Markets are in consolidation mode ahead of the announcement of FOMC monetary policy tonight at 1900BST. The Federal Reserve is set to increase interest rates by another 25 basis points. However the market is fully prepared for this and it is unlikely to create much of a storm. Far more interest will be taken in the move towards the reduction in the size of its $4.5trillion balance sheet. This is sure to dominate the second half of the year as it could impact on the delivery of further rate hikes. How does the Fed juggle balance sheet reduction (something that it has no previous experience of) at the same time as increasing interest rates? The Fed has one more hike pencilled in for 2017 (December at best) whilst another three next year and three in 2019. A slow and steady reduction is likely, reducing the balance sheet by around $300bn to $350bn equates to around a quarter of a point rate increase per year. Will the Fed begin to factor this in to the dot plots? It will also be interesting to see how the Fed tackles the disappointing fall in inflation and inflation expectations (which has led to a flattening of the Treasury yield curve). This could all lead to a more cautious Fed tonight and this would hit the dollar. Outside the US, Chinese economic data was mixed overnight with Industrial Production (+6.5%) and Retail Sales (+10.7%) both beating expectations, whilst Urban Investment (+8.6%) missed. This is relatively risk neutral.
Wall Street shrugged off concerns over falling tech sector prices and closed strongly once more last night. The S&P 500 was +0.5% at 2440, whilst Asian markets were mixed with the Nikkei -0.1%. European markets are mixed to slightly higher today, with the FTSE 100 seen underperforming as the negative correlation with sterling continuing. In forex, there is a slight move out of the dollar ahead of the Fed tonight, although there is unlikely to be any significant moves taken ahead of tonight’s announcement. Sterling has jumped again this morning after yesterday’s strong rebound. In commodities, gold is holding on to yesterday’s positive move into the close, whilst oil is around a percent lower after higher than expected API inventory build and more questions over the actual delivery of OPEC’s promised production cuts.
The Fed will be the key focus for traders, however that is not the only key data of the day. The UK releases employment data at 0930BST with UK Unemployment expected to stay at the 4.6% level. However the big focus will come with the UK earnings growth. After UK inflation spiked higher yesterday the concern over negative real wages grows, with UK Average Weekly Earnings (ex bonus) expected to tick lower again to +2.0% (from +2.1% last month. US inflation then will be watched with US CPI at 1330BST. Inflation has been dropping away in recent months and the CPI is expected to further decline to +2.0% on the headline (from +2.2%), whilst the core CPI is expected to stay at +1.9%. At the same time the US Retail Sales data for May is released at 1330BST, with ex-autos data expected to grow by +0.2% on the month. After last week’s surprise inventories build the EIA oil inventories at 1530BST will also be keenly watched. Crude stocks are expected to be in drawdown by -2.5m barrels, with distillates expected to grow by +1.0m barrels and gasoline stocks expected to be -1.0m barrels. The FOMC monetary policy decision is at 1900BST and is expected to contain a rate hike of 25 basis points for the Fed Funds target range to 1.00%/1.25%. The economic projections will also be keenly watched for any tweaks to inflation and the dot plots, whilst Janet Yellen’s press conference at 1930BST will be watched for talk of balance sheet reduction.
Chart of the Day – USD/CAD
The Canadian Loonie has strengthened significantly in recent days on the back of increased expectations of a potential rate hike amidst surprisingly hawkish comments from the Bank of Canada. The move has sharply impacted on the outlook for USD/CAD. The market had been trending higher over the past few months but the move has completely broken not only that four month uptrend, but is also now breaking the support of the broad 14 month uptrend channel too. The magnitude of the two huge bearish candles of the past couple of completed sessions is also now testing the support of the key April low at 1.3220 which is the basis of a key pivot that has been in place over the first few months of the year. A closing breach of 1.3200 would now effectively open for further decline towards the January/February lows around 1.3000. The momentum indicators are also a key concern for the bulls now with the RSI already at a five month low, the MACD lines having bear kissed below neutral and the Stochastics also crossing lower. Rallies are now a chance to sell. The strength of the sell-off has left initial resistance at 1.3245 and 1.3290, whilst 1.3385 is now a key level of overhead supply.
As the Fed approaches, the euro seems to be drifting into consolidation. The last couple of daily candles have steadied the corrective forces seen at the backend of last week, but there is now a lack of direction. Two mild positive candles with small bodies reflects uncertainty but with a mild bullish bias. The medium term outlook continues to be a buy into weakness and subsequently the bulls will be looking for the next higher low above the $1.1100 long term pivot. This may then be at last week’s reaction low at $1.1165. The momentum indicators are stabilising with the RSI and Stochastics preventing recent corrective slips from falling below 50. The hourly chart reflects consolidation in a range between $1.1165/$1.1232. The Fed tonight will drive volatility and direction but the technicals continue to reflect this as a bull market to use corrections as a chance to sell. Whilst the support at $1.1100 holds on a closing basis, this remains the case.
The strong bull candle added over 90 pips yesterday in a session helped by the perception of improved political risk but also stronger than expected UK inflation. An early jump today means that the key resistance around $1.2775 is now being tested. However, whilst this support remains intact on a closing basis the corrective outlook will remain in place. The reaction to this resistance will be key to the near to medium term outlook now as it will be a source of significant overhead supply. The daily momentum indicators remain correctively configured and rallies will still be seen as a chance to sell. The initial move today shows the bulls testing the resistance, however the Fed tonight is likely to drive near term volatility. The hourly chart shows yesterday’s rally is an unwinding move. With initial support at $1.2705, a retest of the support around $1.2632 is likely in due course. A close above $1.2775 improves the outlook but there is much further resistance overhead, starting at $1.2830.
The market continues to trend lower and the recent moves suggest a consolidation within this trend. The bear candle on Monday has prevented the dollar bulls from gaining traction in their recovery but now the market is consolidating in front of the Fed. This comes with yesterday’s candle being mildly positive, whilst the early moves today are all but flat. The momentum indicators remain negatively configured on a medium term basis which points towards selling into strength, however are latterly consolidating. The hourly chart reflects this sideways drift with moving averages all flat and hourly momentum flattening (RSI and MACD lines especially). The Fed will give the market volatility and direction today. The downtrend currently comes in at 110.40 below last Friday’s high at 110.80. The support is initially 109.60 but 109.10 is last week’s key low.
On numerous occasions in recent months the market has used the pivot around $1261 as the basis of support and resistance. There have been intraday breaches of the pivot but it has been the closing moves that have been the key. Once more yesterday we say an intraday breach of $1261 (to a low of $1259) only for the market to rally for a close above the support. The market has duly turned around again, with the support remaining intact and early gains today. This could easily all change on a hawkish Fed tonight, but again we are looking for a closing break. With $1261 intact, this recent corrective drift seems to be ready to stabilise again. This comes with the RSI holding above 50 and the corrective moves on MACD and Stochastics lines both showing signs of settling. The hourly chart shows momentum picking up and a move (and close tonight) above a near term pivot at $1271 is needed for the improvement to build once more. Subsequent resistance is $1278.
The bulls continue to struggle for a sustainable footing in the market. A series of positive closes on WTI and a positive candle yesterday need to continue, however the early move today shows this is still a fragile rally. With the API inventories showing a surprise build, the market has opened under pressure again. This will put even more focus on the EIA inventories today after the surprise build of last week. The move today threatens to leave resistance with a lower high at $46.70. The fact that this is under the medium term pivot at $47.00 should also be cause for concern. The market may have been holding up above the support at $45.20 in recent sessions but the bears remain in control. Momentum indicators continue to struggle with the RSI below 40, MACD lines falling and Stochastics entrenched below 20. This all goes to show that rallies remain a chance to sell. The hourly chart shows renewed negative configuration and pressure back on $45.20 is growing. A breach of $45.20 would re-open the implied downside target of $44.00 with $43.75 the next key support of the May low. The resistance is now strong between $46.70/$47.00.
Dow Jones Industrial Average
The breakout support band 21,113/21,225 remains a key basis of support near term and a are where the bulls are happy to use as the next buying opportunity. The bull run may be a slow burn but it is still in flow and has once more closed at an all-time high. Corrections remain a chance to buy as the market continues to push into new high ground. Momentum indicators remain strongly configured on the daily chart, whilst it is interesting to see bullishly configured hourly momentum with the RSI supported above 45, MACD lines positive and Stochastics also strongly configured. The hourly chart shows immediate support of Monday’s low at 21,186.