Markets cautious ahead of Fed meeting

Asian shares were a mixed bag this morning even after Wall Street closed at record highs overnight.

Caution will most likely remain a key theme as investors wait for this week’s FOMC meeting for clues on future monetary policy. Although the Fed is widely expected to leave interest rates and policy measures unchanged, all eyes will be on the statement language, updated economic projections and Chair Jerome Powell’s post-meeting press conference. The Fed has managed to persuade markets that the current jump in inflation is transitory. The question is for how long will they keep this mantra? 

Ahead of the Fed’s highly anticipated policy meeting, investors may direct their attention towards a slew of data from the United States which may provide more clues on how the economy is faring. 

Dollar on standby ahead of US retail sales & PPI 

The dollar has struggled for direction on Tuesday morning as market players adopt a defensive approach ahead of the US retail sales report, industrial production and PPI data later in the day. 

Given how the greenback remains sensitive to inflation expectations, the pending economic reports could trigger volatility ahead of the Fed meeting on Wednesday. Despite roughly half of the US population receiving at least one dose of the vaccine and the further reopening of the economy, retail sales are expected to soften in May after the flat number in April. According to a Bloomberg News survey, the headline figure is estimated to have contracted by -0.7% last month.

Given how US inflation has jumped to its highest level since 2008, there will be some focus on the Producer Price Index (PPI) for May. It must be kept in mind that the PPI often serves as a leading indicator for inflation and could provide clues on whether to expect further inflationary pressures down the road. Last month’s figure is forecast to remain unchanged at 6.2% year-on-year, but the core is expected to jump from 4.1% to 4.8% according to Bloomberg.

Looking at the technical picture, the Dollar Index is currently trading marginally below the 90.45 level. A daily close below this point could open a path back towards 90.00 ahead of the Fed meeting. 

Pound wobbles above 1.4100 

The British Pound entered Tuesday’s session tired and exhausted after UK Prime Minister Boris Johnson delayed lifting the remaining Covid-19 restrictions until Monday 19 July. Sterling has weakened slightly against every single G10 currency excluding the Australian Dollar and Norwegian Krone. With the final step of the Government's Covid-19 lockdown easing roadmap delayed by four weeks, the question remains whether this will impact the UK’s economic recovery from the pandemic. 

Earlier this morning, the UK’s Office for National Statistics (ONS) published data that showed the unemployment rate fell to 4.7% for the three months to April marking the fourth consecutive monthly fall in the jobless rate. Unemployment is expected to rise again once the furlough scheme ends in September.

Looking at the technical picture, GBPUSD is struggling to keep above the 1.4100 level. A breakdown below this point could open a path towards 1.4000 in the near term.

Commodity spotlight – Gold 

Gold prices collapsed like a tower of Jenga yesterday as jitters around the Federal Reserve outlining a path for scaling back emergency stimulus weighed heavily on the precious metal. Although prices later clawed back most of the losses, gold remains under pressure on the daily charts. 

Where the metal ends this week is likely to be heavily influenced by the Fed monetary policy meeting. If the central bank remains dovish and continues to preach the “transitory” mantra, this could inject gold bugs with fresh inspiration to challenge the $1900 psychological level. 

Alternatively, any hint of tapering discussions or presence of hawks in the meeting could deal a blow to gold prices. Such a development may drag prices back below the $1855 level.