All eyes on the Fed to drive the dollar this week

Weekly Outlook Monday 13th June with Richard Perry, Market Analyst

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WHEN: Wed, 15th June 1900BST

LAST: Fed funds 0.25% to 0.50%

FORECAST: Fed Funds 0.25% to 0.50%

Impact: Treasury yields have been smashed in the

wake of the Non-farm Payrolls report and Janet Yellen

comments that have all but confirmed that a June rate

hike is not going to happen. Watch for the dot-plots

which currently suggest two hikes still in 2016. If this

remains the case then the potential for a July hike is

much greater (September is difficult in front of the

Presidential election), the dollar and Treasury yields will

rally whilst equities could also sharply decline. The

press conference will also be a key indicator for the

rates outlook.

Key Economic Events

Date Time Country Indicator Consensus Last

Tue 14th Jun 09:30 UK CPI (core) +0.4% (+1.3%) +0.3% (+1.2%)

Tue 14th Jun 13:30 US Retail Sales (MoM) +0.3% +1.3%

Wed 15th Jun 09:30 UK Unemployment / Average Weekly Earnings (x b) 5.1% / +2.1% 5.1% / +2.1%

Wed 15th Jun 15:30 US EIA crude oil inventories -3.2m

Wed 15th Jun 19:00 US FOMC monetary policy 0.25%/0.50% 0.25%/0.50%

Thu 16th Jun 01:00 Japan BoJ monetary policy -0.1% -0.1%

Thu 16th Jun 08:00 Switzerland SNB monetary policy -0.75% -0.75%

Thu 16th Jun 12:00 UK BoE monetary policy +0.50% +0.50%

Thu 16th Jun 13:30 US CPI (core) +1.1% (+2.2%) +1.1% (+2.1%)

Fri 17th Jun 13:30 US Building Permits / Housing Starts 1.15m / 1.15m 1.12m / 1.17m

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1 N.B. Please note all times are BST (GMT+1), data source Reuters

Macro Commentary

Should the Federal Reserve raise rates this week? Yes, as monetary policy needs to be normalised and the longer

the Fed’s maintains emergency monetary policy, the longer the economic malaise will last (artificially propping up

markets, misallocation of capital etc.). Will the Fed raise rates this week? No, as markets would be completely

blind-sided causing a significant shock of selling pressure. Ultimately, the Fed warns the market when it is going to

move and following disappointing Non-farm Payrolls and Yellen’s recent speech, according to CME Group

FedWatch the probability of a hike at Wednesday’s meeting has fallen to just 2%. The Fed has almost become

beholden to the market when it comes to its rate hikes. However, the interest factor could be with the dot-plots

again. What if the dot plots continue to say two hikes in 2016? Could there be a significant swing back in favour of

the dollar again? Could Yellen use her press conference to signal that July is the meeting to move? If not in July,

then it may only be one this year, in December. The proximity of the September FOMC meeting to the Presidential

Election (on 8th November) would be deemed too political. The market is currently saying 58% probability for

December (July is 25%). With recent data concerns this sounds about right, but in the coming months there will be

bouts of dollar strength and dollar weakness according to good/bad data, leading to little overall dollar direction.

Must Watch for: FOMC monetary policy

US 2 year Treasury yield

Will FOMC dot plots keep 2 hikes and spike yields back higher?


Foreign Exchange

The dollar has been rallying despite the continues downside pressure on Treasury yields. Is this sustainable?

The market is taking this move as risk-off and the dollar tends to perform better when risk appetite is lower.

However, market concern is highlighted by the outperformance of the yen, which remains the market’s safe

haven currency of choice. I do not see the dollar as being able to sustain its strength with the June FOMC

looming. A change to the dot plots to two hikes in 2016 would put the dollar under pressure again. However it

could also be a chaotic week for forex majors with three other central banks set to announce monetary policy in

less than 24 hours. After the Fed kicks off on Wednesday evening, the Bank of Japan announces early on

Thursday, followed by the Swiss National Bank early in the European session and finally the Bank of England at

1200BST on Thursday. All are expected to stand pat, but that will not stop the volatility, especially with the

threat of Brexit added into the mix. The Bank of Japan is struggling with the strengthening of the yen and

inflation that is weakening again so there is an argument for further easing on Thursday, but it remains unlikely

with the BoJ set to update on its inflation expectations at the July meeting. Also, the BoJ would want maximum

impact from the move and a Brexit threat may reduce its efficacy on the yen.

WATCH FOR: Monetary policy decisions dominate the week with the Fed, BoJ, SNB and BoE all

announcing. Add in Brexit volatility and inflation for both the UK and US and it could be interesting.


2

FX Outlook

GBP/USD

Watch for: Under increasing pressure following

the break of $1.4330

Outlook: The technical breakdown below

$1.4330 key support has re-opened the

March/April lows around $1.4000/$1.4090. The

momentum is increasingly negatively configured

momentum indicators reflect the downside

pressure and unless the bulls can regain

$1.4330 the outlook will remain negative. With

the Brexit vote less than two weeks away there

is a fear of downside risk not having been

factored in yet. The breakdown of support

reflects the increased fear and if the momentum

accelerates the crucial February support at

$1.3833 could be tested.

EUR/USD

Watch for: Volatility with the Fed but the range

play to continue

Outlook: There is still a lack of real direction on

the dollar despite the near term recovery being

seen. Pulling back from $1.1415 has set up for a

stronger dollar in the near term but there is

significant uncertainty over how the FOMC

meeting will pan out and the direction the dollar

will take afterwards. The long term pivot band

$1.1050/$1.1100 remains key with $1.1215 also

supportive. Long term resistance remains around

$1.1465. Momentum indicators suggest a

choppy range play will continue.


Equity Markets

Bond yields across the world are under pressure as the threat of stagnant growth and deflation remain key

factors for investors. With the Fed likely to put off another rate hike, markets are beginning to look with great

concern at a bigger picture of struggling corporate revenue growth, earnings expansion that has been driven by

cost cutting. Is this an environment to be owning equities with markets still at elevated valuations? Add in the

fears over a Brexit and risk appetite is very much under pressure. The DAX is a market that is eared towards

international growth and the constant underperformance as the markets come under pressure is a concern. The

accelerating sell-off is now approaching a test of the key May support around 9737, a break of which would

change the outlook from a sequence of higher lows and higher highs, to a lower high (at the June high of

10,365 which is below the April high at 10,474) and lower low. That is classic Dow Theory and suggests that

further weakness would be seen in due course. However for now the support at 9737 remains intact. The FTSE

100 is seemingly managing to outperform the DAX, with the market being helped through its exposure to oil.

However, the key multi-month support at 6036 is once more back in range and a closing breach would

complete a huge top pattern. Wall Street has though been the standout performer of the major indices and has

only just pulled back from multi-month highs. It has a long way to go back towards its equivalent support at

2022, but watch for the near term pivot at 2085 this week as a breach would signal further correction.

WATCH FOR: Continued weakness on Treasury yields would be negative, whilst the FOMC will also set

the tone for Wall Street. Brexit volatility will also be an issue for FTSE 100.


3

German DAX

Watch for: Continue to see this as a range play,

but the May lows is under threat

Outlook: Will the selling pressure drive the DAX

lower to confirm a breach of 9737 this week?

This is the key May low and a close below the

support would be a significant medium to longer

term outlook shift. Already an uptrend since

February has been broken. There are a few

technical indicators to watch that might give an

early warning signal. In the past three months,

the 89 day moving average has been a good

gauge and but support at 9835 has been broken,

and the RSI which has previously managed to

bottom around 40 has also broken down. A

closing breach of 9737 opens 9500 and a

negative outlook.

S&P 500

Watch for: The pivot support at 2085 is key for

the near term outlook this week

Outlook: A correction finally seems to be setting

in after three weeks of consisting but creeping

gains. The concern is that corrections after a

period of painfully slow upside can often be far

quicker as markets can take the escalator up but

the lift back down again. That means that a pivot

band of support at 2085 which has been in place

for the past 6 weeks is key this week.

Momentum indicators remain positively

configured and could actually do with a healthy

correction, but preferably with a nice orderly

move. A move below 2085 could quickly result in

the 2022 lows coming back into play.

Index Outlook


Other Assets: Commodities & Bonds

The gold price had been showing signs of a near term correction on Friday morning, however that was before

declining risk appetite spiralled lower and the flight to safety kicked in. This comes ahead of the Federal

Reserve meeting this week which if the Fed takes an even greater dovish shift, could pull the gold price higher

towards the key resistance at $1303. Gold would thrive is a low risk, dovish Fed environment. However, do not

forget silver too which is also in sharp recovery mode. The underperformance that was driven through the dollar

strength of May is being unwound quickly and we now find the precious metals outperforming all of the forex

majors since June began. The oil price correction may have now set in, but this looks to be technically driven

rather than a sustainable correction. It should provide another chance to buy on support this week.

The decline on global bond yields to record levels reflects the huge concerns that traders have over the

prospects for global demand and growth. Remarkably, the German 10 year Bund yield is now within sniffing

distance of going negative. As the BoJ continues to plough into the JGBs market, the Japanese 10 year yields

are also falling to record lows in negative territory. Furthermore, even the US which is apparently on a

tightening cycle of monetary policy has the 10 Year Treasury yield at multi-month lows. The bond markets show

concerns and are decidedly risk off.

WATCH FOR: Fed monetary policy will be key, but also watch for the BoJ too driving sentiment.


4

Gold

Watch for: Resistance could come under

pressure if the momentum is maintained

Outlook: A near 6% rally in the past six

completed sessions has quickly turned around

the outlook. The price action on gold this week

could be the difference between a breakout and

another trading range continuation. The FOMC

decision could be key (it depends upon how

dovish the FOMC is), but I expect this range to

continue. Daily chart momentum remains strong

but there is now the considerable band of

overhead supply from the key turning points of

March, April and May to overcome. I am still

expecting another peak to come under the

$1288 high, but if this is breached then there

could be a move on $1303 this week. Support is

between $1234/$1248.

Markets Outlook

Brent Crude oil

Watch for: A short correction finding support

$48.65/$50.50 remains another chance to buy

Outlook: Near term corrections remain a chance

to buy on oil and after a couple of days of

consecutive correction we find Brent Crude

coming back to this sort of opportunity. The

strong momentum indicators are just now looking

to unwind which should help to renew upside

potential for the next leg higher. There is the

initial band of support between $48.65/$50.50

which would be an ideal buy-zone this week,

whilst more considerable support comes in at

$47.40. The support of the 5 month uptrend

comes in between $45.90/$46.90 this week but I

would not expect the correction to go that far.



5

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Economy & Finance

All eyes on the Fed to drive the dollar this week