Financial market research and analysis

The inflation in the UK rose by 0.3% month-on-month in May, versus 0.2% expected by analysts. The headline inflation rose to 2.9%y/y from 2.7% and the core inflation advanced to 2.6% from 2.4% printed a month earlier.

The rising inflationary pressures in the UK have become a serious headache for the Bank of England (BoE) over the past year. Although the political turmoil in the UK may meaningfully hurt the UK’s economy under the Brexit circumstances, the BoE’s hands are tied due to the rising inflation.

Governor Mark Carney will be obliged to write an open letter to the government if the inflation in the UK rises above the 3% level. A situation he would preferably avoid, even though he has a good explanation to defend his position.

The solid inflation data revived the BoE-hawks before Thursday’s monetary policy meeting and could halt the pound’s decline temporarily. The 100-day moving average is expected to lend support to Cable at 1.2640. Still, the upside potential is seen limited due to political uncertainties following the unexpected outcome on Thursday’s general election. Decent GBPUSD-put options trail below 1.2870 at today’s expiry.

The FTSE opened upbeat as UK homebuilders (+0.95%) and financials (+0.71%) lead gains in London. Energy stocks (-0.04%) lacked momentum at the open, although the oil prices consolidated on yesterday’s recovery.

The WTI crude recovered to $46.85 yesterday amid forecasts showed that the US stockpiles may have decline by 2.25 million barrels last week, versus +3.3mio printed a week earlier. The EIA data is due tomorrow. Improved sentiment in oil markets could encourage a further recovery to $46.90 (minor 23.6% retrace on May – June decline) and $47.88 (major 38.2% retrace).

The DAX (+0.52%) and the CAC (+0.50%) reversed Monday’s losses, as the EURUSD eased to 1.1185 against the greenback.


Any Fed outcome could be positive for US stocks

The Federal Reserve (Fed) starts its two-day meeting today. The Fed is widely expected to raise the interest rates by 25 basis points for the third time since December. The US dollar and the US yields are steady, as the 25bp hike is almost fully priced in. The accompanying statement will be the major highlight: traders will focus on any details regarding the Fed’s balance sheet normalisation plans and the timing of the next rate hike. The Fed could pause its rate hike marathon until the end of the year, given that the Trump-reflation trend is waning and the new government’s massive spending plans and fiscal reforms appear to be delayed.

The G10 currencies traded mixed against the US dollar; the antipodeans (AUD +0.21%, NZD +0.38%, CAD +0.21%) recorded light gains in Asia, as the US yields remained subdued before the Fed meeting.

Gold traded below the critical $1’265-support (major 38.2% retrace on May – June rise). The stagnant US yields could limit the downside potential in gold. Dip-buyers are seen at $1’260 (50-day moving average), $1’255 (50% retrace) and $1’245 (61.8% retrace).

The US futures traded in the green. Dow Jones futures strengthened by 45.00 points, as the NASDAQ 100 and S&P500 futures gained 15.25 and 5.75 points respectively.

The fact is, stock investors have so far refused to unwind their long positions in expectations that the Trump policies would resurface sooner rather than later. Given the unconditional enthusiasm in the US stock markets, the Fed meeting could be perceived positively from any point of view. A hawkish Fed would underpin enthusiasm on solid US recovery and lift the stock prices, while a dovish Fed would suggest a longer period of softer yields and cheap liquidity and encourage increased allocation in the stock markets. As a result, if stock traders are willing to seek reasons to stay invested in stocks, there will be plenty of them.


AUDUSD: double top formation

The AUDUSD had a double top formation at 0.7565. The lack of positive momentum in the USD and the US yields is supportive of a further rise to the critical resistance at 0.7588 (major 61.8% retrace on March – May decline).

Softer Fed expectations could help the AUDUSD breaking the 61.8% Fibonacci resistance and encourage a renewed strength toward the 0.7750/0.7800 mid-term resistance. Failure to surpass the 0.7588/0.7600 area should suggest a short-term correction to 0.7515 (200-day moving average) and 0.7488 (32.8% retrace).