No major negative impact from latest hawkish Fed speak, BoE up next
In yesterday’s US session, the major US stock indices have traded sideways in general with the more technology heavily weighted Nasdaq 100 that managed to squeeze out a minor gain of 0.03% to print another all-time fresh closing high of 1,4274 for the second consecutive session. In addition, the small cap Russell 2000 outperformed with a return of +0.33% to close at 2,303 while the S&P 500 and Dow Jones Industrial Average trailed behind with minor losses of -0.11% and -0.21% respectively.
Dallas Fed President Kaplan and his Atlanta counterpart Bostic have echoed similar hawkish views on the current state of heightened inflationary pressures and advocated a faster time frame to withdraw liquidity in the financial markets via tapering the Fed current pace of $120 billon bond purchases per month, in contrast with Fed Chair Powell’s testimony to Congress on Tuesday that reiterated his stance that the current inflationary pressures are transitory in nature.
The most important aspect of the recent Fed speak that includes last Fri’s St. Louis Fed President James Bullard comment on bringing forward the first Fed funds rate hike earlier to 2022 has not seen any major adverse impact on risk assets so far, even the average prices of high-yield junk bonds with lower credit ratings have traded near its 52-week as indicated by the SPDR Bloomberg Barclays High Yield Bond ETF . In today’s Asia mid-session, Asian stock markets have been steady as well, Nikkei 225 +0.05%, Hang Seng Index +0.07%, China CSI 300 -0.19%, ASX 200 -0.07% and Singapore Straits Times Index +0.26%.
Up next will be Bank of England (BoE) monetary policy decision out later today at 1100 GMT, consensus is set at no change on its policy interest rate at near zero and maintain its quantitative easing programme at 895 billion pounds. However, in the last meeting BoE has mentioned that it will slow down its weekly bond purchase from 4.4 billion pounds from 3.4 billion pound between May and August. Hence, it could be a forward guidance signal that tapering its round the corner even though BoE governor Bailey stated that the weekly reduction in bond purchases was an operational decision rather than a change in the stance of monetary policy.
Given that last month’s inflation data in UK has shot above BoE’s annual 2% target where CPI rose to 2.1% year-on-year in May. Thus, market participants will be paying close attention to the tone and nuances of BoE’s communications later. From a technical analysis, the recent plunge of -340 pips as seen in the GBP/USD has managed to stall at a key medium-term zone of 1.3810/3670 which also coincides with the 200-day moving average at the start of this week. So far it has staged a bounce of +164 pips to close yesterday’s US session at 1.3961, thus a further recovery from here may signal the start of a potential multi-week bullish impulsive up move, the intermediate resistance to watch ahead of today’s BoE will be at 1.4085.