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The British pound remain under pressure towards the key 1.2560 level against the US dollar, ahead of the release of UK inflation data this morning. The 1.2560 level is a key pivot for the GBPUSD pair, with further intraday weakness expected if bulls fail to secure price above this area. An upcoming test of the 1.2500 level is still expected due to broad-based strength in the US dollar index.

The GBPUSD pair is heavily bearish while trading below the 1.2560 level, key support is found at the 1.2500 and 1.2460 levels.

If the GBPUSD pair trades above the 1.2560 level, key resistance is found at the 1.2600 and 1.2655 levels.

The US dollar index was relatively unchanged as traders waited on the Federal Reserve interest rates decision. The bank will make the decision later today and is expected to leave interest rates unchanged at the 2.50% level. It is also expected to make dovish statements that will point to a further rate cut in the near future. This comes a day after ECB’s Mario Draghi said that the bank was prepared to cut rates and restart the quantitative easing program. In a series of tweets, Donald Trump pressured the Fed not to be left behind on easing.

Sterling was also relatively unchanged ahead of inflation data, which is expected today. Data is expected to show that the headline CPI declined from 2.1% in April to 2.0% in May. On a MoM basis, the CPI is expected to have declined from 2.1% to 2.0%. The core CPI, which excludes the volatile food and energy products declined from 1.8% to 1.6%. The house price index is expected to have declined from a growth of 1.4% to 1.1% while the retail price index is expected to have declined from 3.0% to 2.9%.

The Canadian dollar was unchanged in the Asian session ahead of Canadian inflation numbers. Data is expected to show that the headline CPI rose from 2.0% to 2.1% in May. On a MoM basis, the headline CPI is expected to have dropped from 0.4% to 0.1%. The core CPI is expected to have dropped from 1.5% to 1.2% on a YoY basis. Meanwhile, the price of crude oil rose ahead of the EIA data which is expected to show that inventories dropped by more than 1 million barrels in the past week.

EUR/USD

The EUR/USD pair was unchanged in the Asian session. As of this writing, the pair is trading at the 1.11195 level, which is below the 25-day and 50-day moving averages. It is also between the lower and middle lines of the Bollinger Bands and is slightly below the 38.2% Fibonacci Retracement level. The pair will likely remain within this range ahead of the important Fed decision.

GBP/USD

The GBP/USD pair was unchanged ahead of the Fed decision and the UK CPI data. The pair is now trading at the 1.2537 level, which is slightly higher than yesterday’s low of 1.2505. On the hourly chart, this price is along the 25-day moving average and slightly lower than the 50-day EMA. The RSI has moved from a low of 9 to the current 45 while the accumulation/distribution has started moving higher. As with the EUR/USD pair, the GBP/USD pair will likely see increased volatility today.

USD/CAD

The USD/CAD pair was relatively unchanged ahead of the Canadian CPI data. The pair is now trading at the 1.3393 level, which is closer to the month-to-date high of 1.3434. On the hourly chart below, the pair is slightly below the 50% Fibonacci Retracement level while the RSI has been falling. It is also along the 50-day and 25-day moving average. Today, the pair will likely be a bit volatile ahead of the Fed decision.

USDJPY remains stuck in a bearish phase as the momentum oscillators struggle in negative territory. The RSI is trending downwards below the 50 level, while the MACD histogram is heading back down below 0, though it’s holding above its red signal line for now.

Prices are currently being capped by the 108.75 level, whish is the 61.8% Fibonacci retracement of the upleg from 106.50 to 112.39. The 20-day moving average also lies in that region, suggesting this could prove a difficult resistance point to overcome. Should the pair manage to break above this area, the short-term bias would shift to a more neutral one and open the path for the 50% Fibonacci at 109.45. However, prices would need to climb as high as the 50-day moving average just above the 110 handle for the near-term picture to turn bullish again.

On the downside, critical support is being provided by the 78.6% Fibonacci at 107.76. A breach of this support would clear the way for the 9-month low of 106.50 reached in January and reinforce the bearish structure in the medium term. Even sharper losses would bring into range the 123.6% Fibonacci extension at 105.10.

EUR/USD failed to stay above 1.1250 and recently declined below 1.1200. USD/JPY is trading in a broad range and it could slide in the short term towards the 108.30 or 108.20 support.

Important Takeaways for EUR/USD and USD/JPY

• The Euro started a strong decline from well above the 1.1300 support area.
• There is a key bearish trend line in place with resistance near 1.1215 on the hourly chart of EUR/USD.
• USD/JPY is trading in a broad range with resistance near the 108.70 level.
• There is a short term bearish trend line forming with resistance near 108.60 on the hourly chart.

EUR/USD Technical Analysis

The Euro topped near the 1.1350 level and recently started a strong decline against the US Dollar. The EUR/USD pair broke the 1.1320 and 1.1300 support levels to enter a bearish zone.

Moreover, there was a close below the 1.1250 support level and the 50 hourly simple moving average. The pair even gained pace below the 1.1200 level and a new swing low was formed at 1.1181 on FXOpen.

At the moment, the pair is consolidating losses, with corrective moves near 1.1190. It broke the 23.6% Fib retracement level of the recent decline from the 1.1242 high to 1.1181 low.

However, there are many resistances on the upside near the 1.1200 and 1.1210 levels. There is also a key bearish trend line in place with resistance near 1.1215 on the hourly chart of EUR/USD.

The 50% Fib retracement level of the recent decline from the 1.1242 high to 1.1181 low is also near the trend line. Moreover, the 50 hourly simple moving average is positioned near the 1.1212 level.

Therefore, a close above the trend line, 1.1220, and the 50 hourly simple moving average is needed for a fresh increase in the near term.

On the downside, an initial support is near the 1.1185 and 1.1180 levels. If there is a downside break below the 1.1180 support, there are chances of more losses below the 1.1160 and 1.1150 levels.

USD/JPY Technical Analysis

The US Dollar remained confined in a broad range above the 108.00 support area against the Japanese Yen. The USD/JPY pair made many attempts to surpass the 108.70 and 108.80 resistance levels, but it struggled to gain momentum.

The last swing high was formed at 108.61 and the pair is currently moving lower. It broke the 23.6% Fib retracement level of the recent wave from the 108.23 low to 108.61 high.

Moreover, there was a break below the 108.50 support and the 50 hourly simple moving average. The pair is now approaching the 108.40 support and the 50% Fib retracement level of the recent wave from the 108.23 low to 108.61 high.

If there are more losses, the pair could revisit the 108.20 or 108.15 support levels. The main support on the downside is near the 108.00 area.

On the upside, there is a short term bearish trend line forming with resistance near 108.60 on the hourly chart. An immediate resistance is near 108.50 and the 50 hourly SMA.

The main resistance for the bulls is near the 108.70 and 108.80 levels, above which USD/JPY is likely to accelerate sharply towards the 109.00 and 109.20 levels in the near term.

Daily Pivots: (S1) 1.1169; (P) 1.1206; (R1) 1.1231; More......

Intraday bias in EUR/USD remains on the downside at this point and further decline should be seen towards 1.1107 low. We'd stay cautious on strong support from 1.1107 low to bring rebound. On the upside, above 1.1247 minor resistance will turn bias back to the upside for 1.1347 again.

In the bigger picture, considering bullish convergence condition in daily and weekly MACD, a medium term bottom could be in place at 1.1107 after hitting 61.8% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.1186. Hence, for now, risk will stay on the upside as long as 1.1107 low holds. Break of 1.12347 will extend the rebound towards 38.2% retracement of 1.2555 to 1.1107 at 1.1660. However, sustained break of 1.1107 will confirm resumption of down trend from 1.2555.

Market sentiments were given two strong boosts yesterday, first by ECB's indication of monetary stimulus ahead, then by renewed optimism of US-China trade negotiations. Positive sentiments carried forward to Asian session, with strong rally seen in major indices. Though, reactions in currency markets are relatively "refrained" as traders are holding their bets ahead of FOMC rate decision. Two Ps - Patience and Projections - will guide the forex markets ahead.

For now, New Zealand Dollar is the strongest one for the week so far, but it's mainly consolidating recent decline. Yen is the second strongest, thanks to sharp fall in major treasury yields, in particular with German 10-year yield hitting new record low. But then, Yen's rally is capped by strong risk appetite. On the other hand, Sterling is the weakest one, as Boris Johnson is stepping closer to become UK Prime Minister. Euro is the second weakest on Dovish ECB.

Should Fed really delivers something dovish today, there are a few technically levels to watch to confirm weakness in Dollar. 107.81 support in USD/JPY is probably the most important level to watch to gauge Dollar weakness. Break will resume recent fall from 112.40. Similarly, break of 0.9925 minor support in USD/CHF and 1.1247 resistance in EUR/USD will also show Dollar weakness too. Break of 1.3328 minor support in USD/CAD could also suggests completion of recovery from 1.3239. But that might be due to Canadian CPI or oil inventory data.

In Asia, Nikkei closed up 1.72%. Hong Kong HSI is up 2.30%. China Shanghai SSE rose 0.96%. Singapore Strait Times is up 1.46%. Japan 10-year JGB yield is down -0.0068 at -0.136. Overnight, DOW rose 1.35%. S&P 500 rose 0.97%. NASDAQ rose 1.39%. 10-year yield dropped -0.026 to 2.060.

Two Ps to watch in FOMC: Patience and Projections

Fed is widely expected to keep federal funds rate unchanged at 2.25-2.50% today. After recent rhetorics from Fed officials, markets are now looking for clues on rate cuts later in the year. As of yesterday, Fed fund futures are pricing in 85.3% of an "insurance" cut in July to 2.00-2.25%. By December meeting, markets see 83.6% chance of a total of two cuts to bring interest rates to 1.75-2.00%. However, in our view, the pricings are based on assumption of further worsening of US-China trade war. Such expectations could drastically change after Trump's "extended meeting" with Xi at G20 next week.

As for today's announcement, a major focus is this sentence in the statement: "the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate". Change in the statement to remove the element of "patience" will be a strong indication that Fed is ready to move. Otherwise, July could be a little too soon for the "insurance" cut.

Additionally, we'd emphasize that the changes in the statement have to be confirmed by new economic projections. In March, 2019 median projections forecasts GDP to grow 2.1%, unemployment rate to be at 3.7%, core PCE to be at 2.0%. There have to be material downgrades in the numbers, in particular core PCE, support Fed's cut. And of course, Fed projected interest rates to be at 2.4%, that is no change from current 2.25-2.50%, by the end of 2019. This figure has to be revised down too. After all, we believe that the high uncertainty of trade war should be disregarded in the forecasts. So, if they're dovish, they're really dovish.

Fed's March projections:

Here are some suggested readings on FOMC:

• FOMC Preview – Preparing for Rate Cut
• FOMC Preview: Powell Likely to Stay on Hold, Open the Door to a July Cut
• Fed's Upcoming Rate Decision Could be "Trade-Biased"

Trump: I think we have a chance for a trade deal with China

Risk appetite was given a strong boost as US and China are returning to the table for trade negotiations. The news started with Trump tweeting yesterday that he had a "very good telephone conversation" with Chinese President Xi Jinping. And Trump said both will have an "extended meeting" next week at the G20 in Osaka, Japan. The phone call was also confirmed by China's state media.

Later at the White House, Trump told reporters, "I think we have a chance. I know that China wants to make a deal. They don't like the tariffs, and a lot of companies are leaving China in order to avoid the tariffs". He added "I think the meeting might very well go well, and frankly our people are starting to deal as of tomorrow. The teams are starting to deal. So we'll see. China would like to make a deal. We'd like to make a deal, but it has to be a good deal for everybody."

Chinese state media reported Xi saying "The key is to show consideration to each other's legitimate concerns. We also hope that the United States treats Chinese companies fairly. I agree that the economic and trade teams of the two countries will maintain communication on how to resolve differences."

UK Johnson stays as the far and away favorite after Tuesday votes

Former UK Foreign Minister Boris Johnson further solidified his place as far and away favorite to be the next Conservative Leader and Prime Minister. In the last round of leadership vote on Thursday, Johnson got 126 votes, nearly three times of runner-up, current Foreign Minister, Jeremy Hunt's 46. Environment Secretary Michael Gove was third with 41 votes, and International Development Secretary Rory Stewart was fourth with 37, Home Secretary Sajid Javid had 33. Dominic Raab, with 30 votes, was knocked out.  More votes are scheduled for Wednesday and Thursday.

In a televised debate yesterday, Johnson pledged that "we must come out on the 31 Oct. because, otherwise I am afraid we face a catastrophic loss in politics". And, "unless we do it, unless we get out on Oct. 31 I think we will all start to pay a really serious price."

Japan exports shrank for sixth straight months, won't take sides on US-China trade war

In Japan, trade balance recorded deficit of JPY -0.97T (non seasonally adjusted) in May, first deficit in four months. Exports dropped -7.8% yoy to JPY 5.84T, sixth consecutive month of decline. Imports dropped -1.5% to JPY 6.80T, first decline in three months. Sluggish exports are generally seen as the results of on-going, escalating US-China trade war, which remains a negative factor for the Japanese economy.

Looking at some details (non seasonally adjusted): Exports to China dropped -9.7% yoy. Imports from China dropped -0.9% yoy. Exports to EU dropped -7.1% yoy. Imports from EU rose 8.7% yoy. Exports to US rose 3.3% yoy. Imports from US dropped -1.6% yoy.

Separately, Masatsugu Asakawa, Japan's vice finance minister for international affairs, said more substantial talks on trade policy will be held in the G20 summit in Osaka next week. But he also noted that "Japan won't take sides on US-China trade friction, our stance is to not take steps that violate WTO rules."

Asian business sentiment sank to decade low, not just uncertainty but true slowdown

The Thomson Reuters/INSEAD Asian Business Sentiment Index dropped sharply from 63 to 53 in Q2. Worries over US-China trade war sent sentiments down to the worst reading since Q2 of 2009. The index tracks companies' six-month outlook. The survey interviewed 95 companies in 11 Asia-Pacific countries that together contribute about a third of GDP and are home to 45% of the world's population. It was conducted from May 31 to June 14.

Antonio Fatas, professor at global business school INSEAD said "it was the uncertainty about the trade war and people were worried about the future". And, "after four quarters of low numbers that now, it's not just uncertainty. This is a true slowdown in growth. We see activity declining — it's not just the expectation that activity will decline."

Elsewhere

New Zealand current account surplus came in at NZD 0.68B, above expectation of NZD 0.16B. Australian Westpac leading indicator dropped -0.1% mom in May. Germany PPI dropped -0.1% mom, rose 1.9% yoy in May, versus expectation of 0.2% mom, 2.2% yoy.

UK inflation data will be the main focus in European session with CPI, RPI and PPI featured. House prince index will be released too. Eurozone will release current account. Later in the day, Canada CPI will take center stage first, followed by FOMC rate decision.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1169; (P) 1.1206; (R1) 1.1231; More......

Intraday bias in EUR/USD remains on the downside at this point and further decline should be seen towards 1.1107 low. We'd stay cautious on strong support from 1.1107 low to bring rebound. On the upside, above 1.1247 minor resistance will turn bias back to the upside for 1.1347 again.

In the bigger picture, considering bullish convergence condition in daily and weekly MACD, a medium term bottom could be in place at 1.1107 after hitting 61.8% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.1186. Hence, for now, risk will stay on the upside as long as 1.1107 low holds. Break of 1.12347 will extend the rebound towards 38.2% retracement of 1.2555 to 1.1107 at 1.1660. However, sustained break of 1.1107 will confirm resumption of down trend from 1.2555.

Economic Indicators Update

Pivot (invalidation): 53.55

Our preference Long positions above 53.55 with targets at 54.35 & 54.75 in extension.

Alternative scenario Below 53.55 look for further downside with 52.90 & 52.35 as targets.

Comment The RSI is mixed to bullish.

Pivot (invalidation): 14.9200

Our preference Long positions above 14.9200 with targets at 15.0300 & 15.0800 in extension.

Alternative scenario Below 14.9200 look for further downside with 14.8600 & 14.8000 as targets.

Comment Even though a continuation of the consolidation cannot be ruled out, its extent should be limited.

Pivot (invalidation): 1341.50

Our preference Long positions above 1341.50 with targets at 1349.00 & 1352.00 in extension.

Alternative scenario Below 1341.50 look for further downside with 1337.00 & 1333.00 as targets.

Comment The RSI is mixed with a bullish bias.

Pivot (invalidation): 2897.00

Our preference Long positions above 2897.00 with targets at 2935.00 & 2953.00 in extension.

Alternative scenario Below 2897.00 look for further downside with 2871.50 & 2851.50 as targets.

Comment The RSI is mixed to bullish.