Financial market research and analysis

The US dollar consolidates gains as Federal Reserve (Fed) Governor Jerome Powell prepares to deliver his semiannual testimony before the House Financial Community at 10am today and he is expected to keep the possibility of an interest rate cut on the table despite the latest rebound in US nonfarm payrolls data. Powell will probably repeat that the Fed will ‘act appropriately’ to prevent the economy from slowing amid US – China trade tensions. US policymakers will likely question the Fed’s action plan beyond its July meeting, when it is expected to lower the interest rates by 25 basis points. Powell may well leave the door open for further rate cuts, without however precising when and by how much. This is the beauty of the ‘act as appropriate’ formula.

The FOMC minutes will be released later in the session.

Philadelphia Fed President Parker, a non-voter member of the FOMC this year, stated that he would keep the interest rates steady at the July meeting, as he doesn’t see the need for a rate easing just yet. Politicians on the other hand think otherwise. Kudlow, director of the US National Economic Council, insisted that the Fed should ‘take back’ the December rate hike. This is what President Trump has been explicitly asking for as well. On a side note, the mounting political pressure on the Fed’s policy may toughen Powell and his team’s job. Signaling more interest rate cuts at this point may put the central bank’s independency at jeopardy. This is one more reason for Powell to remain as ambiguous as possible on the future of the Fed rates.

The US 10-year yield climbed to 2.07%, as investors continued scaling back their expectations in favour of a less dovish Fed policy. There is potential for a further correction toward at least 2.20% level, if Governor Powell manages to rectify the market expectations at today’s testimony before the congress.

The US stock markets were mixed on Tuesday. The S&P500 and Nasdaq gained 0.12% and 0.54% respectively; the Dow closed 0.08% lower. The US stocks futures traded flat in Asia.

Japanese stocks were little changed in Tokyo, Hang Seng gained 0.41% in Hong Kong while Shanghai’s Composite remained flat. Australian stocks were better bid on news that US and Chinese officials had a ‘constructive’ discussion on the phone, with no further news on the trade deal or the next step of negotiations, however.

Elsewhere, the Bank of Canada (BoC) is expected to maintain the bank rate unchanged at 1.75% at today’s monetary policy meeting. Loonie consolidates gains at year-high levels against the greenback. But stagnant oil prices and increased US dollar demand could pull the Canadian dollar toward the 0.76 mark against the US dollar (USDCAD toward 1.32), the minor 23.6% Fibonacci support on June – July rebound.


Johnson won’t be allowed to suspend Parliament

Britain’s Parliament voted to prevent the UK’s next prime minister to suspend Parliament to push through a no-deal Brexit, which would have a dramatic impact on the country’s relationship with its European neighbours and its economy. Hence, Boris Johnson could no longer threaten to suspend parliament if he becomes the UK’s next prime minister.

On top, Labour party’s originally eurosceptic leader Jeremy Corbyn is not only backing another Brexit referendum to break the deadlock, but he also pledges to campaign in favour of Remain in case of a renewed vote. Corbyn tweeted ‘Whoever becomes the new Prime Minister should put their deal, or No Deal, back to the people in a public vote. In those circumstances, Labour would campaign for Remain against either No Deal or a Tory deal that does not protect the economy and jobs.’

And indeed, if the UK doesn’t like the deal proposed by the EU but doesn’t want to leave the bloc without a deal either, then not leaving at all may be a viable option.

Alas, Parliament’s opposition to suspension didn’t prevent the pound from extending losses. Cable fell to 1.2440 and the euro-pound tested the 0.90 mark, as the UK’s political scene became messier; the rising possibility of another referendum means more uncertainty for the market and investors continue jumpshipping the pound markets.

The UK has a busy economic agenda today. The industrial and manufacturing production are expected to hint at improvement in May according to a consensus of analyst expectations. The UK’s GDP may have reversed a two-month contraction and grown by 0.3% m-o-m in May. While encouraging data may cool down the selling pressure on the pound in the short run, any appreciation versus the US dollar will certainly be challenged before the 1.25 mark. A negative GDP read on the other hand would mark the third straight-month of contraction in Britain’s economy and would give a stronger case for a further sell-off in pound.

Despite Brexit shenanigans, investors continue purchasing UK’s blue chips at cheaper prices thanks to a tumbling pound. The FTSE 100 attracts dip-buyers into the 7500p support.