FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
Surprisingly-strongUS earnings reports released after the NY close generated an upbeat tone in Asia, allowing the Australian dollar to claw back all losses it has suffered since Tuesday’s soft CPI reading. Asian equities also got a boost, and USDJPY is still looking firm ahead of tonight’s Fed policy announcements. There are three FOMC-related events to watch out for.
The policy statement will be published first, but our US economists doubt the Fed will alter its view that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
Ninety minutes later the quarterly forecasts may show some modest upward revisions to inflation and growth projections, and some Fed officials may even forecast an earlier start to policy normalization.
Fifteen minutes after that Chairman Bernanke’s press conference begins, where he is tasked with presenting the FOMC’s opinion and not his own view in particular. We do not expect him to signal additional easing is on the way – whether through additional balance sheet expansion or through an extension of ‘Operation Twist’ beyond the June deadline.
USDJPY is likely to be very sensitive to the outcome but we think upside risks for the pair still dominate – especially with the BoJ likely to ease further still on Friday. We stick to our 3m USDJPY target of 85.00. The FOMC aside, UK GDP is out too, but we expect the RBNZ’s policy meeting to be largely a non-event for the New Zealand dollar.
Reacting to the demands for a mandate of growth for ECB from politicians across Europe including France‘s presidential candidate Hollande, ECB’s Weidmann said that such a debate is “not helpful” as it aims at a mandate for “monetary financing” of governments – an approach which has led to “high inflation and uncertainty” in the distant past.
Weidmann also defended his opposition to further stimulus, warning that “If our actions lead to the sense of urgency disappearing, or political actions necessary to tackle the root causes of the crisis being delayed or postponed, then these are side effects that are detrimental.” These comments support ECB President Draghi’s earlier view that governments needed to play their part in the Eurozone’s adjustment to promote growth, and not rely on ECB stimulus.
Sovereign yields of peripheral countries declined on Tuesday after successful auctions from Spain, Italy and The Netherlands. The EFSF sold EUR 3 bn worth of 7- year bonds and the issue was met with strong demand, with participation from Asia, central banks and sovereign wealth funds.
ECB’s Executive Board member Gonzalez-Paramo said he’s “absolutely convinced” that Spain will meet its budget-deficit targets and that Spain has done a lot to regain credibility.
Greece‘s central bank revised down its original forecast for Greek economic growth in 2012 to -5.0% from -4.5%. Governor Provopoulus urged the country’s politicians to stick to the austerity targets after the May 6 general elections warning that failure to do so will put Greece “very quickly in a particularly adverse situationeventually driving it out of the euro area”.
BoE’s Miles defended his vote for more asset purchases this month as he opined that the weakness of demand, given the amount of spare capacity in the economy, still suggested more expansionary monetary policy is appropriate. He acknowledged the slightly higher than expected “very near term” inflation but maintained that inflationary pressures in the U.K. “really are very low” and “quite likely” go back to the target level or below in the “next six to nine months”. Miles was the sole MPC official seeking an expansion in stimulus, after his colleague Posen switched his vote.
Bank of Canada Governor Carney said on Tuesday that Canadian house prices are ‘high relative to income’ and ‘there is more downside risk than upside’. On the currency, he noted that oil and commodity prices influence the exchange rate, as does the fiscal situation, the strength of the financial system and the current account. He concluded that rising unit labour costs, the current account deficit, and household debt levels are currently CAD-negative, but he warned that it was ‘not wise’ for businesses to assume currency weakness would materialise.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Initial resistance is at 1.3237 ahead of 1.3386. Key support lies at 1.2976/54.
USDJPY NEUTRAL Recovery from 80.86 targets important resistance at 81.78. A clearance of the level would trigger further gains.
GBPUSD BULLISH Look for a break through 1.6167 to trigger extension of the uptrend towards 1.6261. Support lies at 1.6078.
USDCHF NEUTRAL Violation of 0.9252 would open 0.9335. Key support lies at 0.9002.
AUDUSD BEARISH The key support at 1.0260/26 was tested once again yesterday. A close below 1.0226 would expose 1.0119. Resistance is at 1.0343.
USDCAD NEUTRAL The range extending from 1.0052-0.9842 remains intact. A move below 0.9842 would trigger a bear tone.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH The focus is on 0.8142; a decline through the level would signal extension of weakness towards 0.8068. Resistance is at 0.8210.
EURJPY BEARISH A clearance of 106.32 would expose the key support at 104.61/24. Resistance is at 108.03.
Please visit GCI’s Economic Calendar for a schedule of market news and events.