I see that the metal is trading above the uptrend line taken from back at the low of the 17th of December. In my view, this keeps the longer-term picture cautiously positive. I would treat the shot-term downtrend, or any future extensions that stay limited above that line, as a corrective phase of that longer-term uptrend.

• Support: 1313 (S1), 1305 (S2), 1300 (S3)

• Resistance: 1323 (R1), 1340 (R2), 1348 (R3)

WTI hits support near 42.50

WTI hits support near 42.50

• WTI continued sliding on Tuesday and managed to hit our support zone of 42.50 (S1). The price structure on the 4-hour chart still suggests a short-term downtrend and as a result, I would expect a clear break below 42.50 (S1) to open the way for our next support area of 41.30 (S2). Nevertheless, looking at our short-term oscillators, I see that the RSI has exited its oversold territory, while the MACD, although negative, has bottomed and just poked its nose above its trigger line. These indicators give evidence that a corrective bounce could be on the cards before the bears decide to seize control again. As for the broader trend, the break below the uptrend line taken from the low of the 11th of February brought into question the uptrend started back in January. The fact that the price closed below 46.00 on the 7th of July signaled a medium-term trend reversal in my view.

• Support: 42.50 (S1), 41.30 (S2), 40.00 (S3)

• Resistance: 43.60 (R1), 44.50 (R2), 45.20 (R3)

Original Source: IronFX Fundamental Analysis

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