European markets underwent another mixed session yesterday ahead of last night’s release of the latest Federal Reserve minutes, while US markets saw another record close for the S&P500 as traders adopted a fairly relaxed demeanour to the latest Fed minutes.

In them policymakers outlined a gradual approach to reducing the size of the central banks $4.5trn balance sheet, a process, which all things being equal they expected to happen this year. The process would be signalled beforehand with a series of caps, almost like a taper where the Fed would only allow a fixed US dollar amount of bonds and mortgage backed securities to run off every month, while reinvesting the rest.

There was also some more detail on how US policymakers viewed the bigger than expected slowdown seen in Q1. While most members viewed the slowdown as transitory there was broad agreement that it would be prudent to wait for further data to establish that fact before hiking again, though they did express the view that is what they expected would happen.

Only then would it be considered appropriate to raise rates again, which rather begs the question as to whether the market is correct in thinking that June is more or less a done deal for a rate rise, despite the somewhat patchy nature of recent economic data, while the Fed did highlight that risks to the forecast for real GDP were tilted to the downside. This would suggest that while markets may be thinking June is a done deal some on the Fed appear to be less certain, which more or less supports my thinking as well. 

Allowing for the fact that these minutes are a reflection of what we saw at the beginning of the month, and that we have three weeks until the June meeting, there still remains a significant amount of time for expectations to change. Next week should tell us more with the release of the latest ISM, ADP and US payrolls data for May.

Oil prices have gone on a bit of a run since the beginning of the month, largely in anticipation that OPEC and non OPEC members will announce, at the very least a nine month extension to the current production curbs, later today which has helped underpin the oil price since the beginning of the year.

The prospect at the end of last month that an agreement might not happen saw oil prices hit their lowest levels since the end of November, so anything short of a nine month extension is likely to fall well short of market expectations. There is also the prospect that even if we do get what markets expect oil prices will slide back anyway, given that we are already well over 10% above the lows seen at the beginning of the month.

The pound has had a rather difficult few days thus far this week its recent momentum coming to a halt, particularly against the euro where it has lost a significant amount of ground.

Today’s latest UK GDP revision is expected to confirm that Q1 growth slowed to 0.3%, though there is a chance of an upward revision to 0.4%. Exports are expected to be a particular weak spot along with domestic consumption, coming in at 0.5% and 0.3%, both lower than in Q4.

Services are also expected to be a weak spot, coming in at 0%, though business investment is expected to pick up from -0.9% in Q4 and rise 0.3%.

EURUSD – the key day reversal seen earlier this week, after the failure at the 1.1270 area could prompt a drift back down to the 1.1020 area in the short term. There remains significant resistance at the November highs around the 1.1300 area.

GBPUSD – the pound is starting to look a little soft while below the 1.3040 area, having failed four times to break above it. As such we remain vulnerable to the risk of a pullback towards the 1.2840 area. A consolidated move through 1.3050 has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EURGBP – we got the pullback to the 200 day MA and 0.8600 area yesterday, and this is a key support for further upside momentum. This week’s high at the 0.8675 area is a key resistance for a move towards 0 8720. A break below the 0.8600 area could well open a return to the 0.8540 area and the 50 day MA.

USDJPY – the 112.40 area remains the next key resistance level, which a failure to overcome could prompt a return to the 110.20 area, and last week’s low. Above the 112.40 area could well see a move back towards 114.00.

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