FOMC preview
The overwhelming consensus for today’s FOMC meeting is that the Fed will have little to say that would prompt any significant adjustment to the current expectations for the trajectory of Fed policy.
The market is almost as complacent as it has been in recent memory, looking for very slim odds of a September move, and highest odds that the move takes place at either the October or December meeting.
This can hardly shift significantly lower or farther out the curve from anything the FOMC meeting or Janet Yellen have to say today. That’s because the Fed will likely express that it is encouraged by the comeback in Q2 data, but that there is still insufficient evidence to pull the trigger, though that trigger will certainly be pulled if the data continues to improve – i.e., it’s all about the incoming data, not about any new spin the Fed would like to offer at this time on its intentions.
Still, there could be some room for a reaction to the economic and policy forecasts, if these are adjusted a bit more to the weak/dovish side than expected (and the general expectation is that the policy forecasts will be adjusted slightly lower and GDP will be adjusted lower for this year due to the weak Q1).
But overall, the reaction function here is most likely to be about how confident the market is in its still-long USD positioning and whether it is willing to add to that position ahead of the unknown of the next rounds of incoming data.
The major USD pairs look very uncertain here, as again, the reaction may be more about sentiment than about any notable developments. Given extreme complacency on the Fed, the USD downside risk may be minimal, even if the initial reaction is to sell dollars.
Elsewhere
Elsewhere, the news flow is thin, Greece is not sending any signals suggesting we are moving toward a deal as we await the Euro Group meeting of finance ministers tomorrow and what could be a nervous weekend as the threat of capital controls rises dramatically if there is no progress by the end of the week.
Sterling in focus today on the BoE minutes. Hard to see the BoE rattling its cage with core inflation still near 14-year lows, though positive language on the dwindling output gap amid all of this Fed complacency and Euro nervousness could see sterling continuing to outperform, though the pound rally looks stretched relative to basic fundamental indicators like interest rate spreads, particularly in GBPUSD.
Chart: USDJPY
Major USD pairs like USDJPY are waiting and watching for a reason to move between key support and resistance lines. For this pair, note the 123.80 resistance area as the key upside trigger and the downside populated with the nominal recent low just below 122.50, while the 122.00/121.50 zone is the structural pivot zone. Also note the apparent interest in the 21-day moving average.
The G-10 rundown
USD: FOMC expectations very low – reaction mostly about sentiment. Looking for potential USD upside, though confidence not high that the immediate reaction will be USD positive.
EUR: Extreme uncertainty and tough to discern what euro traders are thinking because of the previous behaviour of risk appetite vis-à-vis the euro carry trade.
JPY: Waiting for BoJ on Friday as well as FOMC today – looks like JPY back to trading in weak beta with USD – judging from https://www.tradingfloor.com/forex/eurjpy at least. May be resilient in the crosses, therefore, if USD comes out of FOMC intact and the BoJ expresses hope that the current policy mix is enough to achieve its policy objectives.
GBP: Oddly strong, with today’s BoE minutes and employment/earnings data to tell us whether this strength can extend any farther from here now that we’ve taken out just about every resistance level in GBPUSD ahead of the 1.5800+ top.
CHF: Expecting the SNB to escalate rhetoric at minimum on CHF strength at tomorrow’s SNB, with outside possibility for a policy move to weaken the franc. Any clarity on Greece and CHF may be spring-loaded for extensive weakness across the board.
AUD: AUD trading weakly, perhaps as iron ore prices suffered a sharp drop, but AUD biding its time mid-range versus the USD as we await the FOMC.
CAD: Little to say here as this is trading like “just another USD pair” – mid range and waiting for a reason to react.
NZD: Still weak, with tonight’s GDP as the latest spark for either further downside or consolidation
SEK: EURSEK may look to test lower toward 9.10/05 now that risk appetite appears to be recovering.
NOK: Cut or no cut at tomorrow’s Norges Bank, not looking for much further downside potential for NOK – the difficulty being for traders: “no cut” and EURNOK bears miss the boat if not already short, and “cut”, the bears are squeezed/stopped out before EURNOK reverts back lower. Perhaps safest to hope for the latter scenario, with no position until any post-cut rally shows signs of reversing.
Economic Data Highlights
- Japan Adjusted Trade Balance out at -¥182.5B vs. -¥184B expected and -¥240B in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
- UK May Jobless Claims Change (0830)
- UK Apr. Average Weekly Earnings (0830)
- UK Apr. Employment Change/Unemployment Rate (0830)
- UK BoE Minutes (0830)
- Euro Zone Final May CPI (0900)
- US FOMC Rate Decision, statement release (1800)
- US FOMC Chair Yellen press conference (1830)
- New Zealand Q1 GDP (2245)