· The dollar held near a two-week high on Wednesday ahead of the Federal Reserve’s closely-watched policy decision later in the day, supported by a surprisingly dovish European Central Bank and bearish eurozone economic data.
The dollar index versus a basket of six major currencies was steady at 97.653 after climbing to 97.766 on Tuesday, its highest level since June 3.
· “The market has mostly priced in a July rate cut and unless there is a big dovish surprise at the FOMC (Federal Open Market Committee) meeting it is hard to imagine the dollar coming under downward pressure,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.
“But there will be a lot to digest at this FOMC, such as the Fed’s views on the economy and prices and Chair (Jerome) Powell’s comments. It is hard to tell which of these factors the market decides to latch on and react to.”
· The euro traded at $1.1190, languishing near session lows after shedding 0.2% overnight, when it brushed a 15-day trough of $1.1181.
The common currency dropped along with a decline in German government bond yields, which hit a new record low on Tuesday, after ECB chief Mario Draghi said the bank will need to ease policy again if inflation doesn’t head back to its target.
Germany’s 10-year government bond yield, the benchmark for the bloc, dropped to a new record low of minus 0.274% after the remarks, while other euro zone bond yields were lower by 3-5 basis points.
· USD/JPY: Technical set up turns in favor of bulls ahead of Fed
USD/JPY has been restricted to the 108.80-107.80 trading range since June 4. A bullish breakout looks likely, as the widely followed 14-day relative strength index (RSI) is reporting a descending channel breakout heading into the FOMC.
As of writing, the upper edge of the falling channel is seen at 108.88 and the pair is trading at 108.53.
A breakout looks likely, as the widely followed 14-day relative strength index (RSI) is reporting a descending channel breakout - a bullish development.
That said, it all depends on what the US Federal Reserve says later today. The central bank is widely expected to lay the groundwork for a rate cut later this year.
A channel breakout could happen if the Fed sounds less dovish-than-expected, opening the doors to 110.00.
· EUR/USD technical outlook, levels to watch
The EUR/USD pair trades at its lowest in over two weeks heading into the event, undermined by Draghi's comments about European policymakers' determination to act with more stimulus if needed. The pair has breached a significant support, now resistance at 1.1200, as the level stands for the 61.8% retracement of the latest daily advance. An intermediate support ahead of the event comes at the 1.1150/60 price zone, followed by the yearly low at 1.1106. Quite unlikely, but if this last gives up, the 1.1000 figure will become a more likely target. Resistances come at the mentioned Fibonacci level at 1.1200, followed by the 1.1240/60 price zone. Above this last, the short-term scenario will turn bullish for EUR/USD.
· The U.S. Federal Reserve concludes its latest two-day policy meeting on Wednesday expected to leave interest rates on hold but flag whether it plans to cut rates later this year as investors expect and the U.S. president has demanded.
The central bank may nod to recent weaker-than-expected jobs numbers and softer inflation, and drop from its policy statement a pledge to be “patient” before changing rates - opening the door to a possible rate reduction later.
“If they don’t (reduce the interest rate) in June, the words he uses are going to have to be pretty careful that they are open to July,” said Mark Stoeckle, CEO of Adams Funds, which caters mostly to individual investors.
· A leading U.S. House lawmaker on Tuesday called on Facebook Inc to halt development on its new cryptocurrency and for company executives to testify before Congress, adding to global concerns about what the digital currency could mean for data privacy and security.
Maxine Waters, who chairs the House Financial Services Committee, said Facebook should halt development of the product, dubbed Libra, until Congress and regulators can review the issue, and called on company executives to testify before Congress.
· President Donald Trump formally launched his 2020 re-election campaign on Tuesday by presenting himself as the same political insurgent who shook up the Washington establishment four years ago and who is now a victim of an attempted ouster by Democrats.
At a packed rally at an arena in Orlando, Florida, Trump made clear he would run for re-election as an outsider, just as he did in 2016. Whether he can pull it off remains far from certain as Trump has been in office now for 2-1/2 years.
· Commerzbank said on Wednesday that it has now bought forward its expectations for an interest rate cut from the European Central Bank to July from the fourth quarter of this year.
The change in forecast follows comments by ECB chief Mario Draghi on Tuesday that the central bank will ease policy again if inflation fails to accelerate.
· Substantial discussions on trade, including reform of the World Trade Organization, will likely take place at a summit of Group of 20 major economies next week in Osaka, a senior Japanese finance ministry official said on Wednesday.
Japan, which chairs this year’s G20 gatherings, will take a neutral stance in the U.S.-China trade row and urge countries to resolve tensions with a multilateral framework, said Masatsugu Asakawa, vice finance minister for international affairs.
Markets are focused on whether U.S. President Donald Trump and his Chinese counterpart Xi Jinping can narrow their differences when they sit down at the G20 summit.
· Any Brexit outcome under Boris Johnson, the favorite to succeed U.K. Prime Minister Theresa May, will only compound the recent poor run for the pound, currency analysts have projected.
A staunch Brexiteer, Johnson has vowed to take the U.K. out of the European Union on October 31 regardless of whether any deal is agreed with the bloc, a position which has drawn criticism from fellow leadership contenders.
ING developed markets economist James Smith has assigned a 35% probability that parliament passes a no confidence motion in the next leader, triggering a general election in late 2019 and thus delaying Article 50 for at least three months. Smith projected that prolonged uncertainty would send EUR/GBP to 0.95 and GBP/USD to 1.18.
Stephen Gallo, European head of FX strategy at BMO, has assigned a 53% probability that Brexit happens on October 31, either through a no deal Brexit or a form of “managed no deal.” In this scenario, he predicted that the pound will fall to 1.2100 against the dollar, while the euro would gain ground on sterling, climbing to 0.9008.
· Oil prices extended gains into a second session on Wednesday, buoyed by rekindled hopes for a U.S.-China trade deal and potential economic stimulus from the European Central Bank (ECB).
Tensions in the Middle East after tanker attacks there last week also supported oil markets
Brent crude futures were up 20 cents, or 0.3%, at $62.34 a barrel by 0644 GMT. They rose 2% on Tuesday.
U.S. West Texas Intermediate crude gained 20 cents, or 0.4%, to $54.10 a barrel. The U.S. benchmark surged 3.8% in the last session.
· “It looks like the market is a little bit stunned by the big turnaround in sentiment (on the outlook for prices),” said Michael McCarthy, chief market strategist at CMC Markets in Sydney.
“I suspect that the real driver here is the ECB statements, which are much more important in terms of support for the global economy,” he said.
· Market participants are also waiting for a meeting between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, a group known as OPEC+, to decide whether to extend a supply reduction pact that ends this month.
OPEC and non-OPEC states are discussing holding meetings on July 10-12 in Vienna, a date range proposed by Iran, OPEC sources said on Tuesday.
Reference: Reuters, CNBC, FX Street, Euronews
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