The ECB pulled the familiar trick of striking a dovish tone to the hawkish decision of affirming the end of QE this year. The dovish action was struck by the ECB shifting emphasis away from the end of QE towards announcing a lack of rate hikes well into summer of 2019 (calendar guidance). Just as it took the Fed one year to raise rates after ending QE, the ECB is attempting a similar plan. The only major difference between 2015 and now is that oil prices are currently twice as they were in 2015, which means imported inflation will filter easily via the weak euro, forcing the ECB to jawbone FX and yields earlier than expected. The other question to ask is: Why has the USD and the US 10 year yield failed to regain key resistance levels despite the Fed's hawkish hike and upward revisions? A new trade has been issued with the suppport of four charts, touching upon EUR and USD pairs. Our SMS service is currently facing difficutlies, therefore trades and analysis to Premium subscribers are sent via twitter and this newsletter.
The Fed decision is due at 14:00 Eastern Time, 19:00 London, and is widely expected to raise the Fed Funds rate by 25 bps to the new range of 1.75%-2.00%. The immediate USD reaction will be in function of the number of additional rate hikes signalled by the dot plot forecasts. Expect USD to decline specifically against AUD, CAD, NZD and EUR in the event that only one additional hike is forecast for the year. But if...
If two or more rate hikes are signalled, then expect a knee-jerk climb in the USD, especially against EUR, JPY and CHF, yet the gains will likely dissipate once Fed Chair Powell begins his press conference 30 mins later. Why?
The “S” wordFed chair Powell has not only spoken of his lack of enthusiasm for the dot plot forecasts for their suceptibility to change and long term nature, but most importantly he will likely be asked about the Fed's symmetric approach to inflation reiterated in the last 2 FOMC statements. A symmetric objective to inflation means the Fed anticipates inflation to reach the 2.0% target and is willing to allow it to edge towards 2.5%, just as it has allowed to undershoot to as low as 1.4% last summer. Recall that the Fed's inflation gauge (core PCE) stood at 1.8% y/y in March and April.
Said differently, just as the Fed did not interrupt its campaign of gradual tightening when inflation fell below target last year, it will not necessarily accelerate the frequency of rate hikes this year when inflation reaches 2.2% or 2.3%.
The Usual Bonds ArgumentAs the Fed sells more treasuries to reduce its balance sheet & US govt issues more bonds, the Fed cannot afford to maintain the same rate of pace of interest rate hikes, otherwise, it risks triggering a rapid ascent in bond yields. Holding back on price tightening (Fed hikes) will also be consistent with the Fed's symmetrical assessment for inflation i.e. allowing inflation to run towards 2.3% and event 2.5%. This is exactly what gold bulls will want and USD bears are waiting for We have a list of existing trades for Premium subscribers ahead of the Fed and ECB, discussed in detail in the Premium video here.
|FOMC Press Conference|
|Jun 13 18:30|
كيفية إستعمال الازواج المتقطعة كوسيلة للتداول "الدفاعي" - الفيديو الكامل
Here is why this week will be the most important for financial markets so far this year. Aside from the Fed rate hike and ECB press conference on Wednesday and Thursday respectively, there are key inflation and jobs figures from the UK, CPI from the US, jobs from Australia and much more. The video for Premium susbcribers is found below.
Kicking off all these events on Tuesday will be the much anticipated Trump- Kim Jong summit in Singapore. Aside from the historical element to the meeting, no breakthrough is expected without multiple meetings this year and the next. It's in the interest of both sides to get a deal, yet more so for Trump.
Tuesday will also see the UK jobs and earnings data, followed by the US CPI report. GBP traders shall await important developments in the lower House of Parliament where a set of votes related to Brexit transition and whether Britain stays in the Customs Union after leaving the EU in March 2019. The votes will take place on Tuesday and Wednesday.
Wednesday's release of the UK May CPI will shed light on whether inflation is easing further towards the 2.0% level, which will help determined odds of an August rate hike, which currently stand at 50%.
The 2nd Fed hike of the year is expected on Wednesday alongside the dot plot forecasts, which will reveal whether one or two additional rate hikes are expected for the 2nd half of the year. Fed chair Powell's press conference will be thoroughly monitored and dissected, especially on the extent to which the Fed is ready to have a symmetric approach to inflation.
Thursday's ECB press conference should reveal whether the ECB will provide clarity on the timing of unwinding its QE program. Is the recent rise in inflation and weakness in the euro sufficient to communicate an end of the program by year-end? How will Italy play out in the mix? More details on the ECB and euro found here.
Thursday's Aussie employment data will be vital for AUD traders, fixated on the ensuing breakout in AUDUSD. Will any increase in net employment above 10K will be mostly from full-time jobs? The jobless rate is seen unchanged at 5.6%.
The FIFA World Cup kicks off on Thursday with the opening game between Russia and Saudi Arabia (the 2 weakest teams in the tournament according to latest FIFA standings) as Putin and MBS will likely meet to talk about the OPEC meeting in the week that follows.
Friday's Bank of Japan decision is the least important of all central banks and will likely be lost in the mix of the aftermath of the Trump-Kim summit and post-G7 deliberations and subsequent round of tariff retaliations.
Don't forget my Tuesday webinar previewing my trades ahead of the week. Click here to register.