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Intermarket:
• SP Futures 3954 (+0.05%)
• EUSTXX 3847 (-0.08%)
• Crude Oil 65.30 (+0.77%)
• US 10YR 1.62% (+0.15%)
• EurUsd 1.1903 (+0.02%)
• UsdJpy 109.13 (+0.13%)
• DAX 14548 (-0.08%)
Risk appetite is slightly softer as we enter Wednesday’s European open, after US markets slipped for the first time in six sessions, dragged down by energy and industrials. Yields remain strong ahead of today’s FOMC meeting with the 10YR 1.62%. Bill Gross and Bridgewater have recently warned that inflation could accelerate.
The consolidation in markets ahead of FOMC highlights the importance of the meeting. Consensus is for no change to any policy settings; an upgrade to the 2021 growth and inflation; a hawkish shift in the dot plot to 1 dot in 2023; a dovish tune from Powell, with a reminder that it is too premature to taper. Hawkish case would be 2 dots in 2023 or taper talk; dovish case would be no dots in 2023.
Ahead of the FED watch for CAD CPI. The Loonie’s fundamental picture is strengthening alongside economic data. Today’s print should come in higher as the IVEY PMI prices component rose recently.
EUR still weak on dovish talk by ECB members, alongside weak spending plans and delays by governments and with ongoing vaccine problems.
Matters that Matter:
• Markets on hold ahead of FOMC, yields stable.
• US/China won’t issue joint statement after meeting; China meeting a one-off, not resumption of dialogue; not there yet on negotiating issues with China
•Putin likely directed 2020 U.S. election meddling - U.S. intelligence
• S&P affirms U.S. ratings at ‘AA+/A-1’ with stable outlook
• Honda temporarily cutting production at all U.S., Canada plants
• Japan Inc to offer lowest pay rises in 8 years as pandemic bites
• RBA’s Kent - Sees no immediate decline in lending standards, would look into macroprudential policy if they fell
• RBA’s Kent: Expects a rise in small business failures as the government withdraws Covid-19 support
• ECB Schnabel - EU recovery stimulus may prove too little
• AFR: Queensland records four adverse reactions to AstraZeneca vaccine
Majors 1-Day View:
USDJPY
- A failed rally on Monday, and the swift recovery yesterday, leave prices rangebound ahead of key event risk today. As such, we prefer to remain square and buy dips towards 108.80.
- JPY pairs supported ahead of FOMC
- Offers & large barrier options reported at 110.00
- US yields still supportive, bids from 109.00 reported.
EURUSD
• Prices posted the 3rd lower daily high in a row on Tuesday, with losses of ½ Big Fig. As such, signals remain bearish into Wednesday but ahead of key risk event we prefer to remain square and only sell a rally towards 1.1940.
• Even as IMM Net-Spec positioning remains long, Eur under pressure as yields drive inflows into USD.
• Key to flows is bond market response to FOMC today.
AUDUSD
• Prices posted the 2nd “inside day” in a row on Tuesday, highlighting investor indecision and lack of directional momentum. Ahead of key risk event, we prefer to stay square, and play a break of the .7784/.7706 range.
• Buoyant equity markets keep Aud supported.
• Range trading expected ahead of FOMC.
GBPUSD
• Prices posted the 2nd lower daily high & low in a row, but initial losses of 1 Big Fig were entirely recovered into the close. As such, signals have improved marginally, but until the trend of lower daily highs is interrupted, caution is required. As such, ahead of key event risk today, we prefer to remain flat and buy any dip to 1.3810s.
• 1.3800-1.4000 the range ahead of FOMC.
• USD flows key to direction
FX Relative ATR Grid
Comment: Volatility declined further on Tuesday, with the exception of EUR and selected GBP pairs. Volatility contractions are now evident across multiple pairs, highlighting the significance of tonight’s FOMC meeting.
Relative Strength Grid
Comment: The strongest trends are in JPY (bearish), EUR (bearish), CAD (bullish). The strongest momentum was seen yesterday in JPY (bearish), CHF (bullish), EUR (bearish).