Fed on hold as expected – JPY pairs collapse after no action from the BoJ

Markets had been range trading ahead of the Federal Open Market Committee’s decision as there were doubts on how the recent terrible US unemployment report would affect the outlook in the US economy. With the decision to keep rates on hold and place quite a dovish statement with a few downgrades on growth and the pace of interest rate hikes. The US Dollar tumbled initially with EURUSD rising around 50 pips to around 1.13 on the decision and gold spiked 10$. EUR/USD is back below 1.13 with key resistance at 1.1305 and gold sustained higher, taking out resistance at 1305, giving scope for a test of 1325. Fixed income yields tumbled and US stocks fell as well on the weaker growth outlook with Utilities and Healthcare leading the drop.

EURUSD daily

20160616 EURUSD.Daily

Overnight, market volatility sustained higher as the Bank of Japan decided to keep rates on hold as expected, but the market was not satisfied, sending USDJPY down to levels not seen since August 2014 (current lows at 103.55) and other JPY pairs on the bid across the board as well. From our FX Orderbook in our Weekly Publication, we have hit out first target in USDJPY. The Nikkei tumbled, down more than 3% in the current session on back of the no-action from the BoJ.

USDJPY Weekly

20160616 - USDJPY.Weekly

In the European session, stock indices are in red, down around 0.5% on back of the risk-off sentiment from Asia. This morning the Swiss National Bank has kept rates on hold as well at -0.75% which seems to be appropriate under current market conditions, judging by the relatively low fluctuations in USDCHF since the Black Thursday last year. At 1030CET, we have the UK Retail Sales, where the Headline is expected to come out MoM/YoY at 0.3%/3.8% vs. 1.5%/4.2% prior. The Sterling and FTSE have both been trading lower ahead of the Brexit referendum next week and the FTSE has sustained below the 100-dat SMA, taking out 6,000 with next support at 5,850. Euro zone May Inflation will be released at 11CET, and market is expecting a MoM/YoY figure of 0.3%/-0.1% vs. 0.0%/0.1%.

At 13CET, the Bank of England will be out releasing rates. We expect no change in rates from current 0.5% and no change in asset purchases at 375B. The minutes from previous meeting is likely to reiterate the current stance of uncertainty given the unknown outcome of the Brexit referendum.

GBPUSD Daily

20160616 - GBPUSD.Daily

In the afternoon, US CPI and the Philly Fed will be interesting. The headline inflation figure is expected at 0.3% vs. 0.4% in April, while the Philly Fed is expected to come out at 1.1 vs. -1.8 in May. From the Housing Sector, the NAHB Housing Market Index is expected at 59 vs. 58 in May.

Overall we could see additional USD-weakness on back of the relatively dovish Fed, but see the JPY-move as an overreaction as while we are overall negative on USDJPY, we could see a rebound in today’s trading session.

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