Dollar Mildly Higher ahead of FOMC; GBP, CAD & AUD Weaken

Dollar strengthens mildly as markets await FOMC rate decision but momentum is limited against European majors. Notable moves are seen in Canadian dollar which is weighed down by oil prices. Meanwhile, Australian Dollar follows stocks lower but is holding above near term support at 0.7439 against Dollar. The Aussie is possibly weighed down by selling against New Zealand Dollar too after impressive job data of the latter. Sterling is also generally weaker today on news that EU is raising the amount of the Brexit deal for UK to EUR 100b. Meanwhile, Euro is also a touch softer ahead of French election TV debate.

EU Raised Brexit Bill to EUR 100b

Regarding Brexit, it’s reported that EU has raised the demand on the up-front settlement for UK to as much as EUR 100b. Previously that was estimated to be between EUR 40b and EUR 60b. And the larger demand was believed to be driven by France and Germany. And UK will be asked to cover post-Brexit farm payments and EU administration fees in 2019 and 2020. Nonetheless, over a period of a decade or more, the total amount will be reduced to around EUR 60b in net as UK receives it’s share of EU spending and repaid EU loans. And analysts noted that the approach of making the up-front payment bigger than the long term net is an approach that calculates the most extensive possible liabilities.

Macron and Le Pen for TV debate tonight

In France, pro-EU centrist Emmanuel Macron and EU-sceptic far right Marine Le Pen will have a head-to-head TV debate tonight. At this point, polls are still suggesting Marcon as a clear winner out of the run-off of the French Presidential election this Sunday. With just four days to go, Macron is having a strong lead of 20 points over Le Pen. Macron said that he will use "hand-to-hand fighting to demonstrate that her ideas represent false solutions" in the debate. On the other hand, Le Pen said that "his program seems to be very vague, but in reality it is a simple continuation of (Socialist President) Francois Hollande’s government."

BoJ asset surged to 90% of GDP

In Japan, based on a reported released by BoJ this week, the central bank’s assets grew by JPY 4T between April 20 and 30. And the total assets reached JPY 497.74T. That’s equivalent to the 90% of the country’s GDP. Government securities made up 85% of the total assets, at JPY 424.59T, up JPY 65T from a year ago. And back in 2013 when BoJ started the QQE program, it only had JPY 134T in Japanese government securities. There are calls for BoJ to explain the problems that it would face holding a balance at this level. Some pointed out there could be much negative impact on the value of JGBs when BoJ starts stimulus exit.

Canadian Dollar tumbles as oil dive extends

Canadian Dollar continues its weakness as selloff in oil extends. WTI crude oil tumbled to as low as 47.35 overnight and is hovering around 48 at the time of writing. There were concerns over excessive supply from Libya, Canada and the US have continued to pressure prices. A media report suggested that OPEC’s compliance with the output cut dropped to 90% in April from a revised 92% (from 95%) a month ago. While an OPEC member, Libya is excluded from the output cut deal due to the prolonged disruption in the oil facility since the 2011 Civil War. The country’s production has risen above 0.76M bpd, the highest since December 2014, due to the reopening of the major western field of Sharara last week. The country has pledged to raise production.

FOMC to keep monetary policies unchanged

FOMC rate decision will be a major focus today and it’s widely expected to keep monetary policies unchanged. At this point, the base case for Fed remains unchanged. That is, Fed will continue with it’s plan of a total of three rate hikes this year. That would be followed by a "brief pause" as Fed starts shrinking its balance sheet later in the year. Markets are pricing in over 60% chance of a rate hike by Fed in June. It’s generally believed Fed will look past the weaker than expected Q1 GDP data. There is no post meeting press conference scheduled.

On the data front…

New Zealand unemployment rate dropped to 4.9% in Q1, down from 5.2% and below expectation of 5.1%. Employment grew 1.2% qoq, up from prior quarter’s 0.7% qoq and beat expectation of 0.8% qoq. UK BRC shop price index dropped -0.5% yoy in April. Germany will release unemployment data today. Eurozone will release GDP and PPI. UK will release construction PMI. From US, ADP employment and ISM services will be released before FOMC rate decision.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 144.23; (P) 144.67; (R1) 145.37; More….

GBP/JPY’s rise continued and reached 145.11 so far, breaching 144.77 resistance. The cross continued to lose upside momentum as seen in 4 hour MACD but there is no clear sign of topping yet. Hence, further rise is still expected. As noted before, consolidation pattern from 148.42 has completed at 135.58, ahead of 135.39 medium term fibonacci level. Sustained trading above 144.77 should then resume the whole rebound from 122.36 through 148.42 resistance. On the downside, though, break of 143.79 minor support will bring pull back to 4 hour 55 EMA (now at 142.62) and below, before staging another rally.

In the bigger picture, based on current momentum, rise from 122.36 bottom should be developing into a medium term move. Break of 38.2% retracement of 195.86 to 122.36 at 150.42 should pave the way to 61.8% retracement at 167.78. This will now be the favored case as long as 135.58 support holds.

Economic Indicators Update