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Daily Pivots: (S1) 1.2040; (P) 1.2123; (R1) 1.2255; More...

Intraday bias in GBP/USD remains neutral for consolidation above 1.1932 temporary low. Outlook stays bearish with 1.2666 resistance intact. On the downside, sustained break of 61.8% projection of 1.3297 to 1.2154 from 1.2666 at 1.1960 will extend larger down trend to 100% projection at 1.1523 next.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. On resumption, next target is 1.1409 low.

Daily Pivots: (S1) 133.01; (P) 134.31; (R1) 135.10; More...

Intraday bias in USD/JPY is turned neutral for consolidation below 135.58. Further rally is expected as long as 131.34 resistance turned support holds. Above 135.58 will resume larger up trend to 61.8% projection of 114.40 to 131.34 from 126.35 at 136.81. Firm break there will target 100% projection at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Markets

Yesterday didn’t bring the boring intraday countdown that often guides trading going into a Fed decision. After the recent sharp rise in yields and risk sell-off, investors scaled back on recent unidirectional positioning, whatever the outcome of the Fed decision. Yields corrected south. Equities tried a cautious rebound. Early in Europe, the ECB announced an ad hoc meeting to discuss current market conditions. The outcome of the meeting was meager. The ECB reiterated to apply flexibility in the reinvestment of PEPP redemptions. Staff was ordered to come up with a new antifragmentation instrument. The Italian 10-y spread vs Germany initially dropped more than 40 bps and preserved a big part of this gain even after a disappointing result.

In the meantime, weak US retail sales further supported the bond rebound ahead of the Fed policy meeting. The Fed as expected raised the Fed Fund target by 75 bps to 1.50%-1.75%. In its projections/dots, it sees PCE inflation above 2% over the policy horizon (5.2% 2022, 2.6% 2023,2.2% 2024), with the median forecast for the policy rate seen at 3.4% and 3.8% end 2022 and 2023 respectively. Expected growth is downwardly revised to 1.7% this and next year. The unemployment rate is expected to rise from 3.7% to 4.1%. During the press conference, the Fed Chair reiterated that policy had to move into restrictive territory given the combination of excessive demand (also in the labour market) and restricted supply. Even so, if the Fed would be able to engineer the ‘Dots-scenario’, Powell said this would be close to a soft landing. On the short term trajectory for policy, Powel expects a 75 bps or 50 bps hike in July, but indicated that 75 bps isn’t a common move. He saw a rate at 3.0%/3.50% end 2022and 3.50%/4.0% next year as reasonable tightening to cool down demand. During the press conference, the decline in yields continued especially after his remarks that 75bps isn’t common.

Finally, US yields dropped 23.6 bps (2-y) to 9.6 bps (30-y). Equities got some relief (Dow +1.0%, Nasdaq +2.50%). The dollar (DXY) jumped to a cycle top upon the announcement but dropped back to 104.80. In a similar move, EUR/USD spiked to the 1.10350/65 area, but the 1.0341 support wasn’t questioned. The pair closed at 1.044.

Today, markets will look for a new equilibrium post Fed. US yields, especially at the longer end might enter a consolidation pattern. (10-y: 3%-3.5%). The dollar remains well bid, but the pace of gains might slow, especially if equities would (temporary?) enter calmer waters, too. EUR/USD 1.0340/50 remains an key reference. The BoE will decide on monetary policy. Analysts expect an additional 25 bps hike, but maybe there is an outside risk for 50 bps, even as domestic demand is under pressure from the decline in real disposable income. If the BoE sticks to a 25 bps step, sterling probably will stay in the defensive. Also keep an eye at the Swiss national Bank (SNB)

News Headlines

The May Australian labour market report was decent, but near consensus. The unemployment rate stabilized at 3.9%, still the lowest on record. Employment increased by 60.6k following only 4.4k in April (influenced by Easter, school holidays, floods and ongoing Covid-disruptions). A positive trend in full time employment drives employment gains. In May, they increased by 69.4k, compensating for a 8.7k decline in part-time employment. The employment to population ratio increased to 64.1%, an all-time high and 1.6 percentage points higher than March 2020. Seasonally adjusted hours worked increased by 0.9%. A separate survey this morning shows consumer inflation expectations rising from 5% to 6.7% in June, the highest level since 2008. AUD/USD tries to hold above 0.70, following yesterday’s impressive rebound (from 0.6850) in a more relaxed global context.

New Zealand recorded negative GDP growth in Q1 (-0.2% Q/Q) coming from 3% growth in the final quarter of last year and below 0.6% Q/Q consensus. Net exports were responsible for the decline with exports down 14.3% Q/Q and imports decreasing by 2.8% Q/Q. Export of services fell 24.8% Q/Q and remains significantly impacted by the pandemic and continued border restrictions. Household spending held up, adding 4.6% Q/Q and being driven by spending on services. Real gross national disposable income did fall 0.5% Q/Q, reducing the consumer’s purchasing power. Investments in fixed assets rose 1.2% Q/Q but showed a mixed picture on a sector level. NZD/USD followed yesterday’s global move, bouncing off 0.62 support towards 0.63...

WTI crude oil futures are declining below the 20-day simple moving average (SMA) after the pull back from the 123.50 resistance level. The price has been developing within an uptrend line over the last two months while the technical indicators are mirroring the latest descending move. The RSI indicator is moving sideways near the neutral threshold of 50, and the MACD is falling below its trigger line.

More downside pressures may meet immediate support around the 111.10 barrier, which overlaps with the uptrend line and the 40-day SMA. Should the price retreat further, the 103.24 barrier could come under speculation.

In the positive scenario, the commodity could improve above the three-month high of 123.50 to challenge a stronger resistance around the almost 14-year high of 130.50. The 147.00 area, however, which strictly capped bullish over the past 14 years, remains the big highlight.

In brief, WTI futures are expected to pause the north-run in the very short-term, while in the medium-term, buying interest could advance if the market confirms a jump above the three-month high and the 14-year peak.

AUDUSD has not successfully entered the 0.7000 zone yet despite its impressive post-FOMC rally, which lifted the price by almost 2.0% to 0.7034.

The 23.6% Fibonacci retracement of the 0.7660 – 0.6828 downleg was another struggle yesterday at 0.7024, though the latest big green candlestick seems to be part of a bullish engulfing pattern: an encouraging sign that the rebound could gain more legs in the near term. The upside reversal in the RSI and the Stochastics is sending positive vibes as well, though traders may retain some caution as the indicators remain within the bearish area, while the MACD continues to point downwards.

A clear close above the 0.7000 – 0.7024 bar could initially pause within the 0.7100 – 0.7145 region, where the 20- and 50-day SMAs and the 38.2% Fibonacci level are located. Running higher, the bulls will push for a break above the 200-day SMA and the upper boundary of the bearish channel at 0.7260. The 50% Fibonacci is also in the same neighborhood; therefore, any violation at this point is expected to drive the price straight up to the  61.8% Fibonacci of 0.7395.

Otherwise, a downside reversal may retest the floor around the 2-year low of 0.6826 ahead of the channel’s bottom line seen at 0.6788. A decisive step lower may promote an extension towards the familiar barricade of 0.6660, which had been strongly rejecting upside and downside moves during the 2019 – 2020 period. In case the latter fails to hold, the next stop could be near the 0.6535 mark last seen in May 2020.

In brief, Wednesday’s bounce in AUDUSD has raised the odds for further improvement. A close above 0.7000 could bolster buying interest.

EUR/USD

In the early hours of Thursday, the euro had gained strength against the dollar, and with the opening of the European session, it was quoted at a daily high of about 1.0505. There, however, the uptrend found resistance, and shortly before the release of the retail data for the United States, the currency pair started its decline. The data strengthened the dollar and the pair bottomed out at around its key level of 1.0358. Shortly afterwards, at 18:00 GMT, the U.S. Federal Reserve decided to increase the key interest rate by 0.75 basis points – a decision they had not made since 1994. The effect was not delayed and we saw a 85-pip bounce from the bottom that ended the trading session at 1.0445. The probability for the dollar to continue rising after the Fed's decision is high, and this could seriously affect the prolonged decline of the euro. However, whether we will see a higher correction and a follow-up bear attack will largely depend on the market reaction following the announcement of the unemployment claims data for the United States, which is expected today at 12:30 GMT.

USD/JPY

In the early hours of Thursday, the USD/JPY managed to reach a new monthly peak of 135.57. There, however, the bears found a good entry point, and after breaching the key level of 135.00, they managed to continue the pair’s decline following a short break. The decision to raise the U.S. interest rate had a negative effect on the currency pair and the correction deepened towards the support at 133.57. The day ended not far from it at prices of around 133.72. The trend is likely to continue in the upward direction and to mark new highs, as the Japanese bank is not expected to raise its interest rate this Friday. Still, a deepening of the correction towards the levels at around 133.00 should not be excluded, as the price provides a good market entry point for newly arriving bulls.

GBP/USD

After finding its weekly low at 1.1931, the pound continued to rise throughout today’s early session. The weak dollar at the beginning of the day gave the bulls the strength to extend their attack towards the level at around 1.2121 following a short break and just a few hours before the Fed's decision. After seeing the rise in the key interest rate of the U.S. to 1.75%, the sterling took advantage and continued its growth by rebounding from its key level of 1.2038. It then managed to reach 1.2202 as well and end the day a few pips below its peak. Today, everyone's eyes will be on the Bank of England’s interest rate decision that is scheduled to be released at 11:00 GMT. The expectations are for a growth of 0.25%, but rumours are for a larger hike of 50 basis points. The volatility around such data is high and there will most likely be sharp movements in both directions.

EUGERMANY40

After initially rebounding from the bottom at 13220, the EUGERMANY40 is now pressing on with its upward movement. The opening of the European session revealed high volatility and a serious battle between bears and bulls. However, as we have already mentioned, the bulls prevailed and broke through the resistance at 13400, which after a few hours became a support. After the U.S. indices rose following the Fed’s decision to raise its key interest rate by 0.75%, the German index was not late to the party and mirrored their movements, once more reaching its local peak at 13606. However, there it found resistance and closed the day at around 13544. The downward trend towards 13220 is more likely to continue, but before that could happen, we may first see a higher correction if the bears are unable to find good entry prices.

US30

Yesterday’s price action was extremely volatile for the blue-chip index. In the early hours of today’s trading, the US30 went up after initially bouncing back from the support at 30377. Traders held their breath as they awaited the Fed's decision to raise the key interest rate for the U.S., and 30735 played the role of a light resistance. At 18:00 GMT, the unprecedented rise of 0.75% was already a fact, and within 2 hours, the US30 tested its bottom at 30176 and jumped to a new daily high of 31000. Such volatile movements, however, are typical around key interest rate data, and so the index is expected to continue downward if the reaction regarding today's U.S. unemployment data is negative, but the opposite scenario should still not be ruled out. If the bears do not find good prices today, then the price of the index may rise even higher.

EUR/CHF dives through 1.0216 support after surprised SNB rate hike. The development now argues that corrective rebound from 0.9970 has completed at 1.0513. More importantly, rejection by 1.0505 support turned resistance, as well as 55 week EMA, maintain medium term bearishness.

The development now raises the chance of down trend long term down trend resumption through 0.9970 low at a later stage. If that happens, next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650.

SNB surprises the markets by raising the sight deposit rate by 50bps to -0.25% today, "to counter increased inflationary pressure". It also adopts a tightening bias and said, "it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term." SNB also maintains the willingness to intervene in the currency markets if necessary.

Even with higher interest rates, the conditional inflation forecasts were also raised across forecast horizon. Inflation is projected to peak at 3.2% in Q3, then slow to below 1.4% in Q4 2023, then rise back to 2.1% in Q1 2025. Average inflation is forecasts to be at 2.8% in 2022, 1.9% in 2023, and 1.6% in 2024, upgraded from 2.1%, 0.9% and 0.9% respectively.

As for the economy, SNB still expected 2.5% GDP growth in 2022 while unemployment is "likely to remain low". However, "if the energy supply in Europe were to be adversely affected, this could have a serious impact on the Swiss economy. The global supply bottlenecks and further increases in commodity prices could also slow growth. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out."

Full statement here.

The SNB is tightening its monetary policy and is raising the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25% to counter increased inflationary pressure. The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland. It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term. To ensure appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary.

The SNB policy rate change applies from tomorrow, 17 June 2022. With effect from 1 July 2022, the SNB is also adjusting the threshold factor used to calculate the level of banks' sight deposits at the SNB exempt from negative interest. The factor will be lowered from 30 to 28. This will ensure that the secured short-term Swiss franc money market rates are close to the SNB policy rate.

Inflation reached 2.9% in May and is likely to remain at an elevated level for the time being. The SNB's new conditional inflation forecast is based on the assumption that the SNB policy rate is −0.25% over the entire forecast horizon. The new forecast for the next three years is above that of March (cf. chart 1), and stands at 2.8% for 2022, 1.9% for 2023, and 1.6% for 2024 (cf. table 1). Without today's SNB policy rate increase, the inflation forecast would be significantly higher.

Global economic growth has slowed markedly recently. This slowdown is on the one hand attributable to the high level of inflation, which is weighing on purchasing power and thus reducing demand. On the other hand, the uncertainty stemming from the war in Ukraine as well as the coronavirus lockdowns in China are curbing the development of the global economy.

Since March, there has been a further considerable and broad-based increase in inflation in many countries. The war in Ukraine has been a significant factor here, too, in that the prices of many commodities have risen as a result. In addition, persisting supply bottlenecks have led to further price increases for various goods.

In its baseline scenario for the global economy, the SNB assumes that energy prices will remain high for the time being, but that there will not be an acute energy shortage in the major economic areas. The positive development of the economy should thus continue overall. Owing to the increased prices for energy and food, coupled with the supply bottlenecks, inflation is likely to remain high for some time. However, the importance of these factors should diminish over the medium term. With monetary policy also becoming increasingly tighter in many countries, inflation is likely to gradually return to more moderate levels.

This scenario for the global economy is subject to significant risks. For example, inflation could rise further and thus weigh even more heavily on real incomes and consumer demand. At the same time, high inflation could become entrenched as a result of increased second-round effects, requiring stronger monetary policy responses in other countries. Finally, there are still important downside risks to growth from the war in Ukraine and the pandemic.

The Swiss economy has continued the favourable development it has shown since the beginning of the year. After modest growth in the fourth quarter of 2021, GDP increased by just under 2% in the first quarter of this year. The signals remain positive for the current quarter. The situation on the labour market has also continued to improve.

The war in Ukraine has thus far had comparatively little adverse impact on economic activity in Switzerland. The effect has been most clearly felt in the higher energy prices and in the supply bottlenecks.

For 2022, the SNB still anticipates GDP growth of around 2.5%. Unemployment is likely to remain low. This favourable forecast is based, among other things, on the assumption that the global economy continues to grow and that the war in Ukraine does not escalate further.

The forecast for Switzerland, as for the global economy, is subject to large risks. If the energy supply in Europe were to be adversely affected, this could have a serious impact on the Swiss economy. The global supply bottlenecks and further increases in commodity prices could also slow growth. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out.

Mortgage lending and residential property prices have risen further in recent quarters. The SNB will continue to monitor developments on the mortgage and real estate markets closely.

More detailed information on the monetary policy decision can be found in Thomas Jordan's introductory remarks, available from 10 am. Fritz Zurbrügg's remarks focus on developments in the area of financial stability, while Andréa Maechler's remarks address the situation on the financial markets.

Market movers today

Markets will continue to digest the FOMC meeting yesterday while focus turns to meetings in Bank of England (BoE) and SNB today. We look for BoE to hike the Bank Rate by another 25bp but simultaneously still send mixed signals by repeating that "some degree of further tightening in monetary policy may still be appropriate in the coming months".

In Switzerland, we do not expect the SNB to hike but the pressure is increasing, as the ECB is about to hike policy rates and CPI inflation is running close to 3%.

In the US data releases for housing starts, initial jobless claims and the Philadelphia Fed business survey is due out.

We will also keep an eye on German Chancellor Scholz, French President Macron and Italian PM Draghi's visit to Ukraine for talks with President Zelenskiy.

Early Friday, Bank of Japan (BoJ) finishes up a two-day policy meeting. Our base case is that they will keep steady but the chance of a tweak to the yield curve control set-up in order to ease JPY headwinds has increased just as is the case for the chance of BoJ intervening in the FX market on behalf of Tokyo.

The 60 second overview

Fed: In line with expectations, the Federal Reserve decided to hike the target range by 75bp to 1.50-1.75%. We have emphasised for a long time that the Fed could be forced to follow the "emerging market central bank playbook" by out-hiking expectations and yesterday's announcement seems to be the first step in that direction. While the Federal Reserve now says it is "strongly committed" to get inflation back to 2%, Chair Jerome Powell's press conference was interpreted dovishly, as he indicated that the Fed is not going to make a string of 75bp rate hikes. EUR/USD moved higher and 2yr US Treasury yields declined after this comment. We change our Fed call now expecting the Fed to hike by 75bp in July and 50bp in September, November and December, see Fed Research - Review: big rate hikes until inflation pressure eases., 15 June.

ECB: To address the recent spread widening in particularly Italy, ECB decided to announce that they will flexibly implement the PEPP reinvestments as well as accelerate the work on a new anti-fragmentation work for the governing council to consider. The political signal is strong, but the exact details will determine the actual strength of a potentially new anti-fragmentation tool. We see the decision today as the most likely outcome for now. Further, with ECB tasking the committees they have sent a signal that they are fully committed to ensuring the functioning of the monetary policy transmission. However, they have also bought themselves some time. We will likely only hear from the committees at the July or September meeting.

Japan posted its biggest trade deficit in eight years in May, as import costs continue to weigh heavily for one of the world's biggest energy importers following the big nose dive in yen. Nearly half of Japanese firms see the weak yen as bad for business according to a private survey, see Reuters.

Equities: Equities in a relief rally after a convincing Fed and deflationary macro data. Sector performance reversed with cyclical growth sector (tech) outperforming defensives. Hence, big gap between indices with S&P 500 rebounded 1.5% but Nasdaq 2.5%. Futures are pointing somewhat higher this morning too.

FI: The market reaction to the FOMC meeting yesterday may seem surprising as US Treasury yields/rates declined on the back of a fairly aggressive Federal Reserve and we are revising our forecast for the monetary policy path upwards. Similar to others we change our Fed call and now expect the Fed to hike by 75bp in July and 50bp in September, November and December. However, the market is focusing on the recession risk as well as the comments from Powell that they are not expecting a string of 75bp moves. Yesterday, the ECB announced that they will prepare a backstop facility to stop market fragmentation sooner rather than later. This lead to a massive rally in the periphery and solid spread tightening.

FX: EUR/USD had quite a volatile session yesterday. At some point, EUR/USD was above 1.05 before moving down below 1.04. The cross ended the day slightly above 1.04 after the cross was supported by dovish comments (at least compared to market pricing) from Fed Chair Jerome Powell. EUR/GBP started the day by moving above 0.87 but ended below 0.86. We could see slight relief for NOK and SEK near-term as Fed did little to tighten financial conditions more than what was already priced going into the meeting.

Credit: Credit markets took a pause yesterday from the past several trading days of widening. The indices closed ahead of the Fed decision, with iTraxx main closing some 3.5bp tighter at 105bp and Xover closing some 16.6bp tighter at 527.9bp.