Today, market participants are likely to keep their gaze locked on the FOMC decision. Due to last week’s inflation data suggesting that the acceleration may have been due to transitory factors, we don’t expect any action. However, as several officials have already expressed their desire to have a discussion over QE tapering at one of the upcoming meetings, it would be interesting to see whether this took place now or not. The new “dot plot” may also attract special attention.
WILL THE FED DISCUSS A QE TAPERING AT TODAY’S GATHERING?
The US dollar traded higher against most of the other major currencies on Tuesday and during the Asian session Wednesday. It gained versus CAD, AUD, NZD, and GBP in that order, while it underperformed slightly against CHF, JPY and EUR.
The relative strength of the US dollar and the other safe-havens yen and franc, combined with the weakening of the risk-linked Aussie, Kiwi and Loonie, suggests that market participants switched to risk off yesterday and today in Asia. Turning our gaze to the equity world, we see that most major EU indices traded in the green, with the only exceptions being Italy’s FTSE MIB and Spain’s IBEX 35. However, market sentiment weakened during the US session, and continued on a weak note in Asia today as well. The only gainer was South Korea’s KOSPI.
On Monday, we saw investors pushing equities higher, with the S&P 500 and Nasdaq hitting fresh record highs, despite the Fed decision drawing closer. However, it seems that just a day ahead of the outcome, they decided to reduce their risk exposure and conclude on how to move forward in the aftermath of the gathering. As we already noted, the attention will fall on whether there will be any discussion with regards to a potential QE tapering. Last week’s inflation data revealed that, despite the acceleration in both headline and core terms, there were hefty contributions to that from short-term increases in airline ticket prices and used cars, which supports the fact that the latest inflation spike may indeed be due to transitory factors. However, ahead of the data, we heard several Fed policymakers expressing their desire to discuss QE tapering at one of the upcoming meetings.
With all that in mind, we don’t expect officials to rush into taking any policy action today, and thus, we will scan the statement for any potential discussion on QE. If there is indeed such a discussion, we believe that what could determine the market’s reaction may be any hints over a potential desired pace of withdrawal. A fast pace may suggest that Fed officials do not see the surge in inflation as transitory as they did in the past, and may hurt equities. At the same time, the US dollar and other safe havens could come under some buying interest. On the other hand, any discussion suggesting that the time for scaling back monetary policy has not come yet, or anything pointing to a very slow pace of tightening, may encourage market participants to increase their risk exposure a bit more.
Let’s not forget thought, that we also get updated economic projections, as well as a new “dot plot”. Back in March, the median dots suggested that interest rates are likely to stay at present levels even in 2023. However, looking at the details, 4 members voted for hikes in 2022, while 7 members saw rates higher in 2023. Therefore, combined with a potential discussion over a faster-than-previously-expected tapering process, more members voting for hikes in 2022 and 2023 could hurt risk sentiment even more. The opposite may be true, if the new “dot plot” is more or less a mirror image of the previous one.
NASDAQ 100 — TECHNICAL OUTLOOK
Yesterday, after hitting a new all-time high, at around 14161, the Nasdaq 100 cash index corrected lower and is now trading near a 21 EMA on our 4-hour chart. Even if the price moves a bit further south, we may class this move as a temporary correction, before another possible leg of buying, if the short-term tentative upside support line, drawn from the low of June 4th, remains intact. We will stay bullish overall.
A small decline could bring the index a bit lower and test the aforementioned upside line, especially if the price falls below yesterday’s low, at 14007. If that upside line provides a good hold-up, we might see a rebound back up and Nasdaq 100 may travel back above the 14007 hurdle, possibly aiming for the 14128 zone, marked by yesterday’s intraday swing low. Slightly above it lies the current all-time, at 14161, which could be tested as well.
Alternatively, if the price ends up breaking the previously discussed upside line and then falls below the 13933 hurdle, marked by the low of June 11th, that could scare off some bulls for a while, as the index might increase its chances of moving further south. Nasdaq 100 may fall to the 13848 obstacle, or to the 13806 hurdle, marked by the low of June 9th and an intraday swing high of June 10th. If the sellers are still in control, they could drag the price lower, potentially targeting the 13727 level, marked by the low of June 10th.
USD/CHF — TECHNICAL OUTLOOK
Although USD/CHF recovered some of its losses at the end of last week, it has been flat since the beginning of this week. At the same time, the pair continues to trade below a short-term tentative downside resistance line taken from the high of May 5th. As long as the rate remains below that downside line, the near-term outlook may stay bearish.
If USD/CHF makes a move a bit higher, but fails to break above the aforementioned downside line, another slide could be possible. The pair may slip back to the 0.8965 hurdle, marked by the low of June 15th, a break of which might open the pathway towards the 0.8932 territory, marked by the low of June 11th. Slightly below it lies the 0.8926 level, marked by the current lowest point of June, which could be tested as well.
Alternatively, if the previously mentioned downside line breaks and the rate climbs above the 0.9032 hurdle, marked by an intraday swing low of June 3rd, this may invite more buyers into the game. USD/CHF could then travel to current highest point of June, at 0.9054, which might halt the upmove temporarily. That said, if the bulls are still active, they may push the pair further north, possibly targeting the 0.9095 zone, marked near the highs of May 12th and 13th.
AS FOR THE REST OF TODAY’S EVENTS
During the early European session, we already got the UK CPIs for May. Both the headline and core rates rose by more than anticipated, but the pound added only around 10 pips against its US counterpart after the release. This confirms our view that accelerating inflation is unlikely to spark speculation for more action by the BoE at its upcoming gathering. In our view, GBP-traders are likely to stay focused on the coronavirus saga, and the rising cases in the UK due to the Delta variant, which prompted PM Johnson to delay the reopening of the economy by a month.
We get more CPIs for May later in the day, this time from Canada. The headline CPI is anticipated to have ticked up to +3.5% yoy from +3.4%, while no forecast is available for the core rate. Last week, the BoC kept its policy unchanged and noted that any adjustments to the pace of their QE purchases will be guided by the ongoing assessment of the strength and durability of the economic recovery. Although the Bank scaled back its bond purchases at the gathering before that, we now believe that inflation may need to decently overshoot its forecasts for market participants to start discounting the chance for further tapering taking place soon.
In the US, apart from the Fed decision, building permits and housing starts for May are also due to be released, and expectations are for both to have increased somewhat.
As for the speakers, besides Fed Chair Powell, who will speak at a press conference after the Fed decision, we will also get to hear form ECB Vice President Luis de Guindos and ECB Executive Board member Frank Elderson.
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