The FOMC meeting last week solidified the US central bank as firmly in the dovish camp, which was heightened by hawkish stances at some major central banks elsewhere. The Fed also released their economic and interest rate forecasts at last week’s meeting. As expected GDP was revised lower, the unemployment rate was also revised lower, while the FOMC’s forecast for rate increases in the longer run fell slightly.

The most interesting part of the FOMC meeting, in our view, was the lack of concern about rising inflation. The Fed’s price forecast was little changed, and Fed Chairwoman, Janet Yellen, dismissed the recent increase as “noise”. This has anchored US yields at lower levels, which also weighed on the greenback last week.

We believe that price pressures are more than just noise, after core prices rose to 2% (the Fed’s target) in May, which is a 15-month high. There have been broad-based gains in inflation in areas including rents, medical care, clothing and new vehicles, which could unleash a bigger wave of price pressures and force the Fed to act sooner than it would like.

Interestingly, the markets seem to be suspicious of the Fed’s dovish stance in the face of strong inflation. At the end of last week the USD had recovered some of its post-FOMC losses, the dollar index managed to stay above the 200-day sma, and 10-year Treasury yields had also recovered the 2.6% handle, and are close to their highest level in more than a month.

Next week’s PCE report (see data wrap below), could be crucial as it is watched closely by the Fed. If it picks up as expected then we could see the market challenge the Fed’s view once more. Thus, depending on the outcome of this key inflation release, the USD could be due a period of recovery. We think that GBPUSD could be particularly vulnerable to a USD reversal, because of the recent post-BOE rally.

Towards the end of May we were getting very bullish on both the Nikkei and the USD/JPY from a purely technical point of view. While the USD/JPY has recovered somewhat, it has underperformed the Japanese shares index considerably as the latter has meanwhile rallied to fresh multi-month highs. We still think that continued strength in the Nikkei will support the USD/JPY over the coming weeks. But on this occasion we would like to focus exclusively on the Nikkei.  The index has already reached its highest level since January. But with some key technical levels broken, we think it may head further higher in near term.

As can be seen from the daily chart, below, the Nikkei managed to hold its own above the key 13850-14000 support area last month – just like it did in the previous occurrences in April, February and November. As a result, it has broken above both its 50- and 200-day moving averages and also a bearish trend line (which had been in place since the start of the year). The resulting price action has formed a pattern that looks somewhat similar to a “Cup and Handle” formation.  This is a bullish pattern and we have already seen the break of the neckline at 15200. The height of this pattern was about 1350 points, which gives a projected target of 16550 from the neckline (i.e. 15200 + 1350). If the index gets there, it would thus break the 2014 high of 16375 by 175 points.  But that does not necessarily mean the rally will end there.  In another bullish development, the index has also broken above 15400. As well as old resistance, this level corresponds with the 61.8% Fibonacci retracement of the downswing from the January high. The 78.6% retracement level of the same price swing comes in at 15825/30 which could offer some resistance. Our outlook on the Nikkei remains bullish unless it turns around and breaks back below support at 15200.

Figure 3:

Source: FOREX.com. Please note this product is not available to US clients

 

Both precious metals have enjoyed a good run of late and on Friday they were on track to close higher for a third consecutive week. The metals have been in higher demand after the Federal Reserve’s Janet Yellen delivered what was a dovish FOMC press conference on Wednesday, when she brushed off the recent pickup in US inflation as “noise” in data and hinted that the Fed would keep interest rates at these ultra-low levels well into 2015. One of the major opportunity costs for holding gold and silver is the interest or dividend the investor would have received if he/she had instead invested in the bond or stock markets. With renewed expectations that hiking interest rates may be pushed further out, this opportunity cost has thus diminished somewhat. In order words, holding gold and silver have become slightly more attractive on a relative basis. What’s more, gold has been boosted by safe-haven buying amid the crisis in Iraq, among other places. With the ISIS continuing their advance towards the capital Baghdad, there’s greater risk that the situation could turn into a full-blown civil war.

As a result of the rally, the technical outlook for both metals appears constructive. Gold has broken the key short-term resistance level of $1285, leading to a breakout above both its 50 and 200 day moving averages. The yellow precious metal also took out its 100-day moving average, which sits around the $1300 mark. Although this week’s price action has been bullish, the longer-term trend is still technically bearish as pointed out by the downward-sloping trend lines on the chart, below. Nevertheless, the v-shaped recovery that we’ve seen over the past four weeks or so is an encouraging sign and suggests that gold may be able to sustain its gains, especially while geopolitical concerns are on-going. For now, the path of least resistance is to the upside and we wouldn’t be surprised if gold prices were to climb much higher from here. A closing break above $1315/1322 would be a very bullish development, in our view. As well as resistance, this area ties in with a long-term bearish trend line that has been in place since September 2012. The next immediate upside targets are the Fibonacci retracement levels of the downward move from the March high ($1392), namely $1334/5 (61.8%) and $1359/6 (78.6%). The old resistance levels such as $1300 and $1285 may well turn into support now.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients

 

Silver meanwhile has also broken a key technical area, namely $20.30/40. This is where a bearish trend line that had been in place since the summer meets the 200-day moving average. The grey metal has also closed above another resistance level at $20.60, which has thus confirmed the change in trend. In short, there’s potential for both metals to continue pushing higher now that some of the key resistance areas have been broken.

Source: FOREX.com. Please note this product is not available to US clients

 

Monday, June 23, 2014

1:45 GMT             Chinese HSBC Flash Manufacturing PMI

After a few consecutive months of disappointing results that torpedoed this economic measure below the 50 growth/contraction level, last month’s 49.7 not only turned the ship in the right direction, but beat consensus expectations as well.  Another round of Chinese “hard landing” fears are beginning to subside again as many other Chinese economic measures have been rebounding, and if this release can traverse the 50 barrier, the Chinese economic fear mongers will have to search for different reason for everything to crash and burn.  A positive result may also boost the AUD/USD comfortably above the 0.94 level.

9:00 GMT             European Flash PMI Surveys

These surveys could reveal small falls for the manufacturing and service indices; however they are still likely to suggest that the economic recovery strengthened in Q2. The index fell back in May, and timely indicators, for example the German ZEW surveys, suggest that we could see further weakness this month. However, we continue to expect growth in the currency bloc to average 0.3-0.4% in Q2.

14:00 GMT          US Existing Home Sales

After having struggled to appreciate since September 2013, this figure finally reversed the falling trend last month by increasing 6k from its previous release; though it did miss its consensus.  Despite the fact that it didn’t live up to expectations a general trend change may be in order particularly considering both Housing Starts and Building Permits remained elevated near the 1M level.

Tuesday, June 24, 2014

9:00 GMT             German IFO Data

The market is expecting another fall in IFO industrial and business confidence for this month, after the May survey fell to its lowest level since December. It will be interesting to see if this survey has reacted to the ECB easing measures announced earlier this month, the ZEW survey, released last week, actually fell, which suggests that the ECB action has not been particularly well received by the largest economy in the currency bloc.

9:30 GMT             Bank of England’s Carney, Miles, Bean, and McCafferty Speeches

In the last couple of weeks there has been a notable shift in the BOE’s policy stance, from one of caution to one of pre-emptive action. Although inflation in the UK is running below the BOE’s 2% target, the BOE is still considering a rate hike, potentially as early as this year.   The timing of a rate hike is still uncertain, thus it is important to listen carefully to comments from the MPC, to see which members may be willing to vote for a rate hike in the coming months. While Charlie Bean is leaving the MPC, Carney, Miles and McCafferty are speaking today, and all of them tend to have a slightly hawkish bias. If this shines through during their comments today, GBPUSD could extend recent gains. Near term resistance is 1.7043 – the August 2009 high.

14:00 GMT          US New Home Sales

Much like Existing Home Sales, New Home Sales reversed a downward trend, but actually bested its consensus expectation.  The roll is expected to continue as consensus is firmly planted on an increase once again, and if both New and Existing Home Sales can live up to the hype, the interpreted dovishness from the Federal Reserve this past week could be staunchly reversed.

Wednesday, June 25, 2014

12:30 GMT          US Durable Goods Orders

This is always one of my favorite releases due to the expert’s seeming lack of ability to predict it.  Consensus is often very much offline on this measure, and it changes greatly heading in to it as well.  For instance, last month’s consensus started at 0.4% as the week began, but as subsequent US data became available during the week consensus dropped considerably down to -0.5% in the hours before the release.  The release ended up showing a 0.8% gain along with an upward revision of 0.3% to 2.9% for the previous month’s data.  So to recap, consensus started close to the actual, changed sentiment, and ended up being way off when all was said and done; high comedy.  For what it’s worth, consensus is at -0.3% heading in to the week, but don’t expect it to stay there or even come close to the actual figure when it comes to fruition which could create some significant moves for the USD.

Thursday, June 26, 2014

10:30 GMT          Bank of England’s Mark Carney Speech on Financial Stability Report

This is Mark Carney’s opportunity to lay out the BOE’s plans for how to cool the UK’s housing market. The BOE could follow the Swiss National Bank by asking the largest banks in the UK to boost their leverage ratios, but he may also point to a potential rate rise, like he did during his Mansion House speech.  Empirical evidence suggests that these central bank financial stability reports can have a big impact on equity markets. If the Bank stresses that the UK’s financial sector is in good shape and able to weather a cooling of the housing market then we could see a rally in UK stocks next week.

22:45 GMT          New Zealand Trade Balance

The bar is set up rather low for New Zealand this month as consensus expects this Trade Balance to be the lowest of the year so far at 250M.  Much of that expectation may be due to the perceived strength of the NZD as the Reserve Bank of New Zealand continues to march forward with monetary policy normalization.  However, during the month of May, which is what this Trade Balance measures, the NZD/USD fell from near 0.88 all the way down to 0.84 which could boost trade instead of hamper it.

23:50 GMT          Japanese Retail Sales

FINALLY we are going to be seeing an immensely important release that may have a direct correlation to the Bank of Japan and their decision on the future of Quantitative and Qualitative Easing.  This past week, the rumors that were floating around about the BoJ mulling an exit from QQE instead of a supplement became reality as they released an article detailing the tools of exit for the program.  In response the JPY crosses haven’t reacted strongly, maintaining their ranges, but Retail Sales is the dog and pony show that could change all that.  If consumers continued to be extremely adversely affected by the April 3% Sales Tax hike, the BoJ may have no choice but to mothball their exit strategy and queue up more stimuli.

Friday, June 27, 2014

0:05 GMT             UK Consumer Confidence

This is the most current data that will be released in the UK this week. The market is expecting another increase from 0 to 2, which would be the strongest reading since 2003, and could support further GBP strength.

9:30 GMT             UK Q1 Gross Domestic Product (Final)

This is a fairly quiet data week for the UK, and the final reading of Q1 GDP is unlikely to have a major market impact. Analysts expect no change and for the annual rate of growth to remain at 0.8%. However, the market could pay attention if the reading is revised higher, as economic data has maintained its strong momentum into the second quarter. We think that there is a slight chance of an upward revision and if this happens it could trigger further gains for GBP and UK stocks.

13:00 GMT          German Flash Consumer Price Index (June)

The market is expecting a slight pick-up in price growth in June, but overall it is expected to show that inflation remained subdued in the Eurozone’s largest economy this month. Any increase in prices is likely to be down to oil prices, while core inflation is expected to remain weak. The market is expecting annual inflation to rise to 1% from 0.9%, which is still well below the ECB’s 2% mandate. If German inflation is weaker than expected then this could weigh on the EUR.