Last updated: May 3rd, 2017 at 09:58 pm
- Markets are gearing up towards the announcements of key monetary policy decisions from the Federal Reserve and the Bank of Japan this week. The chances of the Fed hiking is next to zero, but suggestions are that the BoJ is preparing to expand its use of negative interest rates. Markets have moved to price in a slightly more hawkish Fed (look at the strong rise in US Treasury yields) and also a dovish shift from the BoJ (driving a correction on the yen).
- The monetary policy decision from the Fed this week will not come as a big surprise. The FOMC will not raise rates and in the absence of a market moving press conference from Janet Yellen this has the potential to be a very forgettable announcement. However, it could be a policy decision that sets the market up for what lies ahead. The FOMC statement is the only channel by which the Fed can officially convey its policy decision for this meeting, so any tweaks to the statement could have an impact on the market. Markets seem to be fairly settled in their outlook moving into the meeting, but will the statement drive some direction? The FOMC statement currently talks about a “moderate” pace of growth, and whilst this is unlikely to change (Advance Q1 GDP is expected to show a scant +0.7% annualised growth this week), there could be a toning down in the outlook for the international economic and financial developments. If so this would be a hawkish hint to improve the prospects of June and drive some dollar strength.
- The Bank of Japan is battling against the failed traction of Abenomics, with inflation also set to fall back into negative territory this week (to -0.2%). So the clamour for action is growing. The BoJ turned to negative rates on 29th January and after an initial knee-jerk reaction higher, the yen has strengthened significantly. The potential for the government to use more fiscal stimulus (at least by not continuing to hike the sales tax) but there is a suggestion now that the BoJ is ready to expand the use of negative rates by putting them on loans as well in an attempt to get banks to lend into the economy. Dollar/Yen initially reacted higher on the rumour but is now drifting lower again (arguably similar to the move in January). Is it a case of buy Dollar/Yen on the rumour, sell on the news?
- Another significant mover in the forex markets has been Sterling which has broken to multi-week highs in the past couple of days. The March resistance at $1.4515 has been breached and the next key level is the February high at $1.4670. This move has come as President Obama has given a boost to the “Remain” camp in the EU Referendum debate, by arguing strongly for the UK’s continued membership and saying that it would go to the “back of the queue” in any trade negotiations. The chances of a Brexit seems to be a big driver of sterling and this breakout suggests that the market believes that Obama’s intervention could make the difference.
- With the Fed looming there is a degree of consolidation on commodity markets. Gold has been trading in a sideways range for a couple of months now, but in the past few days the strong rally on silver is also now beginning to consolidate. This may be in front of the Fed meeting (which is a historic source of strong volatility amongst the precious metals) but also there is a degree of exhaustion on silver beginning to come in. The oil price has been extremely strong recently, breaking higher despite the failed Doha talks. The comments from BP Chief Executive Bob Dudley that the oil market will balance by the end of the year due to the pick-up in demand and the weak supply growth, should mean the price is supported.
- Equity markets have been on a strong run in recent weeks, breaking through resistance levels. From a UK market perspective it has been interesting to see the reaction to results from both the oil major BP and UK bank Standard Chartered, both of which have beaten expectations. Perhaps these two represent a bottoming out of two of the biggest weighting sectors in the market and this is something that should help to support the FTSE 100.
- Other data releases include important readings on growth and inflation. The UK and US both announce first readings of Q1 growth and expectations are pretty low currently. Q1 GDP tends to always be rather a disappointment for the US and consensus expectations of +0.7% is above the Atlanta Fed’s GDPNow expectation of just +0.3%. The inflation data will also be interesting with Japanese CPI expected to go negative again and the US core Personal Consumption Expenditure again struggling to find any traction to the upside.
- Watch for: FOMC and BoJ monetary policy, US PCE, China Manufacturing PMI
EUR/USD – Any hawkish hints could pull back to $1.1100 again
- A dovish ECB and possible hawkish change in the FOMC statement means that the euro has just started to fall in the past couple of weeks. An upside surprise in the PCE would also help to drive a bout of near term dollar strength.
- Are we now seeing lower highs and lower lows in the near to medium term. The high during the ECB press conference at $1.1395 is below the long term ceiling at $1.1465 could now help to drive the pair back towards $1.1100 which is the long term pivot.
- Watch for: FOMC monetary policy, US PCE
GBP/USD – Outlook has now change on the breakout
- The EU Referendum is a driver of sterling and the move has really turned a corner recently, helped by the Obama intervention. Economic data will drive volatility and the FOMC decision may pull the pair back but will it now prove to be a chance to buy?
- The breakout to multi-week highs above $1.4515 means a test of key resistance at $1.4670 is on. A move above here would be a real signal that the market is beginning to price in a “Remain” victory in the EU referendum. Technically Cable is now more positive than at any time since August 2015. And support is forming at successively higher levels, with $1.4300 now key for medium term improvement.
- Watch for: UK GDP, FOMC monetary policy, US PCE
USD/JPY – Volatility surrounding the Fed and the BoJ
- After the initial knee-jerk reaction last Friday the market is drifting back again. Both the Fed and BoJ announcing policy this week there will be some considerable volatility.
- Technically, if there is a close below 111, then the way is open for a move back to the support at 109.75. On a medium to longer term basis rallies continue to be a chance to sell.
- Watch for: FOMC & BoJ monetary policy
Gold – The medium term range between $1191/$1282 is increasingly set
- Gold is supported by the continuation of the negative real interest rate environment. However there is still no real appetite to drive additional gains. Subsequently a range phase continues however the FOMC and BoJ meetings could drive some volatility.
- The support band $1191/$1208 is the floor, whilst resistance starts at $1260 towards $1282. Momentum indicators are neutral and the range looks set to continue.
- Watch for: FOMC & BoJ monetary policy
Oil – Near term corrections remain a chance to buy
- The market seems to be accepting the higher oil price despite the failure of the Doha talks. The continued decline in the US oil rig count will help this, whilst comments from the BP chief executive suggests the oil market will move towards balance by the year end.
- Technically the outlook remains strong with the higher lows ad higher highs on both WTI and Brent Crude. WTI has reached its implied target of $43.50 but there is no suggestion that dips will not continue to be bought into. Next resistance is $48.30 on WTI and $46.25 on Brent Crude.
- Watch for: EIA oil inventories to drive volatility
Indices – Near term corrective moves should be seen as a chance to buy
- S&P 500 – The S&P 500 has corrected back from 2011 as tech earnings have weighed on the market. However the technical analysis remains strong for the rally and the previous breakout at 2075 is supportive now.
- DAX Xetra – A near term correction could pull back to the breakout at 10,120 and this should now be a basis of support for the bulls. A move back above 10,475 re-opens 10,850.
- FTSE 100 – The pullback to the breakout at 6237 has been seen and this is a basis of support for the bulls to retest 6410 and then 6487.
WATCH OUT FOR THIS WEEK
Tuesday 26th April
- US – Durable Goods Orders
- US – Case-Shiller House Price Index
- US – CB Consumer Confidence
- US – Richmond Fed Manufacturing
Wednesday 27th April
- Australia – CPI
- UK – GDP (Q1 2016 prelim)
- US – Pending Home Sales
- US – EIA Crude Oil inventories
- US – FOMC monetary policy
- New Zealand – RBNZ monetary policy
Thursday 28th April
- Japan – CPI
- Japan – BoJ monetary policy
- Eurozone – German CPI
- US – GDP (Q1 2016 Advance)
- US – Weekly Jobless Claims
- US – Philly Fed Manufacturing Index
Friday 30th April
- Eurozone – Flash CPI
- US – Core PCE
- US – Michigan Sentiment (revised)
Sunday 1st May
- China – Manufacturing PMI
Monday 2nd May
- Japan – Manufacturing PMI (final)
- Eurozone – Manufacturing PMI (final)
- US – ISM Manufacturing PMI
Tuesday 3rd May
- China – Manufacturing PMI (Caixin)
- Australia – RBA monetary policy
- UK – Manufacturing PMI
- New Zealand – Unemployment
Wednesday 4th May
- Eurozone – Services & Composite PMIs
- UK – Construction PMI
- US – ADP Employment Report
- US – Trade Balance
- US – ISM Non-Manufacturing PMI
- US – Factory Orders
- US – Crude Oil Inventories
Thursday 5th May
- China – Services PMI (Caixin)
- UK – Services PMI
- US – Weekly Jobless Claims
Friday 6th May
- US – Non-farm Payrolls
- US – Unemployment & Average Hourly Earnings