European stocks open mixed but failed to gain bullish traction and turned lower as investors are cautious ahead an expected Fed rate hike. The US stock index futures are also lower on Wednesday, still digesting the scandal around Facebook. Global investors fear that the new Federal Reserve governor Jerome Powell will adopt a hawkish approach to the prospects of further tightening, citing the support to the economy from tax cuts and some signs of building inflation pressures in the country. Besides, the lack of risky assets demand is partly explained by the renewed concerns over a global trade war after reports that China is preparing US trade tariff retaliation including levies targeting U.S. agricultural exports from farm belt states. As a result, the Britain’s FTSE 100 sheds 0.52 per cent to 7,024, Germany’s DAX 30 loses 0.30% to 12,269 and French CAC 40 falls 0.45% to 5,228.
Following yesterday’s rally, the greenback is under pressure on Wednesday, partly because traders tend to cut their exposure ahead of a highly anticipated Fed decision, where the dot plots and Powell’s press-conference will take the central stage. The EURUSD pair has partially recouped its losses but lacks momentum for regaining the psychological level of 1.23, in part on the back of the EURGBP cross bearish dynamics amid sterling’s widespread rally. While this is the local factor, the key focus is now the Fed meeting and the prospects for a rise in USD across the board in case of a more aggressive tone by the central bank. In this scenario, EURUSD could break below the 1.2240 support and probe lows around 1.22.
GBPUSD has resumed its ascent after a mild retreat on Tuesday. The price is back above the 1.40 mark fueled by strong UK labor market data. Average earnings including bonus increased 2.8% in January, coming in above initial estimates and expectations. The unemployment rate suddenly dropped to 4.3% and claimant count change rose by 9.2K. The spectacular figures add to positive expectations ahead of tomorrow’s BoE meeting, increasing chances of a hint at the upcoming rate hike in May on the back of healthy economic fundamentals and a major breakthrough in Brexit talks earlier this week. The hawkish tone by Carney may fuel the pound’s rally, while the short-term risk for the pair is the Fed’s decision today.
USDJPY dropped to fresh session lows around the 106.00 level on the back of higher yen demand. The pair has accelerated its daily losses following the report on the China’s countermeasures against the Trump’s tariffs. However, the local rise in US Treasury yields is limiting the bearish pressure on the greenback against the safe-haven Japanese currency. The restricted trading range is also explained by traders’ reluctance to make large bets ahead of the FOMC decision. USDJPY needs to hold above the 106.00 mark in the short term in order to make another recovery attempt.
Crude oil prices continue to trade in a bullish mode, extending gains to early February highs around the $68 level. The positive tone in the market is mainly due to geopolitical tensions between Saudi Arabia and Iran, as well as the high probability of imposing new sanctions against Tehran by the US, which could curb the export of Iranian oil and therefore quicken the rebalancing process in the global oil market. The additional bullish pressure on Brent comes from US dollar weakness. The immediate risk event for crude prices is the FOMC meeting results. The potential profit taking at the current high levels may send Brent back below the $67 threshold.
As for gold prices, the metal is extending its daily recovery and has already recouped its yesterday’s losses. The prices came back to the immediate psychological resistance of $1.320. A sustained break above, though unlikely at the moment, could send the yellow metal to the next bullish target at $1.322. As there is a high probability of the greenback’s recovery before the daily close, gold risks quickly losing its steam and retracing the intraday gains. The scenario with returning above $1.322 will realize if the Fed’s tone doesn’t meet the market hawkish expectations.
Nathan Lambert, Head of Global FX Analytical Departament