Overnight Headlines
- Powell, Bullard dampen hopes Fed will deliver half-point interest-rate cut
- RBNZ stands pat on rates but shifts to easing bias
- G20 Summit draft communique calls for promotion of free trade
- Trump: US will use great and overwhelming force if Iran attacks
US equities lost ground yesterday, led lower by sharp declines in tech, after comments from Fed officials cooled investor optimism around a potential rate cut next month. The market took note of one of the most dovish rate-setters at the Fed, James Bullard, who argued for an insurance cut only and that a 50bp rate cut would be overdone. Having compressed near their all-time highs, stocks sold off to close on their lows.
US bond yields fluctuated around the key 2% level as market participants weighed the prospect of the
ongoing US-China trade tensions against the likelihood that the Fed may be less dovish than expected. There is decent support around the 2.01% level. Consolidation and profit taking are more than likely as it seems as though the combined efforts of Powell and especially Bullard have put a 50bp July cut on the backburner.
USD reclaimed some ground against most major currencies, in a session where FX ranges were mostly subdued. DXY is consolidating just above 96, but still below the 200d MA around 96.57.
Fed Chair Powell repeated his message from the previous FOMC meeting, while adding that it is important not to overreact in the short term. He said that the Fed is weighing whether an interest-rate cut will be needed as trade risks stir economic uncertainty and inflation lags. But he stopped short of saying a cut was guaranteed, noting that the Fed would continue to watch economic events unfold and would avoid reacting to short-term issues. Ultimately, the US economy is still in a good place, but risks have grown which means the idea of a pre-emptive rate cut rather than a full cutting cycle is the most likely way forward.
The RBNZ kept rates unchanged, but signalled that a further reduction in interest rates may be needed due to both slowing global and domestic growth. However, the kiwi is today's leading major currency so far as the RBNZ failed to significantly fuel further dovish bets.
Currency Majors
EUR/USD pushed higher for four consecutive sessions making fresh three month highs until yesterday's dollar advance, with the world's most traded pair failing to break decisively above 1.14. There is solid resistance higher around 1.1450 and 1.1545, but for the time being expect range trading ahead of US PCE data and the G20 Trump-Xi meeting later in the week. The 200d MA lies just below at 1.1350 as first support. We note that underlying trend signals on multiple timeframes are positive.
GBP has turned lower as it continues to struggle with resistance in the upper 1.27s where a confluence of daily and intraday techincal levels exist - the 40d MA, retracement and minor trend resistance. Losses have picked up below 1.2735 which could see 1.2633/42. We need a strong close above 1.2763 to signal more upside and a push beyond the recent one month high above 1.2784.
JPY is consoldiating near its fresh year-to-date lows (ignoring the January flash crash lows), having broken decisively lower through previous support at 107.81 and after tracking sideways for the first part of the month. A series of lower highs and lower lows is in play from the 112.40 high in April, but strong support lies below at 106.60.
Note it is month/quarter/H1 end so along with the G20 meeting over the weekend, it could make for a very messy rebalancing and fixing with talk of heavy dollar selling earlier in the week.
Key Events
A range of Bank of England MPC members, including Governor Carney, will testify before the UK Parliament Treasury Committee.
All eyes are on the G20 Trump-Xi meeting set for Friday and Saturday. The US is willing to put off the threat of tariffs on an additional $300bn of Chinese imports as preparations to resume trade talks are ongoing. Many in the market remain cautious on the dollar going into the meeting as it is assumed that President Trump will reiterate the case that the dollar is too strong.
European stocks have opened very modestly lower while oil pushes higher with the market now more concerned about tighter supply after a report showing a drop in crude stocks last week.
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