All eyes were on the Federal Reserve yesterday as stock markets saw lacklustre trading in advance of the meeting.
Equity markets posted modest losses as some traders wanted to exit their positions ahead of the update from the US central bank.
The Fed kept interest rates on hold at 0.0-0.25%, which met economists’ forecasts. The Fed will continue to purchases treasuries and mortgage-backed securities at its current rate of $80 billion per month and $40 billion per month respectively. Jerome Powell, the head of the US central bank, basically said that interest rates will remain at or near their current level until at least 2022. Mr Powell stated that rates will stay close to zero until the US is on track to achieve maximum employment.
The US central bank released some economic predictions. This year the US economy is tipped to contract by 6.5%, while in 2021 and 2022 it will see growth of 5% and 3.5% respectively. By the end of 2020, the unemployment rate is anticipated to be 9.3% but then it is expected to drop to 6.5% next year and slide to 5.5% in 2022. In 2023, the level is projected to be 4.1%. It is worth remembering the pre-pandemic unemployment rate was 3.5%, so one gets a scale of how the labour market has been impacted by the health emergency. The economic projections are based on the idea the recovery will begin in the second half of this year and it should last two years.
Seeing as the Fed made it clear they will be keeping rates close to zero for a few years, US stocks were initially pushed up by the announcement, but the bullish move didn’t last, and the Dow Jones and the S&P 500 closed down 1.04% and 0.53% respectively. The NASDAQ 100 was already slightly in positive territory before the update from the Fed. The tech-focused index closed off the highs of the session, but it still registered a gain of nearly 1.3%.
Stock markets in the Far East are in the red. The Nikkei 225 is down over 2%. It would appear the dire outlook for the US this year has weighed on sentiment, and European indices are pointing to a lower start.
The US dollar was in the firing line as it dropped to a three-month low on the back of the Fed update, but it did manage to finish off the lows of the day.
Gold traded at a level last seen over one week ago as a mixture of a weaker US dollar and a mild uncertainty in stocks encouraged dealers to snap up the metal. Silver pushed higher too, while it was another bullish run for copper as it hit a level last seen in January.
Earlier in the day, the OECD warned the global economy could shrink by 6% in 2020. In addition to that the body warned the contraction could be 7.2% in the event of a second wave of Covid-19. On Monday, the World Bank predicted the world economy would shrink by 5.2% this year. In the past few days, traders have been hit by three stark warnings about growth.
Oil had a fairly volatile session yesterday as it sold off due to high US inventory concerns for much of the session, but then it rallied in the evening. The API report from Tuesday showed that stockpiles grew by 8.4 million barrels. The EIA update revealed that oil and gasoline inventories rose by 5.72 million barrels and 866,000 barrels respectively The US economy has been reopening lately so one would imagine that demand for oil is on the rise, but the inventory data suggests otherwise.
The Italian industrial production report for April will be posted at 9am (UK time) and economists are expecting -40%, which would be a tumble from the -29.3% registered in March.
At 1.30pm (UK time) the US jobless claims report will be posted and the level is tipped to be 1.55 million. Keep in mind that last week’s reading was 1.87 million. At the same time, the PPI reports will be published. The headline reading and the core reading are expected to be -1.2% and 0.4% respectively.
A Eurogroup meeting will take place today and traders will be listening for any comments in relation to the EU rescue plan. It was proposed that €500 billion will be dished out as grants to areas that have been worst impacted by the health crisis, but countries like the Netherlands and Austria are not in favour of such a high level of grants, as they would prefer loans to be issued.
EUR/USD – has been pushing higher since early May and if the bullish run continues it might target 1.1495. If there is a pullback, it might find support in the 1.1200 region.
GBP/USD – is in an uptrend and it is now above the 200-day moving average at 1.2680. A further rally might run into resistance at 1.3000. A break below 1.2680 might find support at 1.2409, the 50-day moving average.
EUR/GBP – has been in an uptrend for one month and if it retakes 0.9054, it might target 0.9239. A move lower might find support at 0.8831, the 50-day moving average.
USD/JPY – has been driving lower in the past few sessions and a break below 107.08 might put 106.00 on the radar. A rebound might run into resistance at 108.41, the 200-day moving average.