Fed Officials Send Conflicting Signals, BoE Decides on Rates
EU shares slid yesterday, despite the better-than-expected PMIs for June. Perhaps, this was due to the survey revealing surging consumer prices. Appetite remained soft during the US session as well, as two more Fed officials expressed a hawkish view on inflation and monetary policy. As for today, the main event is likely to be the BoE decision. We don’t expect any policy action today, but it would be interesting to see whether we will get a more optimistic language.
EQUITIES PULL BACK ON NEW HAWKISH REMARKS BY FED MEMBERS
The US dollar continued trading lower against all but one of its major peers on Wednesday and during the Asian session Thursday. It gained only against JPY, while it lost the most ground versus NZD, AUD, and GBP.
The continuous weakening of the US dollar and the Japanese yen, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that financial markets continued trading in a risk-on fashion yesterday and today in Asia. However, turning our gaze to the equity world, we see that major EU bourses closed well in the red. Sentiment was somewhat improved during the US session, but still, the Dow Jones and the S&P 500 finished their session lower. Only Nasdaq gained somewhat. Appetite was mixed during the Asian session today.
European shares drifted south yesterday, with major indices losing around 1% each, despite the bloc’s preliminary PMIs for June coming in better than expected. The composite index rose to a 15-year high as the easing of lockdown measures unleashed pent-up demand, but also led to surging price pressures, and that may have been the reason why equities pulled back. However, with the ECB staying adamant that it’s not time to consider withdrawing monetary policy support yet, we don’t expect this to lead to a trend reversal. We believe that this could just be a corrective phase. Nonetheless, bearing in mind that the Fed has already signaled that it is considering raising interest rates in 2023, with some officials even expressing desire for this to happen next year, we prefer to maintain a cautious stance with regards to the broader market sentiment.
Appetite, although somewhat improved, remained soft during the US session as well, perhaps following remarks by Atlanta Fed President Raphael Bostic and Fed Board Governor Michelle Bowman, who said that while they largely agree that the recent surge in inflation is likely to prove to be temporary, they also added that it may take longer than anticipated for it to fade. Bostic also said that with growth surging to an estimate of 7% this year and inflation well above their 2% objective, interest rates will need to rise in late 2022. Following recent hawkish remarks by Dallas Fed President Robert Kaplan and St. Luis President James Bullard, Bostic is another member joining the camp of those believing that interest rates should start rising earlier, and that’s why investors started worrying again, despite Fed Chief Powell and New York Fed President Williams expressing a different opinion. That’s why we preferred to stay somehow neutral, despite Nasdaq hitting a fresh record. We will stick to our guns until we have a better picture of when does the majority of Fed officials want to start pushing the hike button.
AUD/JPY — TECHNICAL OUTLOOK
AUD/JPY has been in a recovery mode since June 21st, when it hit support at 82.14. However, the recovery was paused near the 84.16 barrier. Overall, the pair remains below the prior upside support line drawn from the low of March 24th, as well as below the downside line taken from the high of May 10th. With that in mind, we believe that the pair may not have much room to recover further, and that’s why we will adopt a cautious stance for now and wait for trader’s reaction near those lines.
If the bears decide to take charge again from near the crossroads of those lines, we could see the slide ending up testing the 83.47 level, marked by an intraday swing low formed on Tuesday, or the 83.28 barrier, defined as a support by Monday’s inside swing high. A break below that hurdle could carry more bearish implications, perhaps targeting Tuesday’s low, at 82.78.
Now, in order to start examining whether the bears are not willing to jump back into the action in the near term, we would like to see the recovery extending above the 85.14 level, which provided strong resistance between May 14th and June 2nd. This will also take the pair above both the aforementioned diagonal lines and may initially target the peak of May 10th, at 85.80. Another break, above 85.80, could see scope for extensions towards the high of February 7th, 2018, at around 86.60.
WILL THE BOE SOUND MORE OPTIMISTIC?
As for today, market participants are likely to shift their attention to the UK and the BoE monetary policy decision. When they last met, British policymakers kept interest rates unchanged, but they proceeded with a technical change in which the pace of weekly bond purchases slowed down. That said, they reaffirmed that “as measured by the target stock of asset purchases, that stance remains unchanged”, adding that the QE slowdown is not a material change and that they are ready to reverse it if deemed necessary. With regards to their economic projections, they expected the UK economy to recover to pre-pandemic levels over the course of this year, while on the inflation front, they said that it may rise above 2% towards the end of the year, but this is likely to be due to transitory effects and thus, the rise may prove to be temporary.
Given that this is not a Super-Thursday, where we get updated economic projections and a press conference by Governor Bailey, we don’t expect officials to proceed with any change at this gathering. We believe that they may prefer to wait for the August meeting to announce any further slowdown in bond purchases. However, it would be interesting to hear their opinion on the inflation and growth outlooks, following the recent strong CPI and GDP data. A more optimistic language could be interpreted as a sign that they are getting closer in slowing further their purchases, which could support the British pound somewhat.
GBP/USD — TECHNICAL OUTLOOK
GBP/USD traded in a consolidative manner during the Asian trading today, after hitting resistance near 1.4005 and pulling back yesterday. Similarly to the AUD/JPY pair, Cable has also been in a recovery mode recently, but still remains below the prior upside support line drawn from the low of April 12th, as well as below a downside line taken from the high of June 1st. Taking that into account, we would stay a bit skeptical as to whether the recovery could continue for long.
A break above 1.4005 could extend the recovery towards the 1.4080 zone, or the downside line taken from the high of June 1st. This is the territory from where the bears may decide to jump back into the action and pus the battle lower for another test near 1.4005. If they manage to overcome that barrier on their way south, we could see them challenging the 1.3923 barrier next, which is marked a s a support by yesterday’s low. Another break, below 1.3923, could extend the slide towards Tuesday’s low of 1.3860.
On the upside, we would like to see a strong recovery back above 1.4185 before we start examining whether the bulls have stolen all the bears’ weapons. That barrier acted as a strong resistance during the period between June 2nd and 11th. This is when we will target the peak of June 1st, at 1.4250, the break of which could set the stage for extensions towards the high of April 18th, 2018, at around 1.4315.
AS FOR THE REST OF TODAY’S EVENTS
Besides, the BoE decision, we also have the German Ifo survey for June, the final US GDP for Q1, and the US initial jobless claims for last week. All three of the Ifo indices are forecast to have risen somewhat, while the final US GDP is expected to confirm its 2nd estimate of 6.4%. Initial jobless claims are forecast to have declined to 380k from 412k the week before.
We also have three speakers on today’s agenda and those are ECB Executive Board members Fabio Panetta and Isabel Schnabel, as well as New York Fed President John Williams.
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