US Open Preview – Dollar hits fresh 3-week highs ahead of FOMC rate decision

C. Parthenidou & M. Deltas, XM Investment Research Desk

Here are the latest developments in global markets:

  • FOREX: Sterling dipped towards a 1-week low of 1.3310 against the US dollar on Wednesday (-0.20%) after CPI figures out of the UK missed slightly expectations on a yearly basis, coming at 2.4% instead of 2.5% analysts forecasted. Dollar/yen reached a 3-week high of 110.71 (0.15%) before the two-day FOMC policy meeting concludes later today, which will give hints on how many more rate hikes are in the Fed’s radar. The dollar index, which measures the dollar’s strength against a basket of six major currencies, edged up by 0.04% to 93.89. Euro/dollar rose by 0.18% despite industrial production in the Eurozone easing more than expected. Thursday’s ECB policy meeting remains the main event for the euro as investors are eagerly waiting for policymakers to give direction on the quantitative easing program which expires in December. No rate hikes, though, are anticipated at this meeting. The antipodean currencies are moving higher with aussie/dollar adding 0.17% to its performance to 0.7582, while kiwi/dollar advancing by 0.34% to trade at 0.7037. Dollar/loonie climbed by 0.06% to 1.3020. Also, dollar/lira returned to gains over the last couple of days, surging by 1.30% today to 4.6530.
  • STOCKS: Most of the European stocks opened in positive territory on Wednesday ahead of the Federal Reserve rate decision. The pan-European STOXX 600 jumped by 0.39% at 1130 GMT as miners and tech companies led a broad advance and the blue-chip Euro STOXX 50 was up by 0.35%. The German DAX 30 climbed by 0.39%, while, the French CAC 40 gained 0.35%. Moreover, the Italian FTSE MIB rose by 1.05% while the UK’s FTSE 100 advanced by 0.44%. However, the Spanish IBEX 225 retreated by 0.03%. The US stock future indices were pointing to a positive open.
  • COMMODITIES: Oil prices dived after an industry report showed US stockpiles expanded. Moreover, sources stated today that Saudi Arabia was considering several plans for higher OPEC output, raising speculation that a supply hike could be possible at the OPEC’s policy meeting next week. West Texas Intermediate (WTI) crude oil decreased by 0.48% to $66.04 per barrel and Brent declined by 0.01% to $75.87 per barrel, the lowest in a week. In precious metal developments, gold prices fell by 0.16% to $1,293.80 per ounce.

Day ahead: FOMC rate decision takes center stage; Australian employment figures to move aussie

Wednesday’s economic calendar will feature PPI figures out of the US later in the day, though the conclusion of the two-day FOMC policy meeting will be the main headline.

At 1800 GMT in the US, the Federal Open Market Committee will announce its decision on interest rates, providing the reasoning behind it through its policy statement. Analysts are widely expecting the central bank to lift interest rates by 25bps to 2.0%, completing the second rate hike this year, and at the same time remaining globally at the forefront of the move to reduce monetary stimulus. Since the rate rise has been already fully priced in the markets, the focus will switch to the rate statement and the central bank’s fresh economic projections, while at 1830 GMT, all eyes will turn to the Fed chairman, Jerome Powell’s press conference. Should policymakers back a positive outlook – probably citing recent upbeat economic numbers – hinting the Fed could feel more comfortable to become more aggressive in the future, dollar bulls could push even further towards the 111 round level versus the yen.  On the other hand, concerns over US’s trade relations with its closest allies are not unlikely to keep policymakers cautious over future economic trends. The famous dot plot, which displays where interest rates will head in the next few years according to projections made by Fed policymakers, will also gather a great amount of attention.

Before the FOMC meeting comes to an end, however, US PPI figures for the month of May will have the potential to move the dollar. Expectations are for the measure to rise from 2.6% y/y to 2.8%, while in the absence of volatile components such as food and energy, producer price growth is anticipated to stand flat at 2.3%.

In energy markets, the Energy Information Administration will deliver its weekly report on US oil inventories at 1430 GMT. Analysts believe that crude oil stocks have declined by 2.74 million barrels in the week ending June 8 after rising by 2.07mn in the preceding week. Gasoline and distillate stocks are projected to continue to rise but at a slower pace relative to the previous week.

In other data in focus, UK’s RICS house price index will come under review at 2300 GMT, while on Thursday at 0130 GMT, Australia will see the release of employment stats. Particularly, it would be interesting to see whether the unemployment rate has slipped back to 5.5% in May after inching up to 5.6% in April. The numbers are also forecast to show a slowdown in job creation, with analysts expecting the number of jobs to have risen by 18k compared to 22.6k seen previously. In case the data prove encouraging, aussie/dollar could extend today’s rebound from an almost two-week low of  0.7555 before the Chinese industrial production and retail sales due at 0200 GMT bring fresh volatility to the pair.