Markets are increasingly sensitive to anything that could impact on the Federal Reserve’s thought process for the July FOMC meeting. In the last two sessions, there have been some dramatic swings in pricing for a 50 basis point rate cut. When centrist Williams suggested the Fed gets ahead of the curve, a massive shift was seen, with dollar selling and gold sharply higher. With the New York Fed subsequently dismissing Williams’s speech as academic (followed by a solid Michigan Sentiment reading on Friday), traders completely unwound their positioning. The spike to what was around 70% probability of 50bps cut on CME Group FedWatch is now back around 20% (where it was on Wednesday). EUR/USD and Gold saw similar moves higher with subsequent retracements. To sum up, traders are nervous about how to position themselves. The importance of this FOMC meeting at the end of the month is huge and with the Fed members now into their “blackout” period, markets will only have the economic data to go from. There is nothing of note today, so it could be a relatively quiet session. The oil price could be worth watching as traders react to the increasing geopolitical tensions in the Persian Gulf, initially higher today, but can the potential supply shock outweigh the impact of slowing demand growth.
Wall Street closed lower on Friday with the S&P 500 -0.6% at 2977, whilst there is a degree of support forming for US futures today which are +0.2%. Asian markets have been cautiously lower, with the Nikkei -0.2% and Shanghai Composite -1.1%. European markets are taking a mixed look to early moves, with FTSE futures +0.1% and DAX futures -0.1%. In forex, the recent swings on USD have left a mixed outlook early today, with the underperformance of JPY and CHF pointing to a mild improvement in risk appetite today. In commodities, we find some support forming for gold after the big retracement drop on Friday, whilst oil is over 1% higher.
It is a quiet start to the week on the economic calendar, with no major data due. However, it is certainly worth keeping an eye out for the Bank of Japan Governor Kuroda’s speech at 1600BST for any policy implications given the yen strength and trend of dovishness engulfing major central banks now.