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Forward we walk!

After GBP/USD's election price action to end last week, price has now printed a clean technical pullback.

Open up your MT4 charts and take a look at the GBP/USD daily:

GBP/USD Daily:

This is a range that we've been following on the blog for quite a while now and one that was only broken as Theresa May called the election.

At the time, markets of course didn't expect Corbyn's Labour Party to do as well as they did and priced accordingly. But now we know the result, price dropped back to it's starting price and normal price action has resumed.

Normal price action that involves respecting support/resistance levels on pullbacks and as we've said in previous posts featuring GBP/USD, this is a level that has been respected numerous times on both sized now. There is no questioning the validity of this level.

Fed surprises but it is enough to turn the dollars tide

The Feds were completely unfazed by the soft May CPI report. Mind you the last minute data miss was unlikely to alter their long-term view but none the less we are perhaps witnessing US core CPI becoming the most important data print for traders to key on for the remainder of 2017, even more so than NFP.

The dollar collapsed on the soft CPI data print as dealers viewed three consecutive months of benign core inflation more trend than transitory. The fall in 10-year yield to 2.10 was staggering as was the 100 pip drop on USDJPY as the volatility suggests that the CPI print will be the cornerstone for establishing USD bias for the remainder of 2017.

But it was a case more of two sessions as the Greenbacks morning swoon gave way to an afternoon dollar recovery amidst very hawkish price action.Mind you the bucks recovery should be taken with a grain of salt given the morning CPI induced sell off. The Greenback surprising support came as Feds stuck to their script while adding a couple of shockers by underscoring more balance sheet guidance than the markets expected and downplaying the benign core CPI inflation metrics

While the dollar and US yields have come off overnight lows there remains considerable doubt among investors that the US economy is running hot enough or that inflation will significantly turn the corner to warrant the current FOMC members rate hike expectations.As if in defiance to the markets view an unapologetically hawkish Janet Yellen has left more than a few scratching their heads wondering what actual inflation red light is causing the Feds to tap the stimulus brakes. Their inflation rhetoric was over the top hawkish referencing this year’s run of exceptionally tepid US core inflation prints “ one -off.” The markets are viewing this data more negatively than the Fed which begs the question, are the Fed’s inflation models of crystal balls that much clearer than everyone else’s? Given the market’s glass half full view of the Feds, I suspect traders will have a tough time digesting this overly confident inflation communique from Dr Yellen and will unlikely turn the tide for the beleaguered dollar

However, the real hawkish surprise was offered up in the complete detail regarding balance sheet normalisation. Unexpectedly the Fed has issued an addendum to its ‘Policy Normalization Principles and Plans’ it will allow $6 billion of Treasuries to roll off the balance sheet and increase in steps of $6bn at three-month intervals over 12 months until it reaches $30bn per month. Without question, they delivered way more details than was expected and it’s not such a stretch to assume that the Feds will commence this roll off in September.

But for the beleaguered greenback, the Feds are not the only game in town as the lack of progress on the US economic policy agenda will be an onerous burden for the US dollar through 2017. With more central banks joining the QE taper club, interest rate differentials will likely play less favourably into the dollar hand, so despite short-term dollar reprieves, until the Tump administration gets their economic house in order the dollar could struggle to regain its mantle as king of the hill.

Japanese Yen

Predictably the biggest mover overnight was JPY. And despite the unexpectedly hawkish FED, USDJPY has failed to recover the overnight loss and is struggling for traction in early trade weighed down by the risk fallout from the latest Trump headlines suggesting that special counsel Mueller is investigating President Trump for possible obstruction. .Equity futures wobbled on the news and given investors sensitivity to all things US political risk we could see some follow through on this headline.But so far in early trade 109.30 USDJPY has held as perhaps investors are all too accustomed to these headlines and are more or less desensitised to Trump noise.

Euro

The Euro remains well supported on dips despite the ECB guidance suggesting a status quo on hold approach. Investors remain bullish and appear poised to add on to EUR longs

British Pound

Focus remains on election fallout while the BOE looks through the higher inflation print as little more than a pass-through function of the weaker pound. Given the political landmines dotting the UK landscape, selling GBP on rallies should offer the greatest risk-reward until further clarity on Brexit negations is forthcoming

Australian Dollar

The Australian dollar continues to trade constructively as the market lean suggests early year consternation over employment and inflation may be overplayed as the market sits tight just awaiting critical jobs and inflation expectations corroborating the RBA view to look through soft economic prints in Q1

The Canadian dollar depreciated on Wednesday after the U.S. Federal Reserve raised the benchmark US interest rate by 25 basis points as expected. The Fed also outlined the plans to gradually reduce its massive balance sheet later this year. The American central bank Chair was not concerned with inflation remaining weak and attributed current levels to temporary effects such as cellphone bills and drug prices. Earlier today the Consumer Price Index (CPI) and the core CPI came in lower than expected. CPI showed a contraction of 0.1 percent and the core CPI which is the Fed’s favourite measure of inflation grew less than expected at 0.1 percent. US retail sales also disappointed with a 0.3 percent contraction on both the headline and core numbers.

The loonie got a boost earlier this week when two officials from the Bank of Canada (BoC) discussed the possibility of reducing stimulus after the economy is displaying consistent growth. The Canadian dollar rallied after those comments and only the mighty Fed rate hike is keeping the CAD down.

For a second week in a row the oil inventories sank crude prices. This time it was not a buildup of crude stocks, but a large build of weekly gasoline inventories. The price of WTI fell more than 3 percent but did not drag the loonie down as the currency was still trading on the back of the comments from Bank of Canada officials.

The sugar deal between the US and Mexico appears to have been finalized. It marks the end of a years long dispute is intended to avoid tariffs on Mexican exports of the sweetener to the US. Mexico had already threatened to walk out of the NAFTA negotiations if tariffs are part of the conversation. The sugar agreement has rubbed producers on both sides the wrong way as some compromises were made in all sides. The NAFTA renegotiation is scheduled for the Fall after the US has already started the process to have those talks by late August.

The USD/CAD gained 0.364 in the hour after the Fed released its policy statement. The currency pair is trading at 1.3250 very close to the daily high after the end of the press conference by Fed Chair Janet Yellen. The loonie was up against the USD in the morning as US data disappointed but due to the timing would have little effect on the upcoming decision of the US central bank. The anticipated US rate hike came into being and will pressure the Bank of Canada (BoC) to keep up if it doesn’t want the rate gap to widen more if the Fed follows with another rate hike in September or December.

Another big concern for the Canadian central bank is the state of household debt. It dipped slightly in the first quarter but remains near record highs and could prove to be a big problem if the central bank takes too long to hike rates or if the move is too sudden. The ratio of debt to disposable income is a staging 166.9 percent. The central bank seems to be preparing the market even if the move could come near the end of the year or in early 2018.

Oil lost 3.614 percent on Wednesday. The price of West Texas Intermediate is trading at $44.70 after the release of the weekly crude inventories in the US by the Energy Information Administration (EIA) showed a lower than expected drawdown of 1.7 million barrels and a surprise buildup in gasoline stocks of 2.1 million barrels when a draw of 1 million was expected once again put downward pressure on crude. Low energy prices will keep global inflation under control and could foil the plans of the US Fed of another rate hike if US inflation does not pick up before the end of the year.

Market events to watch this week:

2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
6:45 pm NZD GDP q/q
9:30 pm AUD Employment Change

Thursday, June 15
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
4:30 am GBP Retail Sales m/m
7:00 am GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
8:30 am USD Unemployment Claims
Tentative JPY Monetary Policy Statement

Friday, June 16
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
8:30 am CAD Core Retail Sales m/m
8:30 am USD Building Permits

Fed day was a wild ride that started with soft data and sudden worries about a dovish Fed and ended with Yellen sticking to the Fed plan. The dollar did a 200 pip round trip but at the end of the day the Australian dollar led the way and the Swiss franc lagged. Aussie jobs are due next. Our Dax was stopped out at 12880.

Soft CPI and retail sales reports caused a quick rethink on the Fed among analysts and in markets. Core inflation rose 1.7% y/y compared to 1.9% expected and retail sales were down 0.3% compared to a flat reading expected.

In the aftermath, USD/JPY crumbled to 108.95 from 110.30 as Treasury yields dropped to post-election lows. But the euro chart was telling. Resistance at the election-night high of 1.1299 held and the 100-pip rally stalled.

As a small panic set in among dollar bulls, Goldman Sachs and JPMorgan warned that a Fed communication shift was going to happen. It didn't.

The Fed statement was virtually unchanged. There was a nod to lower inflation but no wavering in the forecast for a return to 2% inflation in the medium term. In addition, the forecasts didn't change except for lower unemployment.

The dollar bears hung on for every word from Yellen's press conference but finally threw in the towel when she blamed low inflation on one-off effects. The euro completely retraced the rally and hit a session low at 1.1193. USD/JPY rebounded as high as 109.89.

It's important to note that while Yellen was confident in her assessment, she said inflation would be watched closely and highlighted data dependency. Given low expectations of a hike in September, there are some upside risks but there won't be any answer with a light eco calendar until the end of the month.

One spot where the calendar (and the currency) is hot is Australia. At 0130 GMT the May employment report is expected to show 10K new jobs with unemployment at 5.7%. Technically, AUD/USD is looking more constructive after a break of the April highs and the 200-dma on Wednesday.

Dollar recovers after Fed doesn't disappoint the market and raised federal funds rate by 25bps to 1.00-1.25%. Minneapolis Fed President Neel Kashkari dissented and voted for standing pat this time. But the greenback is supported by the fact that Fed didn't change inflation forecast for 2018 and 2019. Also, Fed maintained interest rate projections unchanged for 2017 and 2018. Fed released an "addendum to the political normalization principles" laying down the guidelines to shrink its balance sheet. Overall, even though the greenback was sold off after CPI disappointment earlier today, it's kept above key support level around 1.13 handle against Euro and more stimulus is needed to trigger sustained breakout.

In short, Fed raised 2017 GDP growth forecast to 2.2%, up from 2.1%. For 2018 and 2019, Fed projects GDP growth to be at 2.1% and 1.9%, unchanged from prior forecast. Forecasts on unemployment rate were revised down to 4.3% in 2017, 4.2% in 2018 and 4.2% in 2019, down from 4.5% for all the three years in prior projections. Headline CPE was revised to 1.6% in 2017, down from 1.9%. But for 2018 and 2019, headline PCE forecasts were kept unchanged at 2.0%. Core PCE forecast for 2017 was also revised to 1.7% , down from 1.9%. And, core PCE forecasts for 2018 and 2019 were also kept unchanged at 2.0%.

Meanwhile Fed fund rate projections were kept unchanged at 1.4% and 2.1% in 2017 and 2018 respectively. That means Fed is still projecting another rate hike this year. Rate projection for 2019 was just revised slightly down to 2.9%, down from 3.0%.

EUR/USD surged to as high as 1.2615 earlier today but hesitate ahead of 1.1298 resistance. The pair retreated after FOMC announcement. While we're staying bullish with 1.1109 support intact, at this point, there is no clear momentum to break through 1.1298 key resistance to confirm medium term bullish reversal yet.

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee's Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

BoE Adds Hung Parliament to List of Economic Uncertainties Days Before Brexit Talks Begin

The Bank of England announces its latest monetary policy decision on Thursday at a time of significant uncertainty for the country. A hung parliament in, what was, an entirely unnecessary snap election was the worst preparation for Brexit negotiations which are due to begin next week.

BoE policy makers will meet on Thursday to discuss another possible problem facing the country during all of this, rising inflation. In fact, rising prices are largely linked to the above problems, with the UKs vote to leave the EU a year ago triggering the substantial depreciation in the pound that drove up the cost of goods from abroad.

Policy makers must now determine whether the factors that drove inflation well beyond its 2% target are just temporary or represent a longer term challenge for price stability. With headline inflation at 2.9% in May and core inflation slightly lower at 2.6%, the decision for the central bank is not as straightforward as it would like during what is already a complicated time for the country.

Especially when growth is already slowing and the consumer - a hugely important part of the economy - is feeling the pinch.

Real Wage Growth vs Retail Sales

Source - Thomson Reuters Eikon

Policy makers have already previously indicated that they will only tolerate a little more upside on growth or inflation before voting for tighter policy which should technically make a hike a possibility on Thursday and yet, under the circumstances I think this is extremely unlikely. Any form of tightening would catch markets completely off-guard and could therefore generate quite a reaction, although again, this seems very unlikely.

What Can We Expect on Thursday?

The voting on both interest rates and asset purchases is expected to remain unchanged from the last meeting with only one policy maker of the eight - Kristin Forbes - voting for a hike. Forbes will leave her role on the Monetary Policy Committee at the end of the month leaving little support, it would seem, for any policy tightening.

With this in mind, it will be interesting to see how the BoE balances higher inflation with managing expectations, particularly in the absence of a press conference which we only get every three months alongside the inflation report.

All eyes will be on the minutes and the voting and should the central bank give the impression that tighter policy is a real possibility in the months ahead, it will be interesting to see how much the pound rises - if at all - given all of the uncertainty weighing it down. Typically, currencies appreciate in response to an event that is typically more hawkish than anticipated.

The FTSE would also likely be sensitive to any changes in policy stance or outlook, with its negative correlation with sterling also likely impacting its moves in the aftermath of such an outcome.

Once is not a problem, twice is not unusual but a 3rd consecutive monthly slowdown in US inflation accompanied by a back-to-back decline in retail sales should deal a fresh blow to the assumption that US bond yields and their currency ought to find their rallying ways due to superior fundamentals. Today's twin data release highlights the Lame Duck nature of today's anticipated Fed hike, highlighting the eroding probabilities for an H2 Fed tightening.

We should watch whether the language in the statement shall add more weight to slowing inflation and pay growth as well look out for any dissents to the assumed hike. The central Fed Funds rate view in the dot plot shall be scrutinized on whether it would be lowered to 2 hikes this year (i.e. no more tightening assuming a hike today). If maintained at 3 hikes, then watch out for the dot plot on growth and Yellen's press conference.

Traders will find pockets of consolidation between the 10-15 minutes following the release of the FOMC statement and before the Fed chair Yellen begins her prepared remarks. The final wave of trading volatility is likely to emerge from the Q&A session when the probability for further Fed action shall be weighed through Yellen's discussion of bond sales, weakening wage growth and tepid consumer demand. Both of our Premium USD trades are in the green.

Gold has posted considerable gains in the Wednesday session, as XAU/USD is up 0.72%. In North American trade, spot gold is trading at $1275.77 per ounce. consumer data was soft, as retail sales and CPI posted declines of 0.3% and 0.1%, respectively. Later in the day, the Federal Reserve announces its benchmark rate, which is expected to increase by 25 basis points to 1.25 percent. On Thursday, we'll get a look at the weekly unemployment claims report, with an estimate of 241 thousand.

All eyes are on the Federal Reserve, which will release a rate statement later on Wednesday. The Fed is widely expected to raise interest rates by a quarter point to 1.25%, but there's still plenty of anticipation, as analysts will be focusing on the language in the rate statement and as well as the Fed's economic projections. Analysts are expecting a "dovish hike", meaning that together with the rate increase, the Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. A dovish message could pour cold water on a rate hike in September and boost gold prices. Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect gold prices. First, the Fed Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. With the US economy performing better in the second quarter, there's a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. Another variable is the political paralysis which has engulfed Washington. With the Trump administration spending most of its energy on damage control, little progress is being made with regard to Trump's agenda of tax reform and major spending on infrastructure. The markets are becoming more skeptical about Trump's ability to work with Congress, and if this sentiment is shared by the Fed, it is likely to sound dovish regarding rate hikes in September or December.

The British pound has posted slight gains in the Wednesday session. GBP/USD is up 0.43%, as it trades at the 1.28 line. On the release front, it's been a busy day. In the UK, wage growth dropped to 2.1%, short of the estimate of 2.4%. Unemployment rolls dropped 7.3 thousand, missing the forecast of 12.5 thousand. In the US, consumer data was soft, as retail sales and CPI posted declines of 0.3% and 0.1%, respectively. Later in the day, the Federal Reserve announces its benchmark rate, which is expected to increase by 25 basis points to 1.25 percent. On Thursday, the UK releases retail sales, and the BoE will make a rate announcement, with the rates expected to remain at 0.25%. In the US, the major release is unemployment claims, with an estimate of 241 thousand.

After a bruising election which saw the Conservatives squander a comfortable majority, a chastened Prime Minister May met with French President Emmanuel Macron on Wednesday. The two leaders are moving in opposite directions; one leader is heading for a massive majority, while the other is clinging onto power by her fingernails and may be forced out of office in the near future. Macron, who is expected to support a hard line against Brexit, stated that the EU would leave the "door open" in case Britain changed its mind. That, however, is a far-fetched scenario. As for May, she continues to exude an air of "business as usual", and insisted that the Brexit talks would commence as planned on June 19. Will the talks start on time? There are reports that European officials will ask for a delay, given the political turmoil in Britain. On Tuesday, Denmark's Finance Minister, Kristian Jensen, said that he hoped that the inconclusive UK vote would lead to a "time out", so that the UK can rethink its approach to Brexit. The Europeans, stung by Brexit, are not feeling much sorrow for May's troubles, and she will have to soften her approach her previously hard-nosed approach to Brexit. If the new government expresses a willingness to negotiate a "soft Brexit", which keeps the UK in the single market, this would be a positive development for British businesses, and could boost the pound, which has taken a beating since the Brexit vote last June.

The Federal Reserve be on center stage on Wednesday, when it announces the new benchmark rate. The Fed is widely expected to raise interest rates by a quarter point to 1.25%, so the markets will be focusing on the language of the rate statement and economic projections. What is less clear, however, is what the Fed has planned in the second half of 2017. Analysts are predicting that the Fed will deliver a "dovish hike", meaning that together with the rate increase, the Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect European stock markets. First, the Fed Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. With the US economy performing better in the second quarter, there's a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. Another variable is the political paralysis which has engulfed Washington. With the Trump administration spending most of its energy on damage control, little progress is being made with regard to Trump's agenda of tax reform and major spending on infrastructure. The markets are becoming more skeptical about Trump's ability to work with Congress, and if this sentiment is shared by the Fed, it is likely to sound dovish regarding rate hikes in September or December.