The markets all await the FOMC Interest rate decision which will be released around 2:00 pm this afternoon. While there are no changes expected regarding interest rates or programs, there are some projections for the remainder of 2020 and beyond that will garner some attention. As the pandemic was reaching its peak earlier this year, there were no projections given by the Fed in earlier meetings. The press conference held by Fed Chairman Powell following the meeting should give a better understanding as to the Fed’s views. Over the last few days, we have seen the USD move lower as traders exited the “safety” of USD trades for riskier plays. As the Fed has gone above and beyond with policy initiatives, this will be the first time they will present statistics induced by the pandemic causing the economy to collapse. As the Fed has added funds by buying bonds, Treasury yields have fallen as evidenced by the move in 10-year Treasury notes which have fallen from 1.6% in the middle of February to around 0.8% in the last few days. Fed Funds futures point towards rates remaining where they are at least until March of 2021, as traders expect rates to remain the same with a confidence level of around 85%. Given the strong May NFP report, there may be some pleasant surprises on unemployment projections as well as the expected strength of the economy in the second half of 2020. The USD remains under pressure this morning against the major currencies. DOW Futures are nearly flat this morning as equity markets await the Feds decision. The US equity markets look to open around 25 points lower. US Treasury yields are also lower this morning with the 10-year trading at 0.8171%, and the 30-year bond trading at 1.5676%. The US Core Inflation rate has been released at 1.2%, previously 1.4%.
EUR/USD remains strong ahead of the Fed decision. Several ECB members are scheduled to speak today. Technically, the EUR continues to trade above the 50, 100, and 200-day moving averages, while the RSI number remains below the overbought 70-level. The single currency has bounced off resistance levels near the June high but buyer demand remains. Coronavirus cases are falling in Europe, and as economies re-open this has been a positive factor for the EUR. The EU and the US continue to have conversations regarding trade, but there isn’t much to report here. The possibility of potential tariffs on European goods entering the US could eventually weigh on the EUR, but at this point, the market seems to be ignoring these negotiations. The ECB is preparing a 'bad bank' scheme, which will counter the pandemic crisis’ fallout on debt. The ECB continues to urge governments to add further fiscal stimulus. EUR/USD should remain bid throughout the day.
GBP/USD is also trading higher looking to reach levels not seen since March, as traders await PM Boris Johnson’s plan to re-open the British economy. Technically the uptrend remains for the pound after a brief profit-taking dip on Tuesday. As the fund continues to trade above the moving averages, RSI remains below 70 and further gains are expected. According to reports from 10 Downing Street, zoos will be the next to re-open, while pubs will have to wait a bit longer. Great Britain is taking baby steps regarding the re-opening of the economy and surprisingly this has not weighed on the pound in the last few trading days. Instead, sterling is benefiting by the overall USD weakness. At the moment, traders are ignoring economic predictions which show a fall of 11.5% in British GDP this year, which is worse than the projections of the Eurozone. Brexit talks remain deadlocked and every day brings us closer to the UK trading under WTO terms. As the focus remains on the Fed, expect the pound to remain bid during the trading day.
USD/JPY continues to trade lower this morning. There is no underlying reason for the JPY appreciation over the last few days except that the currency had been undervalued. At the present, it is trading below the 50, 100, and 200-day moving averages and the RSI level has dropped below the 30-level indicating an oversold situation. A report from Bloomberg News, says the Bank of Japan believes there is no need for any further action to be taken at next week’s policy meeting. The meeting is set to take place on June 16th. Additional quotes from the BOJ state that the bank “will remain more flexible in managing the yield curve and allow for some fluctuation in 10-year JGB yields around 0% as targeted”. According to Reuters, Japan’s PM Abe is quoted saying “Japan wants to take the lead among G7 nations on issuing a statement about Hong Kong situation.” Following the passage by China of a new law for the Hong Kong which could endanger the city’s special autonomy and freedoms, Japan hopes to draft a joint statement on China’s new security legislation on Hong Kong at the next Group of Seven (G7) foreign ministers’ meeting, a Japanese government source familiar with the matter told Reuters earlier this week. Prime Minister Shinzo Abe had said earlier that Japan is watching the situation in Hong Kong with deep concern. The move by China could erode Hong Kong’s competitiveness as an export hub and an international financial center.
USD/CAD has bounced off its overnight lows as there has been some pressure on the loonie due to the failure of oil to break the $40 level. Oil prices were lower early this morning as data showed a rise in oil reserves in the US. This has traders concerned that an oversupply and a fall in demand could push prices lower. Brent crude futures fell $0.59 to $40.59 per barrel, while West Texas Intermediate crude futures fell $0.72 to $38.22 per barrel. Both contracts had been at their highest levels in three months on Monday. While economies around the world continue to re-open, concerns over a second outbreak of coronavirus cases keep traders from fully embracing an upward move. Technically, the USD/CAD is testing the 50 and 100-day moving averages and resistance levels, while RSI is trading around 50. A failure to break through these resistance levels could see renewed USD/CAD selling. The currency pair should trade quietly ahead of the FOMC release.
The Chinese Foreign Ministry expressed concerns over the remarks stated earlier by Japan’s PM Abe. Chinese President Xi Jinping is scheduled to visit Japan for trade talks soon. This meeting was originally planned for April but was postponed due to the Coronavirus pandemic. Australia’s Trade Minister said on Wednesday morning that the Australian economy would suffer if Chinese students did not return as China warned its students to stay out of Australia due to reports of racial discrimination. He stated, “It would be a loss for our universities and a loss for Chinese students and would do nothing to further the mutual understanding between the two nations.” According to the Department of Education, “China is Australia’s most important trading partner and sends the most international student, accounting for 37.3% of the 442,209 overseas students in higher education in 2019”. On the economic data front, May CPI rose 2.4%, versus the expected 2.7%. May PPI fell 3.7% from a year ago against an expected fall of 3.3%.