US markets closed very slightly lower on Wednesday, marking the first five-day losing streak for the Down Jones since February. Stocks maintained early gains after the Federal Reserve left interest rates at 0.25-0.5% and through Janet Yellen’s press conference, but prices slipped into the close as oil turned negative.

The US dollar was little changed in response to the Fed but has seen some sharp losses against the Japanese yen after the Bank of Japan opted to keep policy on hold. USD/JPY has broken below the key 105 handle. Any flicker of hope the BOJ might have had that the Fed would bail them out by raising rates, allowing the yen to weaken against the dollar, may have just been extinguished. Should the yen’s appreciation pick up pace again, the BOJ intervention risk increases. The ‘anti-currency manipulation’ tone of the last G7 summit probably means BOJ intervention won’t happen while USD/JPY is above 100.

The Fed is running into some credibility issues. The wash of hawkish talk from Fed members throughout May has been shown to be inappropriate in the context of the last payrolls report. The June meeting has seen the Fed, again, have to step back. Whilst the median dot plot estimate remains for two rate hikes this year, the shift of five members to just projecting just one, is a dovish development. FOMC participants also lowered their rate hike projections by 30 bp to a median 1.6% by the end of 2017.

Ms Yellen’s attempt to keep July as a ‘live’ meeting was unconvincing. In answering a question over whether a rate hike is possible at the July 26-27 meeting she said "It could be. It could be. It's not impossible.” The Fed’s belief that “gradual increases in the federal funds rate” are appropriate has been overshadowed by talk of a “loss of momentum” in the labour market and a reiteration of the need to “proceed cautiously”. The changes in the dot plot combined with Ms Yellen’s emphasis on caution takes July off the table for a rate hike, and more-than-likely September too.

The Brexit breather enjoyed by UK and European stocks looks set to turn into a gasp with a lower open expected on Thursday. The Federal Reserve specifically referred to Brexit as a risk to the US economy, upping the ante again for the ramifications of the vote on the global economy.

Brexit contagion does now to appear to be spreading beyond just the British pound. Sectors of the FTSE 100 sensitive to the UK economy, especially banks and homebuilders continued to be punished by investors ahead of the referendum. 

EURUSD – The euro rebounded from 1.12 on Wednesday, near the breakout area for the strong move higher on June 2. Greater support can be found at 1.11 from the May 30 low and 200 DMA, which could act as a magnet for lower prices.

GBPUSD – Cable bounced off 2-month lows near 1.41 on Wednesday to form an inside day pattern. The 1.40-1.41 price zone has been consistent support since prices plummeted this year, with the exception of the fall to 1.37. A topside breakout from the inside day pattern would suggest a near-term base.

EURGBP – The euro-Sterling pair has former three daily candles with long upper wicks suggesting selling pressure at 0.7950, the shoulder of the failed head and shoulder pattern. The failure of the pattern to meet its downside objective suggests this level will eventually be broken.

USDJPY – Dollar-yen has broken beneath key long-term support at 105 on Thursday morning. A close below opens up further weakness in this pair. Still scope for a false breakout to form a double bottom.

Equity market calls

FTSE100: to open 50 points lower at 5,911

DAX: to open 82 points lower at 9,524

CAC40: to open 42 points lower at 4,129


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