Considering the hype surrounding Donald Trump’s meeting with Kim Jong Un of North Korea, financial markets gave a pretty muted response. There are bigger fish to fry, and that leads us to the FOMC meeting today as a degree of consolidation has been forming. If there is any direction, it is coming with US yields edging higher (the 10 year Treasury yield is back within reach of 3% again), allowing the dollar to regain some lost ground ahead of the announcement. The Federal Reserve is expected to raise rates by another 25 basis points which would be the second of at least three rate hikes that the market is pricing for 2018. However, whilst this move is priced in, will the Fed begin to guide markets to prepare for a fourth hike? Core CPI inflation ticked higher to 2.2% yesterday and whilst this move was expected, it lays further evidence that the US recovery is progressing well enough that a fourth rate hike in 2018 is a realistic possibility. The dot plots today (the level of interest rates that the various members of the FOMC project) will be key to watch. In March, the dots were on the cusp of forecasting four hikes. Also watch the inflation projection too. The last FOMC statement contained the term “symmetric” with regards to the inflation target which means that the Fed is happy to let inflation run a little hot for the near term, however raising the projection for inflation would still pull yields higher and subsequently the dollar. Markets took little real direction off the Trump/Kim summit, but the mild dollar bias suggests an expectation of a slightly more hawkish Fed. The question is that would it be a move that begins to trend once more?
Wall Street was becalmed last night into the close, with the S&P 500 +0.2% with futures another +0.2% initially today. Asian markets were mixed to slightly higher, with the Nikkei +0.4% (helped again by the yen weakness), whilst European indices are mixed in early moves today. In forex there is a mild dollar positive bias across the major pairs, but direction is limited ahead of the Fed. In commodities, this dollar bias is also acting as a drag on the precious metals, with gold ticking slightly lower and oil also lower by around -0.5% after API inventories continued to build.
The Federal Reserve meeting dominates the consideration of traders today, however there are also other key economic releases to consider first. Primarily the UK CPI data at 0930BST will be foremost for UK traders. After the earnings growth ticked surprisingly lower yesterday, the expectation of headline CPI rising to +2.5% (from +2.4% last month) will be interesting. Although core CPI is expected to remain at +2.1% (+2.1% last week) this will still mean a squeeze on real wages. UK PPI Input Prices are also expected to rise to +7.6% would be a third straight rise in costs of raw materials and back to levels not seen since November. US PPI is at 1330BST and is expected to rise to +2.8% (from +2.6%) although the core PPI is expected to stick at +2.3%. The EIA weekly oil inventories are at 1530BST and is expected to show crude stocks in drawdown by -2.8m barrels (down from a build of +2.1m barrels last week), with distillates in drawdown by -0.2m (build of +2.2m last week) and gasoline stocks building by +0.6m (+4.6m build last week). The FOMC monetary policy announcement is at 1900BST and a hike of 25 basis points to a Fed Funds target range of +1.75% to +2.00% is expected; with Fed chair Jerome Powell’s press conference at 1930BST.
Chart of the Day – EUR/JPY
The euro has gained good ground across the majors as risk appetite has picked up in the last couple of weeks but also the expectation of potentially a hawkish shift from the ECB at Thursday’s meeting. The result has been that EUR/JPY has built a recovery uptrend that has taken the pair back above key overhead supply at 129.00. A risk wobble in front of the G7 caused a pullback within the recovery but has simply meant that the market is building higher lows and support has been added at 128.10. With the bulls holding the trend this week, the market is building for a continued recovery towards the mid May high at 131.35. Momentum indicators continue to improve with the recovery, with the RSI rising above 50, Stochastics posting a “bull kiss” and MACD lines accelerating higher, all suggesting there is further to run in this recovery. The hourly chart shows there is a positive near term configuration in place and intraday corrections are a chance to buy now. The ECB is on the horizon tomorrow but in front of that announcement, the outlook remains positive.
The bulls have lost control of the recovery as we start to get into the meaty part of a hugely significant run of events this week. A consolidation has formed below an old pivot which has built resistance at $1.1820/40 but support is holding with a near term breakout around $1.1710/50. The candlesticks have begun to alternate bull and bear but there has been a very slight negative bias to the moves. Today’s key event is the FOMC decision at 1900BST and this is likely to drive near term direction on the dollar. Momentum indicators on EUR/USD have tailed off their recoveries with the RSI rolling over just under 50 whilst the Stochastics are turning over around 80. This is a concerning development for the rally if this is now exacerbate by another bear candle today that begins to break the market back lower. The hourly chart shows $1.1640 as a basis of support now which if breached would really put the sellers in control.
It is interesting to see that the market is forming a bearish drift as we move towards the key FOMC decision tonight. The last three completed daily candles have all shown a loss on the day, but the magnitude of the candlestick bodies is small and this suggests a lack of conviction to the selling. Momentum indicators are turning lower, but again there is little real decisiveness to the move. This is reflected on the hourly chart which shows a small uptrend channel has been usurped by a small downtrend channel. Lower highs continue to be formed, with yesterday’s spike to $1.3425 posting another resistance that builds under the old pivot on the daily chart at $1.3450. There is though a basis of support around $1.3345 which is still holding and this is protecting $1.3290 as the first real higher low. In effect this is a consolidation in front of the Fed, which is likely to drive near term direction now.
The dollar bulls are having some traction against the Japanese yen which has come out relatively poorly from the G7 and the Trump/Kim summit. A couple of bull candles have swung the market back higher again and through the near term resistance at 110.25 to re-open 111.40 as the May high. A small uptrend of the past couple of weeks is also building now as the momentum indicators confirm the improvement. The RSI is up into the low 60s, whilst the sensitive Stochastics also accelerate higher. Intraday weakness is increasingly being bought into now and the market is positioning bullishly for the Fed. The hourly chart shows that there is now a basis of support 18.104.22.168 and with hourly momentum bullishly configured further gains are likely within this current move. The importance of support at 109.20 is growing now.
The market continues to show little appetite for direction ahead of the FOMC decision. After a run of almost entirely neutral candles, yesterday’s $4 loss was the most significant candle in over a week, which says a lot about how little the market has moved. Once again the market has been unable to overcome resistance of the old long term pivot band at $1300/$1310 and has backed away again. Momentum indicators are still set up to suggest that a near term rebound remains a medium term chance to sell and even though the recent downtrend has been broken, this is simply a consolidation before what is expected to be renewed downside to test supports at $1289 and then $1281.80. Resistance continues to grow at $1307/$1308.
Appetite for a near term recovery continues to build with a fifth consecutive higher daily high and momentum indicators starting to turn more of an improving configuration. However there is still a big barrier to needs to be broken with a pivot around $66.65 which is also backed up by the 50% Fibonacci retracement of the huge bear market at $66.90. Another consideration is that the underside of the old nine month uptrend is also a basis of resistance too (just overhead at $67.10 today). A decisive close above this confluence of resistance would certainly see the outlook improve further, but there would still need to be a move above the lower reaction high at $68.65 to really confirm the bulls are serious in building a sustainable recovery. The hourly chart shows a dip back towards $65.50 overnight could become a gauge of support with the hourly momentum also more positively configured now for buying into weakness. Support at $64.85 is now a higher low too.
Dow Jones Industrial Average
With another consolidation candle formation yesterday, the bulls are just beginning to question the breakout above 25,086. The uptrend of the past nine sessions is holding for now but with the speed of its advance the market needs to form a decisively positive candle/session today to maintain it. The momentum indicators are all still positively configured near term with the RSI still above 60 and Stochastics above 80 but cautious needs to be taken now near term for chasing the market higher. Perhaps this is simply a consolidation in front of the FOMC but a retreat back towards the near term breakout at 25,086 is growing as a possibility. The hourly chart shows a slight loss of impetus and a move below initial support at 25,165 would conform the bulls would have slipped. For now, corrections are still seen as a chance to buy, but entry points could come at lower levels in the coming days.
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