Espresso Morning Call: USD weakens on dovish FOMC, GDP eyed

What we are looking for

• USD has slipped on a dovish read of the Fed rate hike: A more data-dependent FOMC in the months to come hints at fewer rate hikes. USD has fallen across major forex, especially versus JPY
• Indices with further recovery gains: European markets are playing catch up on a Wall Street rally into the close. US futures are a little cautious this morning though.
• Commodities moving higher: Gold, silver and oil are all benefitting from the USD negative and risk positive market bias.
• Data trading: EUR will be driven mid-morning by the Eurozone sentiment gauges, but also prelim German inflation too. US Q2 Advance GDP is the big trading focus of the day. A negative surprise would be negative for risk assets, driving safe-haven flows and likely support the USD.

Overview

The US Federal Reserve increased the Fed Funds rate (its interest rate) by 75 basis points (+0.75%) last night. However, the market was fully expecting the move (and some had been thinking there was an outside chance of a 100bps hike). Add in a more cautious demeanour to Fed Chair Powell (the Fed will now be more data-dependent and decide on a meeting-by-meeting basis). Subsequently, there was a risk positive and USD negative reaction across major markets. This reaction has largely held into this morning, although as the European session has taken hold, the risk positive bias is being questioned. 

Traders will now look towards US growth data later today and the reaction to any surprises will be an interesting gauge moving forward. Previously, we have seen negative surprises being USD positive. However, this may begin to change if markets believe that the Fed is sensitive to recession risks.

There is a batch of Eurozone and US data on the economic calendar for traders to digest. A clutch of Eurozone sentiment gauges for Economic Sentiment, Industrial Sentiment and Services Sentiment are all expected to show continued deterioration and will impact EUR positions. Prelim German inflation is expected to stabilise. The big event on the calendar is US Q2 Advance GDP. A first look at US growth in Q2 is expected to show only marginal growth at +0.5%. However, this is annualised so could easily slip into negative with a downward surprise. There is subsequently a risk of the US slipping into a technical recession. Weekly Jobless Claims are expected to continue to worsen, adding to the feeling that the labour market is increasingly feeling a squeeze.

Today’s news

Market sentiment is turning into a more mixed outlook: A weaker USD has been the bias overnight, but there are some initial signs of this move stalling. Positive risk appetite has become more of a consolidation.

Treasury yields have picked up: After falling on the back of the Fed decision, yields have rebounded this morning. The 10-year yield is +8bps higher from last night’s close. This is helping to restrict USD selling this morning.

A dovish Fed hike: An increase of +75bps to bring the Fed Funds range up to 2.25%/2.50% (from 1.50%/1.75%). This is around where many believe the “neutral rate” is. Powell said that the FOMC wanted to be “moderately restrictive” on rates, apparently between 3.0% and 3.5%. Powell said that further rate hikes will be necessary but will be data-dependent and decisions will be made on a meeting-by-meeting basis. 

Weak US tech earnings: The earnings continue to miss estimates. Meta (Facebook) shares fell by almost -5% after-hours after earnings, revenue and ad revenue all disappointed. This is weighing on NASDAQ today.

Australian inflation mixed: Headline inflation for Q2 increased to 6.1% but this was below the expectation of 6.2%. Trimmed mean inflation (core) was higher than expected at 4.9% (4.7% exp).

Cryptocurrencies holding higher after rebound: Coins rebounded strongly in the wake of the FOMC decision and are holding on to these gains today. Bitcoin rallied over +8% yesterday and is another +0.5% this morning, close to $23,000. 

Economic Data:

• Eurozone Economic Sentiment (09:00 GMT) – Analysts are looking for a drop to 102 in July (from 104 in June) 
• Eurozone Industrial Sentiment (09:00 GMT) – Forecasts are expecting to show a decline to +6.0 in July (from +7.4 in June) 
• Eurozone Services Sentiment (09:00 GMT) – Consensus is expecting a decline to +13.5 in July (from +14.8 in June)
• German inflation - prelim (13:00 GMT) – Consensus is expected to see a slight reduction to 8.1% in July (from 8.2% in June)
• US GDP – Q2 Advance (13:30 GMT) – Consensus is looking for +0.5% (annualised) after a final -1.6% in Q1
• US Weekly Jobless Claims (13:30 GMT) – Claims are forecast to continue to increase to 253000 (from 251000)  

Major markets outlook

Broad outlook: Sentiment is yet to settle following the Fed, with the USD still unable to claw back losses. The risk rebound is looking a little questionable. Reaction to US GDP will be the next gauge for market sentiment. 

Forex: USD fell on the Fed decision and has yet to claw back any meaningful ground. JPY is the big outperformer. 

• EUR/USD had been threatening lower in front of the Fed, but there has been a turnaround since. This has left a low at 1.0096 as support and the market is once more solidly back into the consolidation area of the past week. However, resistance at 1.0275 remains intact and it suggests that the next break either above 1.0275 or below 1.0096 will be outlook defining for the near to medium term. 
• GBP/USD has broken strongly above 1.2055 and is now testing the resistance band between 1.2160/1.2210. Furthermore, the five-month downtrend is also being tested. Recovery momentum is also building with the RSI into the high 50s and the highest since February. How Cable reacts around here will be key to whether near-term recoveries remain a chance to sell. This could now be an outlook-changing move. Initial support is now at 1.2030/1.2060. 
• AUD/USD has broken out above the resistance of the near four-month downtrend and the 55-day moving average. This continues the recovery uptrend and opens a test of 0.7030/0.7070. The importance of near-term support at 0.6860/0.6875 is growing. 

Commodities: Metals are rallying to test important resistance, with oil also swinging higher again to test resistance.

• Gold has picked up strongly in the wake of the Fed's decision to leave higher low support at $1711 and is now testing $1739/$1752 resistance. A close above $1752 along with the RSI moving above $50 would be an important improvement in the outlook. It would open for a further recovery towards the near five-month downtrend which currently falls at around $1785. Initial support is at $1733/$1734 this morning.

• Silver has taken flight following the Fed and is moving sharply higher. A move through resistance between $18.85/$19.09 is now testing further resistance at $19.48. A decisive close above here would confirm a breach of a four-month downtrend but also open moves back towards $20.20/$20.45. Initial support is around $19.05/$19.10. 
• Brent Crude oil has gained strongly on the back of the Fed decision and has broken the six-week downtrend channel and the falling 21-day moving average. This is the first step to improving the outlook sustainably. The resistance band between $107.65/$109.65 remains key. A close above $110 would be a strong signal of medium-term recovery. Furthermore, the RSI breaking back above 50 (where recent rallies have faltered) would add confirmation. Initial support is at $105.70/$106.70.

Indices: Wall Street breakout, whilst European indices look unsure. 

• S&P 500 futures closed strongly higher in the wake of the Fed decision. The move above 4015 is the next step forward in the recovery. This opens the next band of resistance between 4070/4200. It also leaves 3913 as a key higher low and good support now between 3913/3950. Holding above the 4015 breakout would confirm the breakout today.
• German DAX has continued to struggle for upside traction. Although the market closed with decent gains yesterday the move is entirely being unwound this morning. It leaves the market in consolidation between 13035 and 13440. With momentum hovering around neutral, this is a market in wait-and-see mode.
• FTSE 100 has been more positive recently, even closing above the resistance at 7370 yesterday. We are still cautious though as the market has quickly pulled back this morning. We look for a further close above 7370 to suggest the market is turning more positive. Holding on to the 7282 support as a higher low would certainly help. The importance of 7205/7235 support is strong too. Holding a break above 7370 opens 7500/7600.

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.