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• As expected, the target range for the fed funds rate (the main policy rate) was held steady at 2.25-2.50% today
• The interest rate on excess reserves was lowered by 5 basis points, though Chair Powell downplayed the move as a “small technical adjustment” that didn’t change the Fed’s monetary policy stance
• The Committee’s neutral guidance—that it will be patient in determining future policy adjustments—was unchanged
• The policy statement noted solid economic growth, albeit with household spending and business investment slowing in Q1
• The statement acknowledged a slowdown in core PCE inflation, with both headline and core rates noted to be running below 2%

Overall, Chair Powell sounded firmly neutral—doing little to change market pricing for a rate cut by the end of this year. He took a number of questions on the recent slowing in core inflation. While expressing some concern about the decline, he said transitory factors might be at play and that inflation is expected to return to the Fed’s symmetric 2% target over time amid sustained economic expansion. Powell also noted that some of the “cross-currents” in the outlook have improved (i.e. risks have moderated). He mentioned an easing in global financial conditions, improving data in China and Europe, and reports of progress in US-China trade talks. Those developments were seen as consistent with a continued patient approach to setting monetary policy.

USD/JPY rebounds from three-week low

The initial reaction to the Fed meeting was for the yen to strengthen since the Fed seemed to pour cold water on the notion that the next Fed move could be a rate cut. However, that move didn’t last long and a stronger US dollar contributed to the turnaround aided by reasoning that the Fed was not going to hike rates anytime soon either.

USD/JPY climbed above the 200-day moving average again and appears to be respecting support at the 55-day moving average of 111.28. The moving average has remained intact on a closing basis since March 25.

USD/JPY Daily Chart

Equities rebound after yesterday’s drop

Positive sentiment returned to equity markets this morning, though China and Japan holidays may have contributed to a lack of liquidity. US indices were up 0.2% to 0.3%. Asian bourses responded to PMI readings from across the region which held above the 50 contraction/expansion threshold. The exceptions being Malaysia and Taiwan, the latter stuck in contraction territory for a seventh straight month.

US30USD Daily Chart

German retail sales in focus

Germany’s retail sales data for March are expected to show a deterioration of 0.4% following a 0.9% increase the previous month. The Bank of England holds its rate meeting today and is widely expected to maintain its current rate and asset purchase stance unchanged as the Brexit cloud hangs over the economy.

The North American session sees US Q4 nonfarm productivity and unit labour costs released but March factory orders numbers will attract more attention. They’re expected to rebound from February with a +1.5% reading from -0.5%. The dip in the ISM manufacturing PMI for that month (from 55.3 to 52.8, the lowest since October 2016) could filter through into these numbers and s create a disappointment.

• As expected, the Federal Open Market Committee (FOMC) unanimously decided to maintain the target range for the fed funds rate at 2.25-2.50%.
• The commentary on recent economic performance was updated to reflect the "solid rate" of expansion in the first quarter, but also to highlight the realized slowdown in household and business spending.
• The statement recognized the decline in inflation and also that both headline and core measures are "running below two percent". Other than these updated paragraphs, the statement was unchanged from March.
• The interest rate on excess reserve balances was lowered by 5 basis points to 2.35%.The implementation note commented that this "is intended to foster trading in the federal funds market at rates well within the FOMC's target range".

Key Implications

• There was little new in this statement. The recognition of inflation running below target emphasizes its importance in driving the FOMC's interest rate decisions.
• Until inflation shows convincing signs of moving higher, the Federal Reserve will not raise interest rates. By the same token, inflation would have to move convincingly lower for the Fed to ease policy. As long as economic growth continues and the labour market remains healthy, this appears unlikely.
• We continue to expect the Fed to remain on hold through this year and next. Inflation is more likely to move higher than lower over this time period. But, with economic growth slowing toward potential, there appears to be little risk of it overshooting and warranting a tighter policy stance.

Wall Street drops as Fed pushes back on rate cut hopes

The Fed held rates unchanged, as expected, but crimped market expectations that low inflation would promote a rate cut rather than hike, saying inflation is expected to pick up naturally in the future. Chinese and Japanese markets are closed for the rest of the week.

US30USD Daily Chart

The US30 index fell the most in almost six weeks yesterday after the Fed’s comments on inflation

Rising 55-day moving average support is at 26,026. A drop through 26,264 would bring a possible double-top formation into consideration

US factory orders are expected to rebound in March, rising 1.5% m/m in March following a 0.5% drop in February.

DE30EUR Daily Chart

The Germany30 index has snapped a four-day winning streak in early trading this morning in response to the Fed decision yesterday. So far, the index has dropped the most since April 9. Markets were closed yesterday for the May Day holiday

The 55-day moving average crossed above the 200-day moving average on Tuesday and is now at 11,710

German retail sales are seen falling 0.4% m/m in March after a 0.9% increase in February.

UK100GBP Daily Chart

The UK100 index posted the biggest one-day loss since March 22 yesterday following the Fed meeting. Reports suggest that PM May and opposition leader Corbyn may be closer to reaching a compromise, which could pave the way for a Brexit deal.

The 55-day moving average is at 7,290. The index has traded above this average since January 30

The Bank of England holds its rate meeting today, but is widely expected to leave both rates and its asset purchase unchanged. The Bank seems to be on hold until Brexit is sorted out.

STOCKS

The US Federal Reserve cited that the rates could either way while the market seems to have weighed more for a "no rate cut" going forward. As a result some profits have been taken-off from the US equities overnight.

Dow (26430.14, -162.77, -0.61%) has declined sharply. Immediate support is at 26410 - the 21-day moving average, a break below which can take it to 26250 and 26210 before we see a rise to 26750-27000.

DAX (12344.08) was closed yesterday. It has to be seen if it holds above 12250 to keep the bullish outlook intact for a rise to 12450-12500. A break below 12250 can drag it to 12200-12180.

Sensex (39031.55, -35.78, -0.09%) remains mixed and range bound between 38500 and 39500. We have to wait for this range to break to give clarity on the next move.

Nifty (11748.15, -6.50, -0.06%) can test the crucial resistance at 11800. A pull-back from there can retain the 11550-11800 sideways rage. A break above 11800 if seen can take it higher to 11900.

Japan's Nikkei and China's Shanghai are closed for the rest of the week on account of public holidays.

COMMODITIES

Commodities trade under pressure. Gold has dipped within its sideways consolidation and remains bearish. Silver and Copper have declined below their crucial supports and looks vulnerable for further fall. Oil remains bearish although it has seen some uptick from the recent lows. On one hand the concerns are high on the supply disruption due to Iran sanction and crisis in Venezeula. On the other hand, the US oil inventories are building up. This makes it interesting to watch the oil market.

Gold (1274) can dip to 1268. A bounce from there can take it to 1277-1280 again and keep it range bound for some more time before we see a fresh fall to 1260-1255.

Silver (14.65) is under pressure as it has declined below the crucial support level of 14.75. It can test 14.50 in the near term. The outlook is bearish for a fall to 14 while it trades below 14.80.

As expected, Copper (2.80) has fallen, indeed much beyond our expected level of 2.84. It can test 2.78-2.77 and then see a corrective rally to 2.83-2.84.

WTI (63.60) has cluster of resistances between 63.9 and 64.3. We expect the upside to be restricted to this resistance zone. The outlook remains bearish for a fall to 62 and 61.

Brent (72.10) is getting support near 71 now. But the resistance at 72.7 can cap the upside and keep the bearish view intact for a test of 70-69.8 in the coming days.

FOREX

FED kept interest rates unchanged. US Dollar Index (97.65) tested 97.15 yesterday before moving up to current levels. While the index sustains above 97.15/25, it could rise towards 98 or higher in the near term.

The Euro (1.12) made an intra-day high of 1.1265 yesterday after the FED policy statement, moving closer to our expected 1.13 mentioned on Tuesday. 1.13 is an important resistance on the 3-day candles and while that holds, Euro could continue to dip towards 1.11 again in the next few sessions.

The Euro-Yen (125.08) could rise towards 126.00/50 in the near term which could act as a decent resistance pushing the pair back towards 124 eventually. For now the view is bullish.

Dollar-Yen (111.65) tested 111.04 yesterday in line with the 111 support as seen on the daily candles before bouncing back from there. While support at 111 holds, Dollar-Yen could again rise towards 112.50.

The Aussie (0.7021) trades above support at 0.70 and while that holds, Aussie could attempt to rise towards 0.7100-0.7150 in the near term. While above 0.70, Aussie looks bullish just now.

USDCNY (6.7336) is stable near current levels but has some room on the upside towards 6.75/76 levels from where a fall back to 6.72/70 is possible. In the medium term Yuan could strengthen again towards 6.70.

Dollar-Rupee (69.57) did come down sharply to test 69.50 as expected on Tuesday. While immediate support at 69.50 holds, we could possibly see a bounce from here back towards 69.75/70.00 in the near term. A test of 69 would come into picture if our mentioned support at 69.50 breaks. For now a bounce from 69.50 looks more likely.

INTEREST RATES

The FED kept interest rates unchanged and noted that the inflation is running below the stated target of 2%. FED reiterated that it would be patient and would continue to monitor upcoming data releases.

The US Yields are trading lower. The 10Yr (2.50%) and the 30Yr (2.90%) have fallen as expected from respective resistances near 2.55% and 2.98% as mentioned on Tuesday and while the resistances hold, the 10YR and 30Yr could continue to fall towards 2.48/45% and 2.87/85% in the near term. Overall the US yields look weak.

The UK-US 10Yr (-1.35%) is trading just below trend resistance and could fall from here targeting -1.38% or lower. This could be bearish for Pound (1.3054) in the coming sessions.

The German 30YR (0.655%) and the 10Yr (0.015%) have risen and test immediate resistance near current levels. A fall from here is possible in the next few sessions towards 0.60-0.50% and -0.10% respectively.

The 10Yr GOI (7.5276%) could remain above 7.48% and rise towards 7.60/65% in the near term. View is bullish.

The report from the US Energy Information Administration (EIA) shows that total crude oil and petroleum products (ex. SPR) stocks surged +12.73  mmb to 1257.33 mmb in the week ended April 26. Crude oil inventory soared +9.93 mmb to 470.57 mmb (consensus: +1.49 mmb). Inventories rose in 3 out of 5 PADDs with PADD 3 (Gulf Coast) seen a +9.17 mmb increase. Meanwhile, Cushing stock added +0.27 mmb to 45.18 mmb. Utilization rate slipped -0.9% to 89.2% while crude production gained +0.1M bpd to 12.3M bpd for the week. Crude oil imports increased +0.27M bpd to 7.41M bpd in the week.

Concerning refined oil product inventories, gasoline inventory gained +0.92 mmb to 226.74 mmb as demand slipped -192% to 9.23M bpd. The market had anticipated a -1.01 mmb drop in stockpile. Production slipped -0.4% to 9.93 bpd while imports plunged -14.92% to 0.77M bpd during the week. Distillate inventory fell -1.31mb to 125.72 mmb. Demand jumped 11.04% to 4.22M bpd. The market had anticipated a -0.19 mmb decline in inventory. Imports slumped -74.29% to 0.06M bpd while production gained +1.26 % to 5.13M bpd during the week.

Released after market close on Wednesday, the industry- sponsored API estimated that crude oil inventory jumped -6.81 mmb during the week. For refined oil products, gasoline stockpile drew -1.1mmb while distillate declined -2.1 mmb.

Key Highlights

• The British Pound traded higher recently and broke the 145.00 resistance against the Japanese Yen.
• GBP/JPY broke a connecting bearish trend line with resistance at 144.90 on the 4-hours chart.
• The US ADP Employment in April 2019 changed 275K, better than the 180K forecast.
• Today, the BoE Interest Rate Decision is scheduled in the UK (forecast – no change from 0.75%).

GBPJPY Technical Analysis

After a strong decline, the British Pound found support near the 143.75 level against the Japanese Yen. The GBP/JPY pair started an upward move and broke the 144.00 and 145.00 resistance levels.

Looking at the 4-hours chart, the pair broke many important resistances near the 144.80 and 145.00 levels. There pair surpassed the 50% Fib retracement level of the last decline from the 146.99 high to 143.75 low.

Besides, there was a break above a connecting bearish trend line with resistance at 144.90 on the same chart. Finally, the pair settled above the 145.40 level and the 100 simple moving average (red, 4-hours).

On the upside, an immediate resistance is near 145.75, the 200 simple moving average (green, 4-hours), and the 61.8% Fib retracement level of the last decline from the 146.99 high to 143.75 low.

If there is a successful close above the 145.75 and 145.80 resistance levels, GBP/JPY is likely to accelerate higher above the 146.00 and 146.20 resistance levels.

On the other hand, if there is a downside correction, the previous resistance near 145.40 and the 100 simple moving average (red, 4-hours) are likely to provide support.

Overall, GBP/JPY is trading nicely with a positive bias and it is likely to climb further above 146.00 in the near term. GBP/USD too recovered recently and broke the key 1.3000 resistance level. Today in the UK, the BoE Interest Rate Decision is scheduled, which might impact the market sentiment for the British Pound.

Economic Releases to Watch Today

• Germany’s Manufacturing PMI for April 2019 – Forecast 44.5, versus 44.5 previous.
• Euro Zone Manufacturing PMI April 2019 – Forecast 47.8, versus 47.8 previous.
• US Initial Jobless Claims – Forecast 215K, versus 230K previous.
• US Factory Orders March 2019 (MoM) – Forecast +1.5%, versus -0.5% previous.
• BoE Interest Rate Decision – Forecast 0.75%, versus 0.75% previous.

Will Asia cry over its PMIs?

Wall Street experienced an Economics 101 session overnight with the Federal Reserve holding rates steady and leaving the street in no doubt it has joined the “wait-and-see club” of global central banks. With no mention of an impending rate cut anytime soon, the US dollar rose, tracking higher US yields and equities, while gold and oil fell after a choppy session. Hidden amongst the noise, a blowout in US official crude inventories and rather sickly US ISM manufacturing data suggests the US is not entirely immune to the malaise affecting the rest of the world.

With China and Japan on holiday, trading will likely be muted in the region today, but the rest of Asia will have its own moment in the sun at 0830 Singapore time. South Korea’s inflation rate rose a still sickly 0.6% early this morning, beating expectations, and this will be followed by a raft of Nikkei Manufacturing PMIs for April from Indonesia, Malaysia, Philippines, South Korea, Thailand, Taiwan and Vietnam. This represents quite a list from the workshop of the world, and persistent downside misses could reinforce the two-speed economy thesis and take more lustre from the regional markets.

All is not lost, however, with noise coming from Steve Mnuchin in Beijing that the latest round of trade talks are progressing well and a possible deal is on the horizon. Talks move back to Washington next week, but a deal can’t come soon enough for Asia and indeed the world’s markets before the sugar rush of Chinese stimulus starts to fade.

Europe will also announce a raft of PMIs this afternoon, including the closely watched German data. This will be followed by the Bank of England rate decision, which is universally predicted to remain unchanged as we await Brexit – or not. Tomorrow will finish with a bang when the US Non-Farm Payrolls is released, with the street looking for a climb of 180,000 jobs.

Currencies

The US dollar rose slightly against developed market currencies as US bond yields moved higher following a neutral FOMC. In a holiday-thinned market, we anticipate a similar theme in Asia. As the dust settles ahead of tomorrow’s Non-Farm Payrolls data, the US dollar should maintain its spot as the developed-market high-yielder of choice.

Equities

Wall Street had a lacklustre session as the Federal Reserve refused to play the game and become openly dovish on interest rates. The S&P fell 0.75%, while the Nasdaq and the Dow Jones were down 0.6%. With quarterly earnings season mostly behind us, attention will soon return to fundamentals, and not before time. However, with China and Japan still on holiday, volumes will be muted.

That said, it’s likely regional markets will open lower in line with Wall Street, however, the picture will be complicated by the raft of PMI data released ahead of their openings this morning. An outperformance could see the fallout from Wall Street limited, but if the region’s PMI releases are poor, this could add more dark storm clouds to Asia’s stock markets today.

Oil

Venezuela’s march of the people on the Presidential Palace in Caracas seems to have faded as the President appears to remain in firm control of the military. That took some of the near-term risk premium out of oil, leaving a stronger post-Fed dollar to weigh on the black gold. Brent Crude rose a minuscule 0.1% to USD72.15 a barrel, on a day where oil was not the centre of attention. Much higher official US inventories weighed on WTI, which fell 0.5% to USD63.60 a barrel. Both contracts seem to have found an equilibrium at these levels over the past few days, and we expect that to continue in the Asian session.

Gold

Although gold had a choppy day, as the dust settled, the yellow metal finished its session 0.6% lower at USD1,276.00 an ounce. A wait-and-see Fed and the ensuing dollar strength capped any nascent rallies. Although equities underperformed, higher US yields should maintain gold’s status quo at these levels. In the absence of any geopolitical surprises in today’s session, we expect a quiet day due to the China holiday.

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