Markets Tentative Ahead of FOMC Decision

Analisi Giornaliera - 29/07/2015

Federal Reserve Set to Make Interest Rate Decision and Release Statement Late in the Session


Although unexpected to make any groundbreaking decisions that signal a shift in policy, traders are paring risk ahead of tonight’s FOMC decision and statement. Monetary policy is forecast to remain on hold but the statement could provide hints on the upcoming September decision and whether the Central Bank will pursue a gradual rise in the key rate.

US Home Prices Stall

The latest reading of the S&P Case-Shiller Home Price Index composite of 20 major US cities showed that prices surprisingly fell month over month, contracting by -0.20% according to the seasonally adjusted figures. Annualized price gains held constant at 4.90% missing expectations of a 5.60% climb. More concerning than the surprising slide in the monthly figure was the latest revelations that American home ownership rates dropped to the lowest level since 1967 despite median American rents rising to a record $803 per month as American housing continues the transition from a buyer’s market to a rental economy. Moreover, the dive in consumer confidence figures underlines that the economic recovery remains elusive for most Americans after confidence tumbled from 99.8 to 90.9. Stocks managed to snap a three-session losing streak with the uptick in crude oil spurring a rally in equity benchmarks with the Dow Jones Industrial Average closing up 1.09%.


UK Quarterly GDP Advances

The preliminary gross domestic product figures released from the United Kingdom yesterday showed that second quarter growth topped the prior quarter, expanding at a 0.70% pace in-line with expectations. While annualized GDP decelerated to 2.60%, matching forecasts, the Bank of England is nevertheless preparing markets for the possibility of higher interest rates near the beginning of next year. Policymakers have been increasingly dropping hints that rates might rise near the end of the year as the UK economy expands at the fastest pace among Group of Seven peers like the United States which continue to lag. A faster than anticipated uptick in inflation could bring about the more hawkish policy shift sooner rather than later especially as the Bank of England prepares for the first tightening cycle in almost a decade. The Pound is trading slightly weaker as the US dollar starts to reverse higher ahead of tonight’s decision.


RBNZ Jawbones Kiwi Dollar Lower

In remarks overnight, Reserve Bank of New Zealand Governor Graeme Wheeler discussed the need for the New Zealand dollar to weaken further to account for the drop in commodity prices and inflation which continue to weigh on the economic outlook. Although New Zealand is currently estimated to be growing at a 2.50% annualized pace, falling export prices for key staples such as milk are negatively impacting the pace of economic momentum. In order to maintain and restore growth to full potential, the RBNZ has warned that further easing might be applicable, especially in light of the inflationary outlook. Dropping rates further might help to spur inflation and return the consumer price index to targeted levels while helping to devalue the New Zealand dollar further. According to policymakers, the local currency remains elevated and overvalued relative to fundamentals. While the NZDUSD initially moved lower, the pair has since rebounded to the upside.


USDCNH Equidistant Channel Technical Pattern

The Chinese Yuan continues to gain ground against the dollar as China’s policymakers struggle to contain the growing risks from the financial sector while liquidity continues to drain out of the system. Reduced foreign direct investment and tumbling output are contributing to a situation in which demand for the Yuan is continuing to rise, beckoning further monetary easing from the People’s Bank of China to stave off further strengthening in order to keep exports competitive globally. The USDCNH is currently trending lower in an equidistant channel formation exhibiting a strongly bearish bias. Ideal positions taken at the upper channel line target the lower channel line with any move above the upper channel line indicative of a potential channel-based breakout to the upside to be accompanied by renewed volume and momentum.


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