The growing anticipation that the Federal Reserve may raise interest rates this evening has offered minimal support to the Greenback during early trading with prices edging below 97.00 as of writing. With the probability of a rate hike in June’s FOMC meeting currently at 99.6%, investors will most likely direct their attention towards the FOMC statement and economic projections for clarity on future rate hike timings.
It should be kept in mind that the recent weakness in U.S. inflation has not only sparked concerns for the health of the U.S. economy but also created uncertainty around the Federal Reserve’s policy plan for 2017. A dovish tone in the pending FOMC press conference coupled with a downward drift in the “dot plot” could fuel the Dollar bear rally as questions are raised over the Fed’s ability to hike rates twice more this year. It will also be interesting to see if the weak first quarter GDP Print for 2017 causes any change to the economic projections.
Focusing on the Greenback, the currency has had a turbulent year. I feel the outlook remains tilted to the downside as political uncertainty in Washington and soft economic data weighs heavily on the currency. With a Dovish hike on the cards in today’s meeting, the Dollar Index could find itself under renewed selling pressure. From a technical standpoint, the breakdown below 97.00 may entice bears to target 96.50.
UK jobs report in focus
The pound popped higher on Tuesday as currency investors remained cautiously optimistic over a softer Brexit following last week’s UK election outcome, resulting in a hung parliament. A vulnerable U.S. dollar played a role in the upside with short-term bulls sending the British pound/U.S. dollar (GBP/USD) currency pair towards the 1.2775 resistance. Although the political uncertainty in the UK and pending Brexit negotiations are still in focus, much attention will be directed towards the UK jobs report this morning.
While Britain’s unemployment rate continues to improve, the shrinking average weekly earnings remain a cause for concern and will be heavily scrutinized by investors on release. If average earnings fail to build momentum, consumers may feel the heat especially after inflation has hit a four-year high at 2.9% in May. With rising consumer prices, political uncertainty and ongoing Brexit woes all adding to the messy mix, it will be interesting to see how the Bank of England responds in Thursday’s MPC meeting.
Sterling/dollar is bearish on the daily charts with the dynamic 1.2775 resistance acting as a level of interest. Repeated weakness below 1.2775 could encourage a further decline towards 1.2600.
WTI crude lingers around $46
WTI crude relinquished short term gains on Tuesday after an industry report showed an unexpected increase in U.S. crude stockpiles last week which fueled oversupply fears. The downside was complimented by news of Nigeria and Libya pushing OPEC’s output higher last month for the first time this year. With oversupply woes still a recurring theme, and investors becoming increasing skeptical over the effectiveness of the production cuts led by OPEC and Russia to rebalance the markets, WTI remains vulnerable to further selling pressure. U.S. shale remains a threat to the OPEC deal with markets observing how the cartel reacts when the surging output from the U.S. seizes market share from other OPEC members.
On the daily charts, WTI crude has created consistently lower lows and lower highs which fulfills the prerequisites of a bearish trend. The downside momentum should encourage sellers to send prices towards $45.50. In an alternative scenario, a technical bounce towards $46.50 could attract bears to instigate renewed rounds of selling with $45.50 acting as a first target.
Commodity spotlight – gold
The looming U.S. interest rate hike this evening has had little impact on gold with prices rebounding towards $1,270 during early trade. Although this zero-yielding metal remains dictated by U.S. interest rate expectations, speculations of a dovish hike in June have supported prices. With risk aversion from Brexit developments and political uncertainty in the U.S. likely to accelerate the flight to safety in the medium to longer term, gold bulls could receive enough encouragement to keep the metal above $1,260. From a technical standpoint, the daily bullish outlook on gold remains valid as long as prices remain above $1,260.