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While US markets did finish the day lower yesterday they did at least manage to close well above the  lowest levels of the day, meaning that we should be able to see a positive European open this morning, in a week which could well end up being another disappointing one for equity markets.

A few weeks ago a more dovish tone from the Federal Reserve prompted another leg higher pushing US markets to their highest levels this year, so it’s rather fitting that a renewed bout of Fed hawkishness should push the markets back down again, and the S&P500 to its lowest level since the 24th March.

Just over a week ago a number of Fed officials were bemoaning the fact that market expectations of when the Federal Reserve was likely to raise rates was significantly out of kilter in terms of what they thought the market should be pricing in. This was no better illustrated by the fact that expectations for a rate hike in June were being priced at a 4% probability at the time and have since moved up to 30%.

Cue the start of some, what can only be described, as some efforts at expectations realignment as a succession of Fed speakers articulated a particularly strident and hawkish case for talking up the prospect of the potential for a rate hike in June.

Having planted this seed earlier in the week, the resultant minutes from the April policy meeting acted as a further catalyst for investors to at least consider the possibility that the Federal Reserve might decide that the US economy might be able to absorb a 25 basis points move higher in interest rates, if not in June, then possibly July.

This belief was reinforced later in the day by further comments from Jeffery Lacker of the Richmond Fed who rather absurdly suggested that he could envisage the US economy absorbing at least 4 rate rises this year, in the process taking expectations management to improbable extremes.

It stretches credibility to suggest that the Fed would even consider three, let alone four rate rises at a time when the strength of the US dollar has been a significant concern, and most of the discussion circulating in central bank circles is the subject of “helicopter money”. Not to mention the fact that a good part of the US manufacturing sector is probably in recession. It should be noted that Mr Lacker doesn’t have a vote this year or next so he is free to say what he likes in the full knowledge its unlikely to ever happen.

William Dudley of the New York Fed is a voting member though and he did give the game away somewhat in comments made later in the day when he said that market pricing of Fed hike  odds was way too low prior to the minutes, which would suggest that the events of the past week or so have been predominantly a process of expectations realignment. He also suggested that a move in July was probably more likely given the proximity of the UK vote.

With the latest G7 finance ministers meeting due to start today in Japan, it is quite likely that the subject of currency levels and fiscal policy is likely to be high on the agenda, and while markets have settled down a bit since the G20 meeting in Shanghai at the end of March it remains clear that financial markets are still on edge, due to the lack of progress amongst policymakers with respect to fiscal reform.

This would suggest that for all the bluster yesterday it remains highly improbable that the Fed would look to hike rates in June, given the proximity of the UK referendum vote, just eight days later.

If they did so it would blow out of the water all the dire warnings of economic Armageddon from the IMF, OECD, World Bank, President Obama, Uncle Tom Cobley and all have been peddling to UK voters, and send a message that the world’s global central bank didn’t consider the risk of a UK “Brexit” “leave” vote as that big a deal at all.

Imagine the PR coup the UK “leave” campaign could have with that sort of a move.

EURUSD – we’ve seen a drift below the April lows at 1.1215/20, and with that we could well see a move towards trend line support at 1.1110 from the December lows, and even the 1.1030 area. We need to see a move back through 1.1430 to stabilise.

GBPUSD – the pound continues to remain supported, pushing through 1.4530 and above 1.4600 as we look to retest the highs this month above 1.4700, and close in on the 1.5000 area. Pullbacks should find support at 1.4520 and the recent lows at 1.4330.

EURGBP – having broken below the 0.7760 neckline support area the way looks clear for a move towards the 0.7500 area, on a break below the 0.7680 area. The 0.7770 area should now act as resistance.

USDJPY – the US dollar appears to be running into a bit of a wall around the 110.40 area for now. There is a risk we could well head back towards the 111.00 area, but for now the risk still remains towards the downside and a move back to the 106.00 area. We could head all the way back to the 113.00 area without undermining the recent downtrend, though that isn’t the preferred option.

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