What we are looking for
- USD giving back yesterday’s gains: USD strengthened throughout yesterday but has given back some of these gains overnight. Moves are likely to settle ahead of the Fed and then see elevated volatility later.
- Indices trying to rebound again: Indices fell yesterday on negative data/recession fears. A slight rebound has kicked in overnight, with Wall Street helped by after-hours jumps in Google and Microsoft after Q2 results.
- Commodities trying to recover: Commodities slipped yesterday (negative correlation with USD remains key) but have rebounded today. The Fed will be key later.
- Data trading: Traders will see elevated volatility off the Fed decision. +75bps is expected but guidance on future hikes will be key. Durable Goods and Pending Home Sales may move markets initially but we expect broad consolidation in front of the Fed decision later.
Overview
Markets have fluctuated over the past 24 hours. A risk negative and USD positive bias dominated yesterday’s session, driven in part by more economic data out of the US which painted a picture of further deterioration. However, a large portion of this move has been subsequently unwound overnight and into today’s session. There has been a positive response to US earnings from tech giants Alphabet (Google) and Microsoft which has helped to improve sentiment. This leaves major forex, commodities and indices in wait-and-see mode for what will be a crucial decision by the Federal Reserve later today.
The Fed is the big focus on the economic calendar today. The Federal Reserve is expected to increase the Fed Funds rate by +75 basis points to 2.50% (around where some believe the neutral rate is). Guidance on how aggressive the Fed will be in future meetings in 2022 will be the key consideration for markets. Markets will also move on any signals over how committed the Fed is to fighting inflation and the counterbalance of recession risks. Elsewhere today, we are also looking out for Durable Goods Orders, which are only expected to show marginal month-on-month growth in June. Pending Home Sales are expected to reflect a continued reduction in home sales across the US.
Today’s news
Market sentiment recovers slightly ahead of the Fed: Yesterday’s moves have been pared and markets are beginning to consolidate ahead of a crucial Fed decision. It is likely the consolidation will be replaced by elevated volatility later.
Treasury yields are a shade higher: Yields are c. 1bps higher on both 2s and 10s.
Positive overnight response to after-hours US earnings: Results from US tech giants Alphabet and Microsoft were not great, but investors have looked on the bright side with Google’s ad revenue better than expected and Microsoft’s forward revenue guidance also encouraged. Shares jumping after-hours have helped market sentiment.
Australian inflation mixed: Headline inflation increased slightly less than expected at 6.1% YoY. Core (trimmed mean) inflation was slightly higher than expected at a +4.9% YoY (4.7% exp). AUD has slightly underperformed on the back of this.
Cryptocurrencies find support: After a worrying few days of declines, crypto has found support and picked up today. Bitcoin is almost +2% higher and is back above $21,000.
Economic Data:
- US Durable Goods Orders (ex-transport) (13:30 BST) – Orders are only expected to show marginal growth in June with the consensus forecast at +0.2% MoM (after +0.7% ion May)
- US Pending Home Sales (15:00 BST) – YoY Sales are expected to decline further in June to -13.6% (from -9.0% in May)
- Federal Reserve monetary policy (19:00 BST) – The Fed is expected to hike by +75 basis points to 2.50% (from 1.75% in June)
Major markets outlook
Broad outlook: Tech stocks lead Wall Street in a rebound with European indices edging higher too. A broad recovery in risk appetite is settling into consolidation ahead of the Fed.
Forex: USD is giving back some of yesterday’s gains. However, AUD and NZD are underperforming after mixed Australian inflation data.
- EUR/USD is threatening to move lower again. Yesterday’s strong negative candle breached initial support at 1.0120/30. Although a slight rebound has taken hold today there is a growing prospect of a move lower. The Fed meeting today will be a key driver near-term and we look for market reaction in response later. We favour downside to retest parity but this could change on the Fed decision. A close under 1.0120 today would be bearish. Resistance is strengthening at 1.0275.
- GBP/USD is continuing to pressure to the upside in recovery but cannot sustain the upside traction. A close above 1.2055 would suggest 1.2160 and a test of the five-month downtrend. This very mild positive bias is reflected in the tick higher on momentum with the RSI edging higher towards 50 again. We still prefer to use this rebound as another chance to sell for a retest of 1.1760 in due course. For now, though, the tick higher continues. Initial support is at 1.1960 above the 1.1890 higher low.
- AUD/USD is seeing the rally just beginning to lose momentum around the resistance of the near four-month downtrend and the 55-day moving average. A close above 0.6965 opens for a move towards 0.7030/0.7070. The importance of near-term support at 0.6860/0.6875 is growing.
Commodities: Metals are consolidating, with oil swinging around in choppy near-term trading.
- Gold has improved since rebounding from $1680, but the rebound has lost momentum in recent days. Interestingly, there is a hint that intraday strength is beginning to be sold into. If the bulls can hang on to support between $1712/$1720, this could give the platform for a test of $1739/$1752 resistance. The reaction to the Fed decision tonight could be key.
- Silver has been lagging gold in its technical rally and looks more as though it is fighting to prevent further downside than engaging in a sustainable recovery. The resistance has strengthened between $18.85/$19.09 with further resistance at $19.48 being a barrier to recovery. The market has ticked higher again this morning and there are hints of improving momentum on the RSI. However, a breakout above $19.09 is needed for serious recovery. Support is at $18.14/$18.31.
- Brent Crude oil has been swinging around in recent days, but the resistance band between $107.65/$109.65 remains key. Yesterday’s bull failure has added to the resistance, along with the six-week downtrend channel and the falling 21-day moving average (both around $107.00). The reaction around this resistance band is increasingly looking to be what will define the outlook on a near to medium-term basis. With the RSI struggling under 50 (where recent rallies have faltered) we favour selling into strength still. Initial support is at $101.60.
Indices: Wall Street recovery is trying to recover, whilst European indices remain mixed.
- S&P 500 futures are ticking higher this morning which is helping to bolster the band between 3875/3950 as a basis of near-term support. Closing back above 3950 would add to this and maintain an encouraging outlook but a move above 4015 is needed for the next upside break. A break of 3875 support would question the recovery. Above 4015 (Friday’s high) the next band of resistance is 4070/4200.
- German DAX has struggled in recent sessions with a series of negative bias one-day candlesticks suggesting the bulls are failing to grasp control. This is coming under the resistance that is mounting between 13,360/13,430. Despite this though, the support area around 13,000/13,080 is holding to retain a recovery bias. Above 13,440 opens 13,650. This is a market in wait-and-see mode.
- FTSE 100 has edged more positively in recent days and is again higher this morning. This is adding pressure on the resistance around 7335/7370. A close above 7370 would be encouraging, especially as it is being confirmed on the RSI which is looking to move into the high-50s. The importance of support between 7205/7234 is growing.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
