Financial market research and analysis

The UK unemployment rate fell to 4.5% in May from 4.6% printed a month earlier. The average weekly earnings grew at the slower pace of 1.8% year-on-year, versus 2.1% a month ago. Slower wages growth, combined to higher inflation, is expected to weigh on UK households’ purchasing power. The slowdown in the real wages growth should, at its turn, ease the inflationary pressures in the coming months, as expected by the Bank of England (BoE) Governor Mark Carney.

The GBPUSD extended losses to 1.2812 on BoE-hawks’ disappointment following the bank’s chief economist Andy Haldane and the Deputy Governor Ben Broadbent’s speeches yesterday. Surprisingly, both members gave no hint of an imminent BoE rate hike. Instead, Broadbent told the Press and Journal newspaper that he is not ready to support a rate hike just yet.

As a result, Cable stepped in the short-term bearish consolidation zone and the reversal could encourage a further downside correction toward the 100-day moving average (1.2765). The key support stands at 1.2687 (major 38.2% retracement on March - May rise).

The FTSE 100 is better bid on the back of cheaper pound, firmer oil and commodity prices. The positive momentum could help the FTSE navigating north through the grey zone of 7370 – 7430p, which includes the 100 and 50-day moving averages respectively.


WTI crude hit $46, gains at risk

The WTI crude (+2.00%) traded at $46 as the American Petroleum Institute (API) announced that the US crude inventories fell by 8.13 million barrel last week.

The more official EIA data is due today and analysts expect a decline of 3.2 million barrels in inventories last week.

Lower US stockpiles and a softer USD could underpin the current positive development toward $46.50/46.55 (50-dma & major 38.2% retrace on April - June decline) and $48.05 (50% retrace).

However, the medium term view remains comfortably bearish due to difficulties to drain the global supply glut. In this respect, Saudi said to have surpassed its production limit.


Fed’s Yellen testifies

The US investors’ sentiment was hit by news that President Donald Trump’s son exchanged e-mails with Russians and may have a finger in his father’s victory in 2016 election. Political squeezes interfere with the government’s agenda and the fading hopes for Trump's fiscal reforms dent the appetite in the US markets. The US dollar is softer across the board, the US 10-year yields retreat to 2.35% and the US stocks lack momentum.

The Federal Reserve (Fed) Chair Yellen delivers her semiannual testimony in front of the Congress today and Thursday. In her speech, Yellen is expected keep her policy outlook unchanged, which involves one more rate hike before the end of the year and the balance sheet normalisation.

Yesterday, Fed’s Brainard said that the Fed should start reducing the size of its balance sheet ‘soon’. The term ‘soon’ is a source of confusion and provides a window of opportunity for speculation. Lack of further detail on the size and the timing of the Fed’s portfolio unwind could keep the US dollar under pressure.


Fed balance sheet could trigger a domino effect

The Fed's balance sheet normalisation is expected have an impact comparable to less than 25 basis points raise in interest rates. Yet, the message that will be delivered to the market, combined with speculations that the European Central Bank (ECB) will also start considering a form of tapering, should keep the sovereign yields sustained across the G10 money markets.


Euro continues its journey toward 1.15

The EURUSD advanced to 1.1489 on broad-based USD sell-off. Call options are supportive of the positive trend above the 1.1400/1.1425 region at today’s expiry. There are no option barriers at 1.15, stops are eyed above. Surpassing the 1.15 level should pave the way toward 1.1616 (2016 high).


Gold recovers on softer US yields

Gold recovered to $1’220. Softer US yields could encourage a further correction to $1'226/1'230 (minor 23.6% retracement on June - July decline / 200-day moving average). Support is eyed at $1'200/1'195 area.


BoJ accelerates bond purchases to fight back the yield rally

The USDJPY traded at 114.50 on Tuesday, before the US yields and the dollar came under pressure. The pair gave back gains in Tokyo mainly due to the decline in the US dollar.

Unlike the softer US yields, the Japanese yields were again on the rise. The Bank of Japan announced to increase its 3-5 year maturity bond purchases in an attempt to halt the escalation in the yields. The 115.00 level is still on radar, as the BoJ decidedly fights back to maintain the yen and the Japanese yields at lower levels. The support to the USDJPY's June – July positive trend is seen at 113.15 (minor 23.6% retracement), 112.80 (200-day moving average) and 112.33 (major 38.2% retrace).


Bank of Canada to raise rates

The Bank of Canada (BoC) is expected to increase the overnight rate by 25 basis points to 0.75%. Governor Poloz has been signaling the move since at least a month and the USDCAD trades at its lowest levels since September 2016. The accompanying statement should reveal whether or not this would be the beginning of a gradual rate normalisation process. Any dovish disappointment could send the USD back to the 1.30 level against the Loonie.