Daily Market Pulse

FOMC decision later today


The USD is trading lower this morning as traders await the conclusion of the two-day FOMC meeting. While officials have indicated that no interest rate moves are likely for several years, the market will be waiting to hear the Fed’s revised economic projections and indications on inflation targeting and asset purchases. The Federal Open Market Committee will provide its quarterly update on where it sees GDP, unemployment, and inflation going. The general tone of the meeting is expected to be one of caution and it is expected that there will be some upgrade to recent downbeat economic forecasts, as the current unemployment rate of 8.4% is below the committee’s 2020 forecast of 9.3%. There are no big changes expected and the comments should be upbeat. The rate decision will be released a little after 2 PM EST, and the Powell news conference will follow shortly thereafter. US Stock futures are trading quietly this morning, moving a bit higher earlier this morning and the DOW futures are showing an opening of around 100 points higher when the markets open later today. Before we get the FOMC report this afternoon, traders will be focused on Retail Sales, which are expected to gain 1% in August after a 1.2% rise in July. Purchases in the GDP component control group are forecast to increase by 0.5% following the July gain of 1.4% and sales ex-autos are projected to rise by 0.9%. They were 1.9% higher in July. The major categories of retail sales have had an excellent five months, the best in over 10 years. Despite when sales collapsed by the largest amount on record as the economy was shut by the government in March and April, the recovery in May, June, and July was so energetic that the average for the whole period is one of the highest in history. From March through July sales averaged a 0.98% increase each month. The last time the US consumers spent so avidly was in 2009 when sales gains averaged 1.02% from April through August. US Treasury yields were a bit lower overnight ahead of the FOMC announcement, as the 10-year note was down at 0.6740% and the 30-year bond was down to 1.4226%. 


EUR/USD is trading higher this morning, just below the overnight high, taking back some of the losses in the currency seen during trading yesterday. 50 and 100-day moving averages are converging and a break higher from the 50-day could see an upward surge for the single currency. RSI has been moving steadily higher over the last few hours and is currently at 64. Ursula von der Leyen, President of the European Commission, delivers her wide-ranging State of the Union speech later on Wednesday. Focus however is clearly on the US and we could see some reaction to a weaker than expected US retail sales number later this morning. But the move could be countered by the Fed announcement later today. Coronavirus cases continue to rise in Europe. Investors seem to not be bothered by the disease at this point and are hopeful for a vaccine, or more than one, to be available in the coming months. Continued failed Brexit talks, which weigh on the point have also been a positive for the EUR, as traders are buying EUR/GBP. Look for the EUR to remain better bid throughout the trading day, ahead of the Fed announcement.


GBP/USD is trading at overnight highs, moving above the moving averages. And traders are reacting to better than expected annualized CPI which beat estimates with 0.2% in August. The analysts expected a 0% change. Technically, the pound could see some reversal from the last three down trading days and momentum seems to be turning upward. RSI which has popped above the 70-level in the last hour is now just below at 69. Any Brexit compromise is always good news for the pound and Prime Minister Boris Johnson has been seeking to soothe concerns about the controversial Internal Markets bill that passed the first hurdle in parliament. The legislation violates the Brexit deal that Johnson signed with the EU, as admitted by government ministers. The pound suffered badly when the move was announced and as Brussels laid down an ultimatum to London that the bill must be rescinded by the end of the month or face sanctions. Several members of the PM's ruling Conservative Party have either abstained or voted down the legislation and others were expected to follow. If the final wording refrains from breaking international law, the pound could extend its gains. Like every other currency, the pound will be affected by the comments from the Fed this afternoon. 


USD/JPY is trading near overnight lows as well below the moving averages as the RSI level has fallen well below the oversold level of 30, currently trading at 21. Earlier today, the Lower House of Japan’s parliament formally elected Yoshihide Suga as the country’s new Prime Minister. Suga replaces Shinzo Abe who was forced to resign due to health concerns. He is expected to continue with Abenomics and put together a “continuity cabinet”, which will likely keep about half of predecessor Abe’s lineup. Suga won a ruling Liberal Democratic Party (LDP) leadership race by a landslide on Monday. Turning towards economic news, Japan exports had an 8th straight month of double-digit decline in August. In non-seasonally adjusted terms, Japan’s exports dropped -14.8% year-on-year to JPY 5232B in August. That’s the 8th straight month of double-digit decline, as well as the 21st month of contraction. It’s the worst run since the 23-month contraction through July 1987. Exports are generally expected to stay weak and might not reach pre-pandemic levels until a least early 2022. Imports dropped -20.8% year-on-year to JPY 4984B. The trade surplus came in at JPY 248B. USD/JPY is way oversold, and we should see some pullback during today’s trading day.


USD/CAD is also trading lower this morning, as the moving averages converge and the 50-day looks to break below the 100 and 200-day moving averages. RSI has been falling during overnight trading and early this morning, moving from just below the 70-level to its current 44. Oil prices had a dramatic rise overnight, as Brent crude futures rose $0.88 to $41.38, while US West Texas Intermediate crude futures rose $0.92 to $39.20. Both oil contracts had risen more than 2% on Tuesday. More than 25% of U.S. offshore oil and gas output was shut and export ports were closed on Tuesday as Hurricane Sally headed for land just off the U.S. Gulf Coast. According to reports, U.S. crude oil inventories fell by 9.5 million barrels last week, while analysts had expected oil stocks to increase by 1.3 million barrels. In other news, a US Trade Representative said the US will drop the 10% tariffs on Canadian non-alloyed, unwrought aluminum, retroactive to September 1. The tariffs were reimposed in August due to a surge in imports earlier this year. But USTR expects the volume to normalize back to 70k to 83k tons a month for the rest of the year, after consultation with Canada. Canada also dropped the threat to retaliate after the US move. Trade Minister Mary Ng emphasized “Canada has not conceded anything. We fully retain our right to impose our countermeasures if the U.S. administration decides to reimpose its tariffs on Canadian aluminum products, and we are prepared to do so.” Deputy Prime Minister Chrystia Freeland also insisted: “This is not a negotiated deal. We have not negotiated an agreement with the United States on quotas”.


Mexico on Monday issued what it described as the world’s first sovereign bond linked to the sustainable development goals set by the United Nations, raising 750 million euros ($889.73 million). Deputy Finance Minister Gabriel Yorio said reducing inequality, financial inclusion and the gender gap were among the U.N. goals. “Mexico is the first country to issue a sovereign bond that is linked to the sustainable development objectives of the U.N.,” he wrote on Twitter. “Our country starts its sustainable finance program as a pioneer.” The government did not specify how it would spend the money raised. The bond’s preliminary investment prospectus cautioned that there was no guarantee Mexico would make disbursements for projects that meet the U.N. characteristics. The bond is part of an emerging trend of debt issuance aimed at raising funds that attempt to tackle social, environmental, and other issues. It was more than six times oversubscribed. The coupon of 1.350% was the second-lowest among all euro-denominated bonds issued by the Mexico federal government, the ministry said, allowing the government to borrow at an attractive rate. The bond matures in September 2027. The Finance Ministry added that the euro bond allowed Mexico to tap into international investment funds, many of them in Europe, that are committed to financing sustainable economic development.


China's economic recovery continued to gather steam with major economic indicators further improving last month as the country's efforts to boost growth amid the COVID-19 slowdown gradually paid off. Retail sales of consumer goods, the main gauge of China's consumption, returned to growth for the first time this year, rising 0.5 percent year on year in August, according to data from the National Bureau of Statistics (NBS). The measurement of consumption fell 1.1 percent in July. Industrial output increased 5.6 percent year on year in August, accelerating from the rise of 4.8 percent registered in July. In the first eight months, industrial output expanded 0.4 percent from one year earlier, compared with a decline of 0.4 percent in the January-July period, NBS data showed. Fixed-asset investment edged down 0.3 percent year on year in the first eight months, further narrowing from a fall of 1.6 percent posted in the January-July period. Employment remained stable as the surveyed unemployment rate in urban areas stood at 5.6 percent in August, 0.1 percentage points lower than that of July. Meanwhile, the country's exports in August rose at a faster-than-expected pace, increasing 11.6 percent year on year, though imports edged down 0.5 percent from one year earlier. NBS spokesperson Fu Linghui said despite pressures from both the COVID-19 fallout and floods, the country's economy has sustained a steady recovery. The country's GDP expanded 3.2 percent year on year in the second quarter, reversing from a contraction of 6.8 percent in the first quarter.


Brazil’s Economy Ministry on Tuesday kept its forecast for a record 4.7% fall in gross domestic product this year, predicting that the recovery already underway from the depths of the pandemic-fueled crisis will accelerate as the year goes on. The ministry said it expects growth in the third quarter to be led by industry, agriculture, and trade, which will help drive an overall GDP expansion of 7.3% from the preceding three-month period. Brazil’s economy shrank by a record 9.7% in the second quarter, figures earlier this month showed, a bigger fall than economists had expected. The unchanged 2020 outlook came as a slight surprise, after Waldery Rodrigues, special secretary to the ministry, had indicated earlier this month that the forecast could be revised up. Still, a contraction of 4.7% is smaller than the average forecast in the latest weekly central bank survey of economists, of around 5.1%, and far less gloomy than the International Monetary Fund’s projection of a 9.1% crash. The ministry noted that Brazil’s dominant services sector, which accounts for around 70% of all economic activity, has been slow to recover from the pandemic shock, but will start to show a “more vigorous” performance in the fourth quarter. “According to our projections, the services sector will be stronger from October onwards, and will lead (the economy’s performance) in the fourth quarter,” economic policy secretary Adolfo Sachsida told reporters in an online press conference on Tuesday. The ministry also maintained its 2021 GDP growth forecast of 3.2%. While the outlook is still subject to a high degree of uncertainty due to the COVID-19 crisis, Sachsida said next year’s projection was still on the conservative side.


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