Overnight Headlines

*USD firm but holding range, printing another “doji” candle

*US equities dipped from all-time highs pre-FOMC

*Oil traded at the highest level since 2018 above $74

*UK CPI just released, 2.1% versus expected 1.8%, core 2% exp 1.5%

US equities took a step back with all three main indices falling a day after both the S&P500 and Nasdaq posted record highs. Growth stocks broke their week-long streak of outperformance with industrials, financials and energy the leading sectors. Implied volatility (VIX) rose slightly but is still below the long-term average. European bourses are set to open flat to small higher with Asian markets retreating slightly.

USD remains stuck near Friday’s highs around 90.50 on the DXY. EUR was flat while GBP eased, having fallen to a one-month low of 1.4034 before recovering. Trading is quiet with trends mixed across G10 pairs with CHF an outperformer while AUD and GBP lag.

Market Thoughts – FOMC and the “t” word

Consensus sees no major changes in policy signalling at the FOMC, with positive risk appetite and renewed dollar downside after the meeting, especially for commodity and higher beta FX pairs as investors continue their hunt for carry. There may be some confirmation of considering tapering discussions and a positive risk outlook, but the labour market is expected to constrain this chatter.

A hawkish surprise is being talked up in some circles. The median 2023 dot moving up to indicate one hike is now pretty much expected, with the potential for more dots moving to 2022 and changes to the policy paragraph mooted (eg. the date of any tapering announcement is brought forward to the third quarter), which would boost yields and the dollar.

Analyst expectations are currently more dovish, so the response seems to be asymmetrical as markets will react in a bigger way in the event of the hawks winning the argument. If the Fed stand pat and remain cautious with no acknowledgment that tapering talks have moved closer, then risk-on trades should enjoy the near term.

Chart of the Day – USD/JPY aiming for highs

The bullish trendline from the April low has proved decent support over the past few weeks and USD/JPY has picked up bullish momentum with the RSI and MACD strengthening. The pair traded in a tiny range yesterday and bulls have their eyes on the early June highs around 110.32 and then the year-to-date high at 110.96 if Jay Powell comes out talking taper. Support lies at the upward trendline around 109.30 and then the 50-day SMA at 109.10, with a more dovish outcome from the FOMC challenging these levels. This might entail the lack of the median 2023 dot moving up. All eyes are on Chair Powell, those “dots” and the press conference.