Yesterday, the minutes from the latest FOMC meeting showed that policymakers, despite agreeing on raising the Federal funds rate, were split on the outlook for inflation, how it might affect the future pace of interest rates, and when they should start normalizing the Bank’s enormous balance sheet. Specifically, most participants viewed the recent softness in prices as reflecting idiosyncratic factors, while others expressed concerns that this weakness may persist. Officials generally reiterated their support for continuing a gradual approach to raising the federal funds rate. However, a few members expressed concerns that the current rate path projections might prove inconsistent with a sustained return of inflation to 2%. On the B/S front, several officials supported beginning its normalization in a couple of months, while others suggested deferring until later this year.
As for the greenback, the initial reaction was a slight decline on the divided Committee and the lack of any clear signals with regards to B/S norm and the next hike. Nevertheless, the currency bounced quickly to recover the losses and even traded higher in the following minutes.
EUR/USD continues to trade between the support of 1.1300 (S1) and the resistance of 1.1380 (R1). Given that the rate is still trading above 1.1300 (S1), which acted as the upper bound of the sideways range that contained the price action from the 19th of May until the 27th of June, we maintain the view that the near-term outlook remains positive and that the latest slide from near 1.1450 (R2) is just a corrective phase. If the bulls take advantage of the 1.1300 (S1) territory, we would expect them to drive the battle above 1.1380 (R1), something that may open the way for another test near the 1.1450 (R2) zone. A clear break above that obstacle would confirm a forthcoming higher high on the daily chart and perhaps signal the resumption of the prevailing medium-term uptrend.
Now the focus for USD traders shifts to incoming US data and specifically, to the US employment report tomorrow, and the CPI data due out next week. A robust jobs report and a decent rebound in the nation’s core inflation rate is needed to bring forth market expectations with regards to the next hike, which remained unaffected by the minutes and still price in the next increase to come in March 2018.
WTI tumbles as Russia opposes deeper output cuts; OPEC exports rose in June
WTI tumbled yesterday on sources that Russia will oppose attempts for deeper production cuts and that it is also against any extension of the cut deal. The climb in OPEC exports for June added fuel to that decline. WTI fell below the support (now turned into resistance) of 46.50 (R1) and the short-term uptrend line taken from the 26th of June, to hit support at 44.65 (S2). Then, the price rebounded back above 45.35 (S1) after the American Petroleum Institute showed that US crude inventories fell by 5.8 million barrels in the week ended on the 30th of June.
In our view, yesterday’s tumble changes the short-term outlook to flat for now and turns investors’ attention to the Energy Information Administration (EIA) report later today. The EIA is forecast to report a fall in crude inventories of about 2.8million barrels, which may encourage the bulls to treat yesterday’s slide as a corrective phase and perhaps drive the price back above 46.50 (R1). Such a break may open the way for another test near the 47.50 (R2) zone.
Overall though, we remain sceptical with regards to the establishment of a healthy longer-term uptrend in oil prices. As we noted several times, we expect any potential recovery to remain capped by the 51.00-55.00 range, where we believe US shale producers may be attracted to increase production.
As for today’s events:
During the European morning, the calendar is relatively light. The only release that could attract some attention are the minutes from the ECB’s June policy meeting. Even though these are usually not a major market mover, considering the signals that we got at that meeting and afterwards, we could see some reaction in the euro.
In the US, the ADP employment report for June will be in focus. The forecast is for the private sector to have added 185k jobs, less than the 253k print in May. Nevertheless, this would still be a decent print and if met, it may increase speculation that Friday’s NFP will also meet its forecast of 179k. Having said that, we have to sound a note of caution. Even though this is the only major gauge of the NFP, the correlation of the two numbers has fallen notably during the last few months.
The ISM non-manufacturing PMI for June is also coming out. Expectations are for the index to have slid somewhat, but given the upside surprise in the ISM manufacturing print, we would stay mindful that the service sector may also have performed better than anticipated. Initial jobless claims for the week ended on the 30th of June and the nation’s trade balance for May are due out as well.
As for the speakers, we have three on the agenda: ECB Executive Board member Peter Praet, San Francisco Fed President John Williams, and Fed Board Governor Jerome Powell.
EUR/USD
Support: 1.1300 (S1), 1.1220 (S2), 1.1170 (S3)
Resistance: 1.1380 (R1), 1.1450 (R2), 1.1500 (R3)
WTI
Support: 45.35 (S1), 44.65 (S2), 43.70 (S3)
Resistance: 46.50 (R1), 47.50 (R2), 48.50 (R3)
