- Rates: Fed to present dire outlook, but no additional stimulus expected
The Fed is will present a grim economic outlook and fortify guidance of policy rates stuck at their lower bound for some time to come. Yield curve control targets have become topic of debate, but it’s too soon to expect decisions. Main question is whether the promise alone is sufficient to prevent last week’s selling pressure on LT Treasuries to return. - Currencies: Dollar in the defensive going into Fed policy meeting
The dollar couldn’t profit from a (admittedly) modest risk-off correction yesterday. Investors apparently were cautious on any USD long positions going into the Fed policy meeting today. The Fed probably will keep a soft/cautious assessment. The debate on yield curve control might loom on the horizon. Will it become a further USD negative?
The Sunrise Headlines
- US equities ended mixed yesterday. The DJI (-1.09%) lagged while the Nasdaq outperformed (+0.29%), flirting with the 10 000 barrier and reversing the recent stock rotation. Asian markets trade muted without a clear direction.
- US economic advisor Hassett said that there’s a very good chance there will be another, fourth stimulus package happening before the August recess even if output and jobs data continue to beat expectations
- South Korean unemployment jumped to a 10-year high of 4.5% in May, up from 3.8% in April. The figure is probably an underestimation as payouts for jobless claims topped 1tn won in May, the highest on record.
- The US and Canada will probably keep their borders shut to non-essential travel until late July, quoting people familiar. The travel ban has been in place since March 21 and has been extended multiple times already.
- Chinese CPI slowed more than expected to -0.8% m/m (2.4% y/y) in May. Cooling food prices were the main reason pulling the headline figure down, rising a still significant 10.6% y/y though less than the 14.8% in April.
- The UK is setting up a strategy, Project Defend, to reduce Chinese reliance for key imported goods. Brexit and the pandemic force the country to rethink supply chains, leading to a reshoring of the production of some critical goods.
- Today’s economic calendar contains US CPI and the Fed policy meeting, which will include the first dot plot since December. Several ECB speeches are due. The OECD publishes its Economic Outlook
Currencies: Dollar In The Defensive Going Into Fed Policy Meeting
Dollar weakens going into Fed policy meeting.
European equities corrected lower yesterday after an uninterrupted rally since mid-May. The move initially hurt the likes of EUR/JPY and EUR/USD. Still the global USD picture was less straightforward. The TW dollar struggled to sustain the risk-off gains. Maybe markets pondered the room for USD gains ahead of today’s FMOC. Whatever, the reversal of the TW dollar (DXY) including a break below the 96.60 ST support, sent the dollar lower overall. Declining US yields and a mediocre US 10-y auction also didn’t help. EUR/USD reversed earlier losses (closed 1.1340). The yen also outperformed, but the intraday USD/JPY correction was more orderly than in EUR/USD or DXY.
This morning, Asian equities indices mostly trade little changed to slightly higher which isn’t that bad give yesterday’s WS performance.
The dollar remains in the defensive. The TW dollar is setting a new correction low in the 96.20 area. USD/JPY dropped to the 107.50 area and EUR/USD is also trending higher (1.1360). This looks like outright USD weakness. The yuan also joins this global move (USD/CNY 7.0675 area). AUD/USD is again testing the 0.70 barrier.
Today’s focus will be on the Fed policy decision. The Fed probably won’t change its crisis fight stance yet with the focus still on controlling market stress. However, with the new Fed projections on growth and inflation, the Fed will get questions and maybe give some hints on its policy strategy/framework for the second phase of this crisis. In this context, a form of yield curve control might appear on the radar. This is no surprise. Even so, the Fed cementing (ST) rates near current low levels for a prolonged period of time probably won’t help the dollar even as other central banks might move in a similar direction. The EUR/USD intraday reversal yesterday confirms recent trends of both USD softness and euro resilience even in a context that wasn’t really risk-on. This suggests a EUR/USD buy-on-dips pattern. Will the Fed trigger a further return to the 1.1495 range top?
There was no obvious story to guide sterling trading. After a start in the 0.8875 area, the pair gradually returned north of the 0.89 pivot as sentiment on risk turned more fragile. There are no important data in the UK today. The debate on brexit moved a bit to the background bit is still lingering. We expect more sideways trading in the 0.89 area and look out whether the 0.8665 area will develop as a new ST bottom
EUR/USD: euro resilience and ever more USD softness. Will Fed trigger a test of the 1.1495 range top?
