Fed’s interest rate decision in focus

We highlight the release of the Fed’s interest rate decision later today. The bank is widely expected to remain on hold and Fed Fund Futures tend to imply a probability of 99% for such a scenario to materialise. We concur with the market’s expectations and hence place more emphasis on the bank’s forward guidance, its projections, the new dot plot and Fed Chairman Powell’s press conference later on. It should be noted that since the release of the hotter than expected US employment report for May, the market’s expectations for the bank to start cutting rates in its September meeting and deliver another rate cut in December had started to wobble, yet cooler thoughts tended to prevail and now the market is once again expecting a rate cut in September and another one in December. Hence, should the bank show that it’s prepared to keep rates high for longer we expect the USD to gain while a possible predisposition of the bank to start cutting rates could weaken the USD as it would verify the market’s hopes for an earlier rate cut. Please note that the US CPI rates for May are also to be released on Wednesday, and a possible failure of the CPI rates in the past month to slow down could harden the Fed’s stance. We expect the release of the Fed’s interest rate decision to have ripple effects beyond the FX market with possibly US stock markets and gold’s price being also affected. A possible hardening of the Fed’s hawkish stance could weigh on both US stock markets and gold.

In the FX market we note that USD/JPY edged higher yet remained below the 157.75 (R1) resistance line. We tend to maintain a bias for the sideways motion of the pair to continue, between the R1 and the 154.60 (S1) support line. Yet we also note that the pair has been moving within an upward channel since the start of the year, hence we issue a warning for any bullish tendencies. Should the bulls reign over the pair’s direction, we may see USD/JPY breaking the 157.75 (R1) resistance line and aiming for the 160.35 (R2) resistance level. Please note that the R2 is practically a multi decades high and any breaking of the R1 sets the pair in a zone that may prompt BoJ to intervene in JPY’s favor. On the flip side, should the bears take over, we may see the pair breaking the 154.60 (S1) support line and taking aim of the 151.90 (S2) support level.

Gold’s price edged higher on Monday and yesterday after bouncing on the 2290 (S1) support line. The RSI indicator has neared the reading of 50 implyig a relative indecisiveness for the precious metal’s direction on behalf of market participants. Hence for the time being we maintain a bias for the sideways motion to continue. For a bullish outlook, we would require the pair to break the 2355 (R1) resistance line with the next possible target for the bears being the 2430 (R2) resistance level. Should the bears take over, we may see the precious metal’s price dropping and breaking the 2290 (S1) support line and aiming for the 2220 (S2) support base.

Also in the FX market, we note the release of a slew of data for April. The GDP rate slowed down to stagnation levels as expected, darkening the economic outlook of the UK. Yet the surprise for the markets came from the wider contraction than expected of the manufacturing and industrial output growth rates of the UK for the same month. There were some slight losses for cable at the release, yet were quickly recovered as traders remained unfazed by the release.

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Today in the European session, we note the release of Germany’s final HICP rate for May and UK’s GDP and manufacturing growth rates for April, while ECB board member Schnabel speaks. In the American session, we note the release of the US CPI Rates for May, while oil traders may be more interested in the release of the weekly EIA crude oil inventories figure, while on the monetary front, we note that ECB Vice President De Guindos and later on BoC Governor Tiff Macklem are scheduled to speak. During tomorrow’s Asian session, we note the release of Australia’s employment data for May.