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Daily Pivots: (S1) 109.56; (P) 109.99; (R1) 110.37; More...

USD/JPY drops sharply in early US session but stays above 109.11 temporary low. Intraday bias remains neutral first. Near term outlook stays bearish with 111.70 resistance intact and further decline is expected. Break of 109.11 will resume the fall from 114.36 and target 108.12 low first. Break will extend the whole corrective fall from 118.65 to 61.8% retracement of 98.97 to 118.65 at 106.48. We will look for bottoming sign there. Meanwhile, break of 110.70 will indicate near term reversal and turn bias back to the upside for 114.36 resistance instead.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It's uncertain whether it's completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Daily Pivots: (S1) 1.3193; (P) 1.3259; (R1) 1.3306; More....

USD/CAD's decline continues today and reaches as low as 1.3164 so far. The strong break of 1.3222 support as well ass the medium term channel support affirms our bearish view. That is, corrective rise from 1.2460 has already completed at 1.3793. Intraday bias stays on the downside for next key level at 1.2968 (38.2% retracement of 1.2460 to 1.3793 at 1.2969). On the upside, above 1.3245 minor resistance will turn bias neutral and bring consolidations. But upside should be limited by 1.3387 support turned resistance and bring fall resumption.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and has completed at 1.3793, ahead of 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should now indicate the start of the third leg while further break of 1.2968 should confirm. In that case, USD/CAD should decline through 1.2460 support to 50% retracement of 0.9406 to 1.4869 at 1.2048.

Dollar is under some renewed selling pressure in early US session after poor economic data. Headline CPI dropped -0.1% mom, rose 1.9% yoy in May. The annual rate was notably slower than prior month's 2.2% and missed expectation of 2.0%. Core CPI rose 0.1% mom, 1.7% yoy. The annual rate was also slower than prior month's and expectation of 1.9% yoy. Headline retail sales dropped -0.3% in May, below expectation of 0.1%. Ex-auto sales dropped -0.3% versus expectation of 0.2%. The weakness against Canadian Dollar is particularly clear as USD/CAD is now clearing 1.3222 key near term support firmly. There is prospect of EUR/USD revisiting 1.1298 key resistance level even before FOMC announcement.

Talking about Fed, it's widely expected to raise federal funds rate by 25bps to 1.00-1.25% today. The base case for this year "was" that Fed will hike a total of three times, with another one in September, and then start shrinking its balance sheet in December. But there are doubts on whether the economy could withstand that recently. Today's set of data adds much to such worries. The new economic projections to be released today with the rate announcement are key to market expectations. That includes growth and inflation forecasts (with unemployment forecast a little less important), as well as the so called dot plot interest rate projections. In addition to that, the vote split will be closely watched to see how divided the committee is. Meanwhile, technically, we'd maintain the view that should EUR/USD takes out 1.13 handle decisively, selloff in Dollar will likely accelerate.

Former PM urges May on softer Brexit

In UK, former Prime Minister David Cameron urged Prime Minister Theresa May to "consult more widely with the other parties on how best we can achieve" success in the Brexit negotiation with EU. He noted there "will be pressure for a softer Brexit" and the parliament "deserves a say" on managing the Brexit process. Separately another former Prime Minster John Major said that "the concept of what we crudely call a hard Brexit is becoming increasingly unsustainable." And, "a hard Brexit was not endorsed by the electorate in this particular election." Theresa May said yesterday that the Brexit negotiation will formally start next week as scheduled.

Released from UK, claimant counts rose 7.3k in May, below expectation of 10.0k. ILO unemployment rate was unchanged at 4.6% in April. But average weekly earnings rose 2.1% 3moy, below expectation of 2.4% 3moy.

France and Germany open if UK changes mind

French President Emmanuel Macron said that the "doors remains open" if UK is to change their mind about Brexit. And it's "always open until the Brexit negotiations come to an end. But he emphasized that its a "a sovereign decision was taken by the British people and that is to come out of the European Union, and I very much respect the decisions taken by the people, be it by the French people or the British people." And, "once the negotiations have started we should be well aware that it'll be more difficult to move backwards." Comments of Macron echoed those of German Finance Minister Wolfgang Schaeuble that "if they want to change their decision, of course they would find open doors, but I think it's not very likely."

Released from Eurozone, industrial production rose 0.5% mom in April, employment grew 0.4% qoq in Q1. German CPI was finalized at 1.5% yoy in May.

IMF raised China growth forecasts but urged reforms

The International Monetary Fund raised its growth forecast for China to 6.7% this year, up from 6.6% in April. For the period from 2018 to 2020, IMF now projects China's growth to be averaged at 6.4% annually. That's also an upward revision from April forecast of average 6.2%. At the same time, IMF urged China to speed up actions on debt and reforms. The fund's First Deputy Managing Director David Lipton said in a statement that "while some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment. And, "it is critical to start now while growth is strong and buffers sufficient to ease the transition."

Released from China, industrial production rose 6.5% yoy in May, fixed assets investments rose 8.6% yoy, retail sales rose 10.7% yoy. Staying Asian Pacific, Japan industrial production was finalized at 4.0% mom in April. Australia Westpac consumer confidence dropped -1.8% in June. New Zealand current account balance turned into NZD 0.24b surplus in Q1.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3193; (P) 1.3259; (R1) 1.3306; More....

USD/CAD's decline continues today and reaches as low as 1.3164 so far. The strong break of 1.3222 support as well ass the medium term channel support affirms our bearish view. That is, corrective rise from 1.2460 has already completed at 1.3793. Intraday bias stays on the downside for next key level at 1.2968 (38.2% retracement of 1.2460 to 1.3793 at 1.2969). On the upside, above 1.3245 minor resistance will turn bias neutral and bring consolidations. But upside should be limited by 1.3387 support turned resistance and bring fall resumption.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. Rise from 1.2460 is seen as the second leg and has completed at 1.3793, ahead of 61.8% retracement of 1.4689 to 1.2460 at 1.3838. Break of 1.3222 should now indicate the start of the third leg while further break of 1.2968 should confirm. In that case, USD/CAD should decline through 1.2460 support to 50% retracement of 0.9406 to 1.4869 at 1.2048.

Economic Indicators Update

GMT	Ccy	Events	Actual	Forecast	Previous	Revised
22:45	NZD	Current Account Balance Q1	0.24B	1.00B	-2.34B	-2.42B
00:30	AUD	Westpac Consumer Confidence Jun	-1.80%		-1.10%
02:00	CNY	Retail Sales Y/Y May	10.70%	10.80%	10.70%
02:00	CNY	Fixed Assets Ex Rural YTD Y/Y May	8.60%	8.80%	8.90%
02:00	CNY	Industrial Production Y/Y May	6.50%	6.50%	6.50%
04:30	JPY	Industrial Production M/M Apr F	4.00%	4.10%	4.00%
04:30	JPY	Capacity Utilization M/M Apr	4.30%		-1.60%
06:00	EUR	German CPI M/M May F	-0.20%	-0.20%	-0.20%
06:00	EUR	German CPI Y/Y May F	1.50%	1.50%	1.50%
08:30	GBP	Jobless Claims Change May	7.3K	10.0K	19.4K	22.0K
08:30	GBP	Claimant Count Rate May	2.30%		2.30%
08:30	GBP	ILO Unemployment Rate 3M Apr	4.60%	4.60%	4.60%
08:30	GBP	Average Weekly Earnings 3M/Y Apr	2.10%	2.40%	2.40%	2.30%
09:00	EUR	Eurozone Industrial Production M/M Apr	0.50%	0.50%	-0.10%
09:00	EUR	Eurozone Employment Q/Q Q1	0.40%	0.30%	0.30%
12:30	USD	CPI M/M May	-0.10%	0.00%	0.20%
12:30	USD	CPI Y/Y May	1.90%	2.00%	2.20%
12:30	USD	CPI Core M/M May	0.10%	0.20%	0.10%
12:30	USD	CPI Core Y/Y May	1.70%	1.90%	1.90%
12:30	USD	Advance Retail Sales May	-0.30%	0.10%	0.40%
12:30	USD	Retail Sales Less Autos May	-0.30%	0.20%	0.30%
14:00	USD	Business Inventories Apr		0.30%	0.20%
14:30	USD	Crude Oil Inventories			3.3M
18:00	USD	FOMC Rate Decision		1.25%	1.00%

 

EURUSD: With the pair continuing to hesitate, a move lower on correction is envisaged. Resistance comes in at 1.1250 level with a cut through here opening the door for more upside towards the 1.1300 level. Further up, resistance lies at the 1.1350 level where a break will expose the 1.1400 level. Conversely, support lies at the 1.1150 level where a violation will aim at the 1.1100 level. A break of here will aim at the 1.1050 level. All in all, EURUSD faces further pullback threats in the days ahead.

The DAX index has posted strong gains in the Wednesday session, and has climbed 0.97 percent. The index is currently at 12,892.50 points. On the release front, German Final CPI declined 0.2%, well off the forecast of a 0.5% gain. Employment Change climbed 0.4%, edging above the estimate of 0.3%. Eurozone Industrial Production climbed 0.5%, matching the estimate. There are a number of key events in the US, highlighted by the Federal Reserve rate announcement. As well, the US will release retail sales and CPI reports.

The markets are awaiting the Federal Reserve rate announcement later on Wednesday. The markets have priced in a rate hike at close to 100%, so it's a given that the Fed will increase rates by 25 basis points, to 1.25%. What is less clear, however, is what the Fed has planned in the second half of 2017. 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. 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 items which could affect the movement of the dollar. 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.

Wednesday June 14: Five things the market is talking about

Soft U.S inflation data is raising market uncertainty about the Fed's policy plans for the rest of the year. Will Fed Chair Janet Yellen clarify their outlook this afternoon?

The Fed is widely expected to agree on an interest-rate increase today (2:00pm EDT) at the conclusion of its two-day meeting. U.S policy makers will probably also acknowledge recent inflation declines, while sticking to previous guidance for another hike before year-end and a first step towards unwinding its +$4.5T balance sheet.

Note: Fed officials have said for months they were discussing how to reduce the balance sheet, and last month outlined a proposed approach that would let increasing amounts of securities mature over time.

Any 'dot plot' downshift would definitely cast doubt on the Fed hiking three times in 2017.

Ahead of the U.S open, the 'mighty' dollar has weakened for a third consecutive day, Treasury prices have edged a tad higher and global equity markets are mixed.

Note: Bank of Japan (BoJ), Swiss National Bank (SNB) and Bank of England (BoE) are also scheduled to weigh in with policy decisions this week.

1. Global equities mixed performance

In Japan, stocks ended marginally lower in choppy trade overnight, as investors abstained from taking positions ahead of the Fed's rate announcement. The Nikkei share average fell -0.1%, while the broader Topix Index also closed down -0.1%.

Down-under, Australia's S&P/ASX 200 Index climbed +1.1% to its highest print since mid-May.

In China, the Shanghai Composite Index tumbled -0.8% and the CSI 300 Index dropped -1.3%, its biggest loss this year.

In Hong Kong, the Hang Seng Index pared losses, up +0.1%, while in South Korea the Kospi Index fell -0.1%.

In Europe, indices trade modestly higher following on from yesterday's rebound stateside. The French CAC is the out performer, whilst the FTSE MIB (Italy) again lags.

U.S stocks are expected to open little changed.

Indices: Stoxx50 +0.6% at 3578, FTSE +0.3% at 7527, DAX +0.4% at 12820, CAC-40 +0.9% at 5306, IBEX-35 +0.1% at 10896, FTSE MIB +0.1% at 21107, SMI +0.3% at 8897, S&P 500 Futures flat

2. Oil prices fall as OPEC output, U.S crude stockpiles rise, gold unchanged

Ahead of the U.S open, oil prices are under pressure after industry data yesterday revealed a build in U.S crude stocks and OPEC reported a rise in its production despite a pledge to cut output.

Brent crude oil is down -45c a barrel at +$48.27, while U.S light crude (WTI) is -50c lower at +$45.96.

Note: Crude prices have fallen more than -10% since late May, pulled down by heavy global oversupply that has persisted despite a move led by OPEC to curb production.

Oil stocks are near record highs in some parts of the world, and producers that are not part of the OPEC deal are increasing output.

API data yesterday showed that U.S crude stocks rose by +2.8m barrels in the week to June 9 to +511.4m, compared with expectations for a decrease of -2.7m barrels.

According to BP data yesterday, global energy demand grew by +1% in 2016, a rate similar to the previous two years, but well below the 10-year average of +1.8%.

The market will take its cues from today EIA report at 10:30 am EDT.

Spot gold is little changed ahead of the Fed rate announcement (+0.1% at +$1,267.05 per ounce). Yesterday, the yellow metal touched its weakest price since June 2 at +$1,259.16.

3. Yields require Fed guidance

U.S equities continue to climb, yields have fallen (U.S 10's at +2.21%) and volatility remains low, despite recent Fed rate increases and plans for more.

Note: A Fed board whitepaper estimated that the expansion of Fed bond holdings since the crisis likely lowered the yield on the benchmark 10's by a percentage point from where it would otherwise have been. By 2023, the paper said, the yield would still be about -25 bps lower despite an anticipated shrinkage in the balance sheet.

The Fed's portfolio of assets has grown to +$4.5T from around +$800B before the crisis through a series of bond-buying programs aimed at lowering long-term interest rates. Allowing these assets to roll off is expected to push up long-term rates.

Market volatility has been well contained thus far, but is expected to pick up when fixed income dealers knows when the Fed will begin the process of reducing its balance sheet, the pace and the likely size of the balance sheet at the end.

Elsewhere, U.K, Germany and French benchmark yields all rose +1 bps, while the Aussie benchmark yield is little changed at +2.40%.

4. Dollar small under pressure

It comes as no surprise that the FX market is relatively steady ahead of the expected interest rate hike by the Fed.

The dollars next step will depend on what clues Ms. Yellen will serve up regarding the Feds policy for the rest of this year.

USD/CAD (C$1.3198) continues to trend lower, trading atop of its two-month lows following 'hawkish' comments from Bank of Canada's Deputy Governor Carolyn Wilkins Monday and Governor Poloz yesterday pointing out that the central bank may consider curtailing its accommodative monetary policy in view of the broadening economic growth.

GBP (£1.2745) is off its overnight highs, but is supported now that PM May seems to have secured the support of the DUP to form a working government. U.K wage data (see below) registered a lower reading for the second consecutive month hindered some of the pounds progress. Sterling 'bulls' believes that last week's snap election results have reduced the odds for a "hard" Brexit actually occurring is also supporting the pound. The Bank of England (BoE) rate announcement is due Thursday, no change is expected.

5. UK Real Wages Fall Again, China sales improve

Data this morning showed that the U.K. unemployment rate held steady in the three months to April, but regular wages adjusted for inflation fell on the year for the second consecutive month, suggesting accelerating inflation is squeezing British shoppers' wallets.

The unemployment rate stood at +4.6% - the lowest rate since mid-1975 - but real wages fell by -0.6% compared to the same period last year. Inflation stood at +2.9% in May, the fastest pace of price growth in nearly four-years.

In China, retail sales rose +10.7% y/y in May, in line with consensus, while industrial production was up +6.5% vs. an expected +6.4% gain.

GBPJPY is in a downtrend since the May 10 high of 148.09, with prices falling in a descending channel and touching a low of 138.65 this week. The short-term bias turned more bearish after breaking below the 50-day moving average last week. The market is now holding below the base of the daily Ichimoku cloud, giving a bearish setup. Prices are also capped under the tenkan-sen line. Meanwhile, momentum studies are also bearish, since RSI is below 50 and MACD is below zero.

In the near-term, GBPJPY is finding support from the 200-day moving average at 138.87 and is finding resistance at 140.36 and has not recorded a daily close above it in the past two days. This level is the 61.8% Fibonacci retracement level of the upleg from 135.58 (April 17) to 148.09 (May 10).

The market is now at a critical point. If support at the 200-day moving average fails to hold, then there would be an accelerated decline towards the 135.58 (April 17). At this point, the market would have retraced all of the uptrend from 135.58 to 148.09, and a deeper decline would strengthen the bearish outlook for the medium-term picture.

A rise above the June 2 high of 143.93 (top of the cloud) is needed to shift momentum back to the upside to target resistance at the 23.6 Fibonacci at 145.14. A move above 147.00 would help bring a resumption of the April to May uptrend.

For now the short-term bias is bearish within the descending channel, while the medium-term picture is neutral since the beginning of the year.

Recovery rally stays capped under daily cloud top where today’s extension of Tuesday’s strong bounce stalled. Profit-taking on two-day rally and disappointing data from UK pushed pound to the session low at 1.2724 and sidelined immediate risk of breaking above pivotal 1.2800 resistance zone.

Average earnings fell to 2.1% in April, missing the forecast at 2.4% and falling below downward-adjusted 2.3% numbers of March.

Stubbornly low wages underscore growing Brexit squeeze and are seen as a warning signal that may keep the pound under pressure, as unemployment rate stayed unchanged at 4.6%, the lowest since 1975.

Better than expected UK jobless claims that rose by 7.3K in May vs forecasted 20.3K, did not help much.

Weakness in the labour sector is also expected to affect BOE and keep central bank’s policy on hold for some time.

Bank of England is expected to keep interest rate unchanged at 0.25% on Thursday’s MPC meeting.

Daily technicals remain mixed, however, today’s rejection at daily cloud top and subsequent easing would keep the downside vulnerable. Extension below 1.2700 handle (Fibo 61.8% of Tue/Wed recovery) would further weaken near-term structure and expose key supports at 1.2640/35 zone.

Res: 1.2796, 1.2806, 1.2847, 1.2882
Sup: 1.2724, 1.2695, 1.2673, 1.2635

Notes/Observations

Focus on FOMC rate decision. Few are anticipating the central bank will accelerate its projected pace of rate increases given modest inflation and planned the reduction of bond reinvestment

UK wages register lower reading for the 2ns straight month to 2-year lows as accelerating inflation squeezes British wallets

IEA Reports saw expected non-OPEC 2018 production to grow by 1.5M bpd which is slightly more than the expected increase in global demand

Overnight

Asia:

China May Retail Sales Y/Y: 10.7% v 10.7%e; YTD Y/Y: 10.3% v 10.3%e

China May Industrial Production Y/Y: 6.5% v 6.4%e; YTD Y/Y: 6.7% v 6.6%e

China National Bureau of Stats (NBS): China economy remains stable in May with improvement in momentum

South Korea May Unemployment Rate: 3.6% v 3.9%e

Europe:

Agreement between PM May and Democratic Unionist Party (DUP) for minority govt expected to be signed on Wed, Jun 14th

PM May: Timetable for Brexit negotiations remains on course and will begin next week

France President Macron: hopes Brexit talks begin as soon as possible and are led by European Commission

EU official: disagreements remain between EU and IMF on Greek debt sustainability

EU's Moscovici reiterated view that expects Greece and lenders to reach compromise deal on new loans this week;3rd aid tranche would be last for Greece

Americas:

Attorney Gen Sessions testimony: Have never met with foreign officials, Russian included, to discuss interfering in US elections

White House spokesperson: President Trump has the right but no intention to fire Special Counsel Mueller

Energy:

Weekly API Oil Inventories: Crude: +2.8M v -4.6M prior (first build in 4 weeks)

Economic Data

(DE) Germany May Final CPI M/M: -0.2% v -0.2%; Y/Y: 1.5% v 1.5%e

(DE) Germany May Final CPI EU Harmonized M/M: -0.2% v -0.2%e; Y/Y: 1.4% v 1.4%e

(FI) Finland May CPI M/M: -0.2% v +0.3% prior; Y/Y: 0.7% v 0.8% prior

(IN) India May Wholesale Prices (WPI) Y/Y: 2.2% v 2.9%e

(UK) May Jobless Claims Change: +7.3K v +22.0 prior; Claimant Count Rate: 2.3% v 2.3%prior

(UK) Apr Average Weekly Earnings 3M/Y: 2.1% v 2.4%e; Weekly Earnings (ex bonus) 3M/Y: 1.7% v 2.0%e (slowest pace in two years)

(UK) Apr ILO Unemployment Rate 3M/3M: 4.6% v 4.6%e, Employment Change 3M/3M: +109K v +125Ke

(IS) Iceland Central Bank (Sedabanki) cuts 7-day Term Deposit rate by 25bps to 4.50% (2nd straight rate cut since removing capital controls)

(EU) Euro Zone Apr Industrial Production M/M: 0.5% v 0.5%e; Y/Y: 1.4% v 1.4%e

(EU) Euro Zone Q1 Employment Q/Q: 0.4% v 0.4% prior; Y/Y: 1.5 v 1.4% prior

(CH) China May M2 Money Supply Y/Y: 9.6% v 10.4 %e; M1 Money Supply Y/Y: 17.0% v 17.6 %e; M0 Money Supply Y/Y: 7.3% v 6.0%e

(CH) China May New Yuan Loans (CNY): 1.11T v 1.00T e

(CH) China May Aggregate Financing (CNY): 1.06T v 1.19Te

Fixed Income Issuance:

(IN) India sold total INR140B vs. INR140B indicated in 3-month and 6-month Bills

(DK) Denmark sold total DKK2.56B in 3-month and 6-month Bills

(SE) Sweden sold total SEK2.5B vs. SEK2.5B indicated in 2025 and 2026 Bonds

(GR) Greece Debt Agency (PDMA) sold €1.3B vs. €1.0B indicated in 13-Week Bills; Avg Yield: 2.70% v 2.70% prior; Bid-to-cover: 1.30x v 1.30x prior

(CH) Switzerland sold total CHF443.6M in 2026 and 2045 bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 +0.6% at 3578, FTSE +0.3% at 7527, DAX +0.4% at 12820, CAC-40 +0.9% at 5306, IBEX-35 +0.1% at 10896, FTSE MIB +0.1% at 21107, SMI +0.3% at 8897, S&P 500 Futures flat]

Market Focal Points/Key Themes European Indices trade modestly higher following on from a rebound in the US overnight. The French CAC is the out performer this morning whilst the FTSE MIB lags. Spanish retail giant Inditex trades lower after Q1 results which were mostly inline. Hexagon trades sharply higher in Sweden on potential take over talks with a potential deal in the region of SEK130B. US Futures are slightly higher reversing earlier declines tracking the gains in Europe.

Equities

Consumer discretionary [ Inditex [ITX.ES] -0.5% (Q1 earnings), Mulberry [MUL.UK] -2% (Earnings)]

Materials: [Gemfields [GEM.UK] +12.7% (Raised offer from Fosun Gold)]

Industrials: [Bossard [BOSN.CH] +8.7% (Trading update), Hexagon [HEXAB.SE] +14% (Take over speculation)]

Financials: [Bellway [BWY.UK] +4.3% (Trading update), Euronext [ENX.FR] -2% (Placement)]

Technology: [Wandisco [WAND.UK] +10% (Contract win)]

Healthcare: [Gensight [SIGHT.FR] +3.0% (long-term positive safety and visual acuity results)]

Speakers

ECB's Weidmann (Germany) stated that he saw the risk of ECB coming under political pressure to keep monetary policy loose

ECB's Constancio (Portugal): Banks needed to strengthen their solvency. Bank profitability might not reach sustainable targets over the next 3-5 years even under a benign scenario . Saw consolidation in Italy's banking sector

ECB's Hansson (Estonia) stated that all talking about incremental approaches to normalization; issue is about calibrating

ECB's Knot (Netherlands): Effect of ECB policy on inflation has been disappointing

German Bundesbank's Dombret (ECB SSM member): Seen 1st applications from banks seeking to move due to Brexit

Netherlands Bureau for Economic Policy Analysis (CPB) raised 2017 GDP growth forecast from 2.1% to 2.4%

German Chancellor Merkel's conservatives to form a three-way coalition with Free Democrats (FDP) and the pro-environment Greens in the northern state of Schleswig-Holstein. Merkel might be able to forge a similar three-way coalition on the federal level after elections in September, ending her party's current link with the centre-left Social Democrats

UK Chancellor of Exchequer Hammond said to be preparing bid within govt to soften Brexit and keep Britain inside EU customs union

UK Government deal with DUP might be delayed until next week (press report)

Bank of Italy (BOI) again raised its 2017 GDP growth forecast from 1.0% to 1.3% (**Note: 2md hike in a week)

Sweden Central Bank (Riksbank) May Business Survey: Strong economic situation to continue in the months ahead. Export companies are encountering ever-stronger demand from abroad

Norway sold NOK3.0B vs. NOK3.0B indicated in 3.0% 2024 bonds; Avg Yield: 1.25% v 2.12% prior; Bid-to-cover: 2.02x v 2.3x prior

IMF raised China GDP growth forecast from 6.6% to 6.7%. Noted that reform progress needed to accelerate and address risk of sharp economic adjustment

IEA Monthly Report noted that Growth in oil supply in 2018 was expected to outpace an anticipated pick-up in demand that would push global consumption above 100M barrels per day (bpd) for the first time. In 2018, we expected non-OPEC production to grow by 1.5 million bpd which is slightly more than the expected increase in global demand

Currencies

FX markets were steady and quiet ahead of the expected interest rate hike by the Fed. The main focus will be on for clues regarding Federal Reserve policy for the rest of the year

GBP saw its session gains erode. Pound currency was supported PM May seemed to have secured the support of the DUP to form a working govt. Howvere, UK wage data registered a lower reading for the 2nd straight month to 2-year lows as accelerating inflation squeezed British wallets. The price action was mainly in the Gilts as the 10-year yield dipped below the 1.00% level. GBP/USD was lower by 0.2% just ahead of the NY morning at 1.2725 area.

Fixed Income

Bund futures trade at 164.99 down 2 ticks, remaining tight ahead of FOMC rate decision. Resistance lies near the 165.25 level followed by 165.95. A break of the 164.65 support level could see lows target 163.70 followed by 160.30.

Gilt futures trade at 129.46 higher by 48 ticks, extending to session highs after UK weekly earnings data missed expectations and jobless claims changed declined. Gilts are trading in the middle of the trading range seen in June. Price still finds initial support at the 129.14 level, with key support at the 128.27 support level. An acceleration lower could test the 127.43 region. Resistance remains the 129.75 level followed by 130.28.

Wednesday's liquidity report showed Tuesday's excess liquidity rose to €1.6785T a slight gain of €13.5B from €1.6650T prior. Use of the marginal lending facility rose to €178M from €85M prior.

Corporate issuance saw over $1.8B come to market via 3 issues headlined by Apple's $1B senior unsecured green note offering and American Equity Investment Life Holding Company $500M in senior unsecured note offering

Looking Ahead

(PT) Bank of Portugal reports May financing to Portuguese Banks: No est v €23.4B prior

05:30 (DE) Germany to sell €3.0B in 0.25% 2027 Bunds

05:30 (PT) Portugal Debt Agency (IGCP) to sell €1.0-1.25B in 2022 and 2027 OT bonds

06:00 (IL) Israel Q1 Current Account: No est v $3.3B prior

06:00 (ZA) South Africa Q2 BER Business Confidence: 39.8e v 40.0 prior

06:00 (CZ) Czech Rep. to sell Bonds

06:00 (RU) Russia to sell combined RUB40B in 2020 and 2026 OFZ bonds

06:45 (US) Daily Libor Fixing

07:00 (US) MBA Mortgage Applications w/e Jun 9th: No est v 7.1% prior

07:00 (ZA) South Africa Apr Retail Sales M/M: -0.9%e v +0.3% prior; Y/Y: 0.5%e v 0.8% prior

07:00 (BR) Brazil Jun FGV Inflation IGP-10 M/M: -0.5%e v -1.1% prior

07:00 (UK) Prime Minister's Question Time in House of Commons

07:30 (CL) Chile Central Bank's Traders Survey

08:00 (PL) Poland May M3 Money Supply M/M: 0.8%e v 0.2% prior; Y/Y: 6.5%e v 6.6% prior

08:00 (BR) Brazil Apr IBGE Services Sector Volume Y/Y: -5.8%e v -5.0% prior

08:15 (UK) Baltic Dry Bulk Index

08:15 (IT) ECB's Visco (Italy) in Rome

08:30 (US) May CPI M/M: 0.0%e v 0.2% prior; Y/Y: 2.0%e v 2.2% prior

08:30 (US) May CPI Ex Food and Energy M/M: 0.2%e v +0.1% prior; Y/Y: 1.9%e v 1.9% prior

08:30 (US) May CPI Index NSA: 251.580e v 244.524 prior; CPI Core Index: 244.891 v 251.172 prior

08:30 (US) May Advance Retail Sales M/M: 0.0%e v 0.4% prior; Retail Sales Ex Auto M/M: 0.2%e v 0.3% prior; Retail Sales Ex Auto and Gas: 0.3%e v 0.3% prior; Retail Sales Control Group: 0.3%e v 0.2 prior

08:30 (US) May Real Avg Weekly Earnings Y/Y: No est v 0.3% prior; Real Avg Hourly Earning Y/Y: No est v 0.4% prior

08:30 (CA) Canada May Teranet/National Bank HPI M/M: No est v 1.2% prior; Y/Y: No est v 13.4% prior, House Price Index: No est v 206.41 prior

10:00 (US) Apr Business Inventories: -0.2%e v +0.2% prior

10:30 (US) Weekly DOE Crude Oil Inventories

11:00 (BR) Brazil to sell 2023 LFT

11:00 (BR) Brazil to sell 2018, 2019 and 2020 LTN Bills

13:30 (LT) ECB's Rimsevics (Latvia) in London

14:00 (US) FOMC Interest Rate Decision: Expected to Target Range by 25bs

14:30 (US) Fed Chair Yellen post rate decision press conference

The euro continues to have a quiet week, as EUR/USD is trading at the 1.12 line in the Wednesday session. In Germany, Final CPI declined 0.2%, well off the forecast of a 0.5% gain. Employment Change climbed 0.4%, edging above the estimate of 0.3%. Eurozone Industrial Production climbed 0.5%, matching the estimate. There are a number of key events in the US, highlighted by the Federal Reserve rate announcement. As well, the US will release retail sales and CPI. The markets are prepared for a busy day, and traders should be prepared volatility from EUR/USD. On Thursday, the major event is US unemployment claims.

The markets are awaiting the Federal Reserve rate announcement later on Wednesday. The markets have priced in a rate hike at close to 100%, so it’s a given that the Fed will increase rates by 25 basis points, to 1.25%. What is less clear, however, is what the Fed has planned in the second half of 2017. 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. 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 items which could affect the movement of the dollar. 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.

Almost overshadowed by the Fed’s rate announcement, the US will release key consumer numbers later on Wednesday. Retail Sales, the key gauge of consumer spending, is expected to drop to 0.1%. On the inflation front, CPI is projected to remain at 0.2%. On Tuesday, PPI dropped to a flat 0.00%, down from 0.5% a month earlier. Will CPI follow suit and lose ground in the May report? If so, the dollar could lose ground against major rivals, such as the euro.