Fed’s interest rate decision in focus

The Israel-Iran conflict entered its sixth day and uncertainty remains high. US President Trump called for Iran’s unconditional surrender while media report that the US is considering joining Israel’s airstrikes. Should we see further escalation of the conflict, we may see oil prices and safe havens such as gold and the Yen gaining, while a possible de-escalation could weigh on the prementioned assets. Market focus today is expected to be shifted on the Fed’s interest rate decision. We make a start by noting that the US employment report for May released last Friday showed a tighter US employment market than expected. Furthermore, we also note that the release of the US CPI rates for May showed a slowdown of the rates, yet they tended to remain at relatively high levels implying a relative persistence of inflationary pressures in the US economy. Such employment and inflation data may be easing the pressure on the Fed to ease its monetary policy. The market for the time being expects the bank to remain on hold on Wednesday, and Fed Fund Futures imply a probability of 98.8% for such a scenario to materialise. But the market also seems to be currently pricing in two more rate cuts until the end of the year, which implies a dovish inclination of the market for the bank’s intentions. Should the bank remain on hold as expected, we may see market attention shifting towards the bank’s forward guidance, which is to be included in the accompanying statement, Fed Chairman Powell’s press conference and the new dot plot. Should the bank signal strong hesitation towards easing its monetary policy further, the Fed may force the market to reposition its expectations, thus providing support for the USD and vice versa.

USD/JPY continues its sideways movement within the boundaries set by the 145.50 (R1) and the 142.20 (S1) levels and its characteristic how it corrected lower after testing the R1. We maintain our bias for the sideways motion to continue between the prementioned levels. Should the bulls take over we may see USD/JPY to break the 145.50 (R1) resistance line and start aiming for the 148.20 (R2) level. Should the bears take over USD/JPY may break the 142.20 (S1) support line and start aiming for the 139.60 (S2) support level.

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Today we get Germany’s ZEW indicators for June, the US retail sales for industrial output both for May and on a monetary policy level, we note the release of BoC’s summary of monetary policy deliberations of the June meeting, and we get the API weekly crude oil inventories figure. In tomorrow’s Asian session, we get New Zealand’s current account balance for Q1, while from Japan we get machinery orders for April and the trade data for May.

AUD/USD corrected lower after teasing the 0.6515 (R1) resistance line. Nevertheless we maintain a bullish outlook as the pair forms higher peaks and higher troughs, allowing for an upward trendline to be drawn. The Bollinger bands seem to have a similar opinion as they form an upward channel, yet the RSI indicator remains close to the reading of 50, implying that the bullish market sentiment for the pair is still weak, and market participants are more likely to be indecisive in regards to the pair’s direction. Given the position of the RSI indicator and a relative difficulty of AUD/USD to clearly break above the 0.6515 (R1) resistance line and use it as a support platform, we have to admit that there are some doubts about the continuance of the bullish outlook. Yet for the bullish outlook to be broken we would require the pair to clearly break the prementioned upward trendline in a first signal that the upward movement has been interrupted and for a bearish outlook to emerge the pair has to drop further breaking the 0.6340(S1) support line, thus paving the way for the 0.6130 (S2) base. For our bullish outlook to be maintained, the pair would have to break the 0.6515 (R1) line clearly and start actively aiming for the 0.6690 (R2) resistance barrier.