Dollar Softens ahead of FOMC, Fed to Release New Economic Projections

Dollar is back under pressure against and focus turns to FOMC meeting. NASDAQ managed to break 10k level for the first time, and closed up 0.29% at 9953. But DOW and S&P 500 ended lower. Mixed trading in stocks carry on in Asian session. Yen continues to ride on pull back in treasury yields and stay as the strongest one for the week, followed by Swiss Franc. On the other hand, the greenback is so far the worst performing, followed by Aussie and then Canadian.

Technically, it’s still unsure how far the record run in NASDAQ could extend to. But as it goes, let it go. Some forex pairs are sort of preparing for a pull back in risk sentiment, but near term levels are not broken yet. We’ll continue to monitor 74.40 minor support in AUD/JPY, 0.6856 minor support in AUD/USD, 79.95 minor support in CAD/JPY, 1.3572 minor resistance in USD/CAD. To a lesser extent, these levels will be watched too, 135.95 minor support in GBP/JPY, 1.6453 minor resistance in EUR/AUD, 1.0744 support in EUR/CHF.

In Asia, Nikkei closed up 0.15%. Hong Kong HSI is down -0.04%. China Shanghai SSE is down -0.54%. Singapore Strait Times is down -0.01%. Japan 10-year JGB yield is up 0.0007 at 0.020. Overnight, DOW dropped -1.09%. S&P 500 dropped -0.78%. NASDAQ rose 0.29%. 10-year yield dropped -0.0055 to 0.829.

Fed projections to reveal the perceived strength of economic rebound in H2

FOMC meeting is the major focus for today and there is no doubt that Fed will keep policy unchanged. Federal funds rate target will be held at 0.00-0.25% while the QE-without-limit program will be maintained. A major focus will be on the first update to economic projections since last December. In particular, the expected strength of recovery in H2 would be revealed, as well as the time frame for the economy to go back to pre-crisis level. Given the strong May non-farm payroll report, there might be some pleasant surprise to the unemployment projections. Meanwhile, inflation forecasts could be off the mind of traders for now.

Fed’s view on the economy will be heavily tied to its projected path of emergency stimulus exit. It’s still too early to call for an end of the stimulus for now. But eventually, Fed needs to lay down the conditions, and possibly the time frame. Unemployment rate has improved while stock markets are at record high, while economy is gradually reopening. Fed might hint on ending some of the lending program at least. This would be the second focus.

The third focus would be on any information regarding “yield curve control”. WSJ reported over the weekend that officials are debating on whether to reinforce low-rate pledge with yield caps at the long-end. That could be seen as a way to keep long-term rates low, and help the economy to transit as Fed moves out from the current emergency measures at a later stage. Fed Chair Powell might reveal some information on his ideas.

Here are some suggested readings:

Dollar index might draw support from 95.8 projection level, on oversold condition

Dollar index dropped further to close at 96.32 yesterday, mainly due to decline in USD/JPY this time. More pressure is likely to be seen today as EUR/USD looks set to resume recent rise through 1.1383 temporary top. while USD/JPY is still on track to 107.08 support and below.

For now, considering oversold condition in daily RSI, we might seen some support around 100% projection of 102.99 to 98.27 from 110.55 at 95.83 to contain downside. Break of 97.06 minor resistance would bring recovery back towards 55 day EMA (now at 98.89). But firm break of 95.83 might bring further downside acceleration through 94.65 support.

Australia consumer sentiment rose 6.3%, back around pre-COVID levels

Australia Westpac-Melbourne Institute consumer sentiment rose 6.3% to 93.7 in June, up from May’s 88.1. Confidence is now “back around pre-COVID levels”, and has recovered “all of the extreme 20% drop” seen after the pandemic exploded. It’s been buoyed by the country’s “continued success” in bringing the coronavirus control and further easing of restrictions. The index is now just 2% below the average between September and February.

Westpac said that the survey would “boost confidence” around the RBA board table as they meet again on July 7. RBA Governor Philip Lowe has been clear that he’s having a wait-and-see approach on monetary policy. Negative rate is “extraordinarily unlikely”. “An earlier than expected recovery in the economy will ease pressure on that current entrenched policy stance”.

Elsewhere

New Zealand manufacturing sales rose 0.0% in Q1. Japan PPI slowed to-2.7% yoy in May, below expectation of -2.4%. Machine orders dropped -12.0% mom in April, worse than expectation of -8.6% mom. China CPI slowed to 2.4% yoy in May versus expectation of 2.6% yoy. PPI dropped further to -3.7% yoy, versus expectation of -3.3% yoy. Looking ahead, US will release CPI and oil inventories, in addition to FOMC.

USD/JPY Daily Outlook

Daily Pivots: (S1) 107.39; (P) 107.97; (R1) 108.32; More..

USD/JPY drops to as low as 107.38 so far today and intraday bias remains on the downside. Fall from 109.85 is seen as the third leg of the pattern from 111.71. Break of 107.08 would target a test on 105.98 support. On the upside, above 107.42 minor resistance will turn intraday bias neutral first. But risk will stay mildly on the downside as long as 109.85 resistance holds.

In the bigger picture, USD/JPY is still staying in long term falling channel that started back in 118.65 (Dec2016). Hence, there is clear indication of trend reversal yet. Break of 105.98 support would extend the down trend through 101.18 low. However, sustained break of 112.22 should confirm completion of the down trend and turn outlook bullish for 118.65 and above.

Economic Indicators Update