Judgment Week: Markets Await FOMC's Meeting

The main event of the week will be the FOMC meeting on Tuesday and Wednesday. The markets will be looking for greater clarity on when and how the Fed may begin “tapering off” its quantitative easing. The Fed has been trying to send the message that they might reduce their bond-buying a bit, but is frustrated because the market seems to think just in on/off, all-or-nothing terms. That’s why the rise in US bond yields and growing expected yield gap with other countries has failed to support the dollar vs many of the major currencies, although the ensuing “risk off” environment has strengthened the US currency vis-à-vis the EM currencies. With US stocks remaining fairly well underpinned (down from the highs but well off the recent lows), demonstrating continued confidence in the US economy, it’s possible that the Fed gives both confirmation of the likelihood of “tapering off” and more reassurance about the pace and the impact on the US economy. That combination could prove reassuring for the markets and set the stage for a USD rally.

GBP is likely to be in the spotlight this week after Bank of England Deputy Governor Paul Tucker announced his resignation Friday. Tucker has voted against expanding QE. UK Chancellor of the Exchequer George Osborne will appoint Tucker’s successor. As Osborne was the one who chose former Reserve Bank of Canada Gov. Mark Carney as the new BoE Governor, it’s likely that he will appoint someone with a similarly dovish view to replace Tucker. That prospect could weigh on GBP/USD, although such a move might just change the monthly Monetary Policy Committee vote to 4-5 from the recent 3-6; still not enough for a majority.

The two-day G8 meeting begins today in Northern Ireland. The summit is likely to focus on boosting trade, fighting tax evasion and increasing tax transparency, particularly with regards to mining companies and their payments to EM countries. Last year’s summit resulted in a rather bland statement with no mention of FX matters; this year’s may be similarly a non-event for FX. Greek PM Samaras meets with his two coalition partners to discuss his decision to shut the state broadcasting company, ERT. A rift in the coalition could cause a destabilizing early election, but as polls indicate that no one party has enough support to govern alone, it’s likely they will reach some compromise. ECB Board members Joerg Asmussen and Yves Mersch will be speaking; Mersch said last week that it was “conceivable” for the ECB to institute negative deposit rates “depending on the economic landscape.” This contrast with Fed policy should restrain EUR/USD. In the US, the Empire State manufacturing survey for June is expected to rise to zero from -1.43 and the NAHB housing market index to rise slightly to 45 from 44, which could help to counter the impact of last week’s disappointing US statistics.

The Market

EUR/USD

• EUR/USD found support at 1.3300 following the narrower-than-expected US current account deficit, but the USD gains were short-lived as the market digested news of a record net sale of Treasuries by foreigners in April. Worse-than-expected US industrial production and capacity utilisation for May and the first decline in US consumer confidence in two months drove EUR/USD to resistance at the 61.8% retracement level of the February – March plunge.

• Friday’s hanging man candlestick formed a bearish crossover on the Stochastic oscillator, having found resistance around the common 94 Stochastic level. A down move today on a resumption of the risk-on sentiment may lead to a bearish crossover on the RSI as well, with a break of the three-week upward-sloping trendline marking a possible reversal. Fibonacci support comes at 1.3320, and 1.3230, with support in between at 1.3300. Fibonacci resistance is seen at 1.3340, with further resistance at 1.3370 and 1.3395.

USD/JPY

• USD/JPY rebounded from the plummet that followed the release of the BoJ meeting minutes, which showed one policy member in favour of a two-year restriction on the unprecedented quantitative easing. Resistance came at 95.30 with the weak U.S. data causing a plunge to 94.15 support.

• The pair looks to be rebounding today as the Japanese equity indices are continuing to rebound, with resistance coming at 94.90, 95.30 and 95.90. Notable Fibonacci support is seen at 94.40 with weaker support at 94.15 and a tested low at 93.75.

GBP/USD

• Cable experienced significant downward pressures on Friday before the official resignation of Deputy Governor Tucker, breaking down from very significant support at 1.5690 which concentrated the 200-day MA, the 61.8% Fibonacci level of the June – December rally, and two overlapping, well-tested upward sloping trendlines. The weak US data that followed led to a rebound above these levels, with resistance coming at 1.5730.

• Resistance stays at 1.5730, with significant overlapping Fibonacci levels at 1.5780. Support is seen at 1.5690 again, with weak trendline support at 1.5665 and further support at 1.5610.

Gold

• Gold’s same story different day trading action (sic) continued. Some gains were witnessed on the poor industrial data, though interestingly the gains came despite an increase, albeit marginal, in the Dollar Index.

• Resistance is likely to come just below the $1400 level with further resistance at $1412 and $1423. Support comes at $1387, $1378 with possible trendline support at $1372.

Oil

• WTI was a major gainer despite the weak US industrial data, gaining as the dollar fell, breaking out from significant trendline resistance, spiking to $98.15, before retracing on the deterioration of consumer confidence consolidating at $97.75.

• With crude in a converging pattern for a number of months, identifying resistance levels following the most recent breakout involves a look back to 2012 price action. $97.75, the 61.8% retracement level of the steep decline from March to June 2012 is the key level with further resistance at $98.10 and $98.50. Trendline support comes at $96.95 and $96.25.

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MARKETS SUMMARY