Today, investors will probably be sitting on the edge of their seats in anticipation of the minutes from the latest FOMC gathering, where the Committee raised the Federal funds rate by 25bps. In the statement accompanying the decision, Fed officials noted that they expect to begin normalizing the Bank’s balance sheet later this year in a slow and predictable manner, but left the precise timing and sequencing a mystery. Meanwhile, they kept the ‘dot plot’ largely unchanged, signaling that one more rate hike is on the cards for this year. In our view, market participants will dig into the minutes for more details on the timing of the balance sheet normalization, as well as any discussion with regards to the timing of the next rate increase. At the time of writing, the market is anticipating the next hike to come in March 2018. This shows that the dot plot has not convinced the financial community, which may need stronger hints before it prices in another hike for 2017.
USD/JPY traded in a consolidative manner yesterday, oscillating around the 113.25 (R1) hurdle and the downside resistance line taken from the peak of the 11th of January. On the 4-hour chart, the price structure suggests a short-term uptrend, but the bulls need to clear the 113.25 (R1) zone before we get confident on further upside extensions. Something like that could signal the break of the aforementioned downside resistance line and is possible to see scope for extensions towards our next resistance level of 113.90 (R2). The catalyst for such a move could prove an optimistic Fed tonight. On the other hand, if the Committee disappoints those who expect strong hints with regards to another rate increase this year, or those who look for extra details with regards to B/S normalization, the pair may slid and challenge the short-term uptrend line taken from the low of the 14th of June.
With what we know until now, our own view is that the Fed is indeed likely to proceed with another hike this year. The Committee has repeatedly pointed out that the softness in the economic data for Q1 was transitory. Indeed, the Atlanta Fed GDPNow model adds credibility to that scenario by indicating that GDP growth rebounded to 3.0% in Q2, while the June employment report is expected to show that the labor market continues to tighten. The key risks to our view are further weakness in growth data and/or further slowdown in the nation’s core inflation.
Qatar’s deadline expires
Turning to the political spectrum, today is the deadline of the 48-hour extension given to Qatar to comply with a list of 13 demands issued by Saudi Arabia, the UAE, Bahrain and Egypt, with the four countries meeting to take a final decision. On Monday, Qatar handed its response to Kuwait, which is the mediator of the crisis, while the other Arab nations received it earlier today and will examine it. Qatar’s Foreign Minister said that Doha replied only to the demands that did not violate international law or interfere in the country’s domestic affairs. He also noted that Doha is prepared to engage in dialogue to resolve the issue and that he believes there is good will on both sides. Combined with UAE Foreign Minister’s comments that ‘the alternative is not escalation’, this makes the threat of something like that minimal.
Nevertheless, if the situation does escalate, risk off may prevail. Safe havens are likely to be the main beneficiaries, while riskier assets may come under some selling interest. Oil and natural gas prices could gain as the risk of supply disruptions would likely increase. However, given that yesterday Qatar announced plans to boost gas production, speculation of increased supply in the longer run may keep any potential natural gas gains short lived and moderate.
WTI continued trading higher on Tuesday, breaking the resistance (now turned into support) level of 46.70 (S1). In our view, the short-term outlook remains positive and therefore we would expect that break to set the stage for extensions towards the 48.50 (R1) territory, marked by the peak of the 6th of June. Zooming out to the daily chart, we see that the price continues to trade within the downside channel that has been containing the price action since early February. However, given that the latest recovery started after testing the lower bound of that channel, we see the case for further near-term advances, perhaps towards the upper bound.
As for the rest of today’s events:
During the European day, we get the final services and composite PMIs from several European countries and the Eurozone as a whole. As the final figures are expected to confirm the preliminary estimates, any reaction in the euro may by muted. Eurozone’s retail sales for May are also coming out.
We get the services PMI for June from the UK as well. Expectations are for the index to have slid somewhat, to 53.5 and 53.8. Following the more-than-expected declines in both the manufacturing and construction PMIs for the month, we see the case for the services index to follow suit and perhaps fall by more than anticipated.
In the US, factory orders are expected to fall faster than the previous month. However, we expect the indicator to have little market impact as investors will probably have their gaze locked on the FOMC minutes.
USD/JPY
Support: 112.90 (S1), 112.50 (S2), 111.80 (S3)
Resistance: 113.25 (R1), 113.90 (R2), 114.40 (R3)
WTI
Support: 112.90 (S1), 112.50 (S2), 111.80 (S3)
Resistance: 113.25 (R1), 113.90 (R2), 114.40 (R3)
