Fed forward guidance in the spotlight.
Headlines
* FOMC set to pause with hawkish hold and eyes on the dot plot
* Energy prices likely to push UK CPI in the wrong direction
* US 10-year Treasury yield nears highest level since 2007
* USD eases as traders focus on upcoming central bank decisions
FX: USD moved lower for the majority of the day dipping below 105. But the DXY closed above this mark as Treasury yields pushed up to new cycle highs. This week’s move could be a bullish consolidation in the long-term uptrend. A long-term Fib level of the September 2022 decline sits above at 105.38. The March high and year-to-date top is at 105.88. See below for more on the FOMC meeting and the dollar index.
EUR looked good for more modest gains. But the dollar reasserted itself and the euro’s advance above 1.07 failed. Final euro zone August inflation was 0.1% below forecast. But core inflation remained at 6.2%, more than three times the ECB’s target.
GBP struggled in a narrow range day hovering above three-month lows. The 200-day SMA at 1.2435 is acting as resistance. The next support is around the May lows and a Fib level just above 1.23. Consensus sees today’s UK CPI headline increasing one-tenth to 7.0%. The core print is expected to drop one-tenth to 6.8% in August. Money markets continue to price in around an 80% chance of a 25bp BoE hike on Thursday.
USD/JPY was little changed again. It is consolidating just below recent highs under 148. This major has a strong correlation to the US 10-year Treasury yield. This has advanced to new cycle 16-year highs.
AUD and NZD were outperformers. The Antipodeans have been holding up on hopes the China slowdown may be abating. Hot inflation lifted the CAD to a six-week high. It touched its strongest since August 10 at 1.3378. Annual inflation jumped to 4%, two-tenths above forecast and up from 3.3% in July. Markets have doubled bets on an October BoC rate hike to 40% from 20% before the release. There is one more inflation report before the BoC meeting.
Stocks: US equities closed lower but close to their highs. The benchmark S&P 500 lost 0.22% to settle at 4443. The tech-laden Nasdaq finished 0.22% lower at 15,191. The Dow underperformed, closing down 0.31% at 34,517. Disney was in the spotlight as it said it would double spending on theme parks, resorts, and cruise lines to $60bn over the next decade. The stocks fell more than 3% and have plunged more than 25% over the past year.
Asian futures are very subdued after the small losses Stateside. Traders await the big risk events of the week. The RBA minutes from the meeting earlier this month provided very little new information. The Nikkei 225 underperformed as traders returned from holiday closure.
Gold closed marginally lower and around the 50-day SMA at $1931. Oil hit session highs before the US open with Brent crossing $95 and seemingly on its way to $100.
Day Ahead – FOMC meeting front and centre
It will have been eight weeks since the last Fed meeting, but hopefully, it’ll be worth the wait. The central bank is fully expected to keep rates unchanged at 5.25-5.50%. But we get fresh economic projections and dot plots to show us what the FOMC is thinking. Any hints about the future rate path from the initial statement and Powell press conference will also be keenly watched.
The Fed is likely to keep one more rate hike in the 2023 dot plot. The risk is whether policymakers scale back the 100bps embedded in the 2024 dot plot published in June. That would cement the higher for a longer stance for rates. The economy is in a relatively healthy condition, with resilient data and falling core inflation. However there are concerns that the recent oil surge will lift price pressures going forward. That said, tightening financial conditions amid rising borrowing costs and less credit availability should eventually impart some softness into the economy.
Chart of the Day – Dollar Index on highs
The dollar has enjoyed nine straight weeks of gains. Streaks of this type, and extending into double digits, are very rare in major currencies. Indeed, a run like this was last seen in 2014. That means we are ripe for some consolidation or correction. That only comes if Powell is more cautious than expected. But consensus sees a hawkish flavour to the meeting as likely. This could see the greenback revisit the March and year-to-date highs. An underpinning of support should also be evident as there are few alternatives to “US exceptionalism” at present.
