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Japanese and Australian Markets Continue Winning Streak, Eyes on U.S. Federal Reserve's Monetary Policy Decision
Japanese stocks continued their impressive rally, with the benchmark Nikkei 225 index surging by 1.47% to close at 33,502.42. This marked the fifth straight session of gains, highlighting the market's resilience amid ongoing economic challenges. Additionally, the Topix index climbed 1.31% to reach its highest level this year, closing at 2,294.53.
One of the key contributors to Japan's market success was the notable rise in Toyota's shares, which reached a 16-month high. The surge came after the automaker's shareholders voted to retain Akio Toyoda as the company's chairman, indicating strong support for the management's strategic vision.
In Australia, the S&P/ASX 200 displayed a positive trajectory, advancing by 0.32% to end at 7,161.7. This marked the third consecutive daily gain, highlighting the sustained momentum in the Australian market. Investors worldwide are eagerly anticipating the U.S. Federal Reserve's monetary policy decision, which is expected to have a significant impact on global markets. The recent release of U.S. inflation data, showing a slowdown in price pressures during May, has fueled optimism among investors. This has raised the possibility that the Federal Reserve may choose to hold off on raising interest rates during their policy announcement.According to the consumer price index, May's year-over-year increase was 4.0%, marking the slowest annual rate since March 2021. Traders have subsequently increased their bets that the Federal Reserve will keep rates unchanged on Wednesday, deviating from the trend of consecutive rate hikes witnessed in previous meetings. CME Group's FedWatch tool currently indicates a probability of over 95% that the central bank will maintain the target rate between 5% and 5.25%.
EURUSD
Softer US consumer inflation figures reaffirm market expectations of a pause in the Federal Reserve's tightening cycle. The headline CPI rose modestly in May, with the annual rate slowing to its lowest level since March 2021. However, the year-on-year inflation rate of 4.0% remains twice the Fed's target, leaving the possibility open for a 25 basis points increase at the July FOMC meeting.These factors support elevated US Treasury bond yields and lend some strength to the US dollar. On the other hand, influential European Central Bank (ECB) officials' recent hawkish comments suggest that the Eurozone still has a way to go before raising borrowing costs, despite a decline in the headline Eurozone CPI to 6.1% in May.
ECB President Christine Lagarde indicated the likelihood of additional interest rate hikes due to the absence of clear evidence that underlying inflation has peaked. This could provide support for the euro and the EUR/USD pair. Traders are cautious and await the outcomes of the upcoming FOMC decision and ECB meeting.
Looking at the technical aspect, the EUR/USD pair did not behave as expected following the release of the CPI data, and there was low volatility in the market due to the focus shifting towards the upcoming Fed meeting. It is important to highlight that the next significant resistance level can be found around the 200-day Moving Average (MA) on the 4-hour chart, aligning with the upper Parallel of the descending long-term bearish trend. Additionally, the DXY (US Dollar Index) reached its 200MA and its lower parallel
GBPUSD
In April, the UK's Gross Domestic Product (GDP) showed 0.2% growth compared to a previous contraction of -0.3%, but both Industrial Production and the Index of Services disappointed during the same period. Despite this, the GBP/USD pair remains attractive to bullish traders due to positive employment and inflation figures reported by Britain. Additionally, the Bank of England (BoE) has shown indications of potential rate hikes.
On the other hand, weak US inflation data, as reflected in the Consumer Price Index (CPI) and Core CPI figures for May, weighed down the US Dollar and supported buyers of the GBP/USD pair.
Although the initial reaction to the UK data did not significantly impact the Cable pair traders, the focus on the upcoming Federal Reserve (Fed) meeting limited the pair's hawkish sentiment. If Federal Chair Jerome Powell delivers an unexpectedly positive tone or if the economic forecasts are optimistic, it could prompt a reversal and bring back sellers.
GBP/USD is currently gaining bullish momentum in the short term, supported by favorable fundamentals. The pair has potential support levels at around 1.2590 and 1.2535, while resistance levels are located at around 1.2625 and 1.2670.
JPYUSD
The latest United States inflation data shows a slight increase of 0.1% compared to expectations of 0.2% and a previous rate of 0.4%. The annualized Consumer Price Index (CPI) has also softened to 4.0% instead of the anticipated decline to 4.1% from the previous release of 4.9%. The decline in gasoline prices is a significant factor behind the decrease in headline inflation.Furthermore, the core CPI, which excludes the impact of oil and food prices, maintained a monthly pace of 0.4% and an annualized rate of 5.3% as expected.
Given the easing labor market conditions and ongoing contraction in factory activities, the market closely watched the inflation data. The deceleration in inflationary pressures is expected to allow Federal Reserve Chair Jerome Powell to maintain a neutral interest rate policy this time.JP Morgan Asset Management analysts anticipate that the Fed will keep the federal funds rate unchanged. However, they expect the post-meeting statement and the dot plot to emphasize that this inaction should be seen as "skipping a rate hike" rather than signaling an end to monetary tightening.Aside from the Federal Reserve's policy decision, market attention will also be on the Bank of Japan (BoJ) and its interest rate decision. Economists at OCBC Bank believe it may be too soon to expect any policy shift during the upcoming Monetary Policy Committee meeting. Nonetheless, they are in favor of BoJ policy normalization due to broadening inflationary pressures and wage growth in Japan.From a technical analysis perspective, the USD/JPY pair is currently trading within a price range as market participants await the Federal Reserve (Fed) meeting and its decision. The pair maintains a significant correlation with the US 10-year Treasury yield, and yesterday's positive movement had an impact on the pair's dynamics. However, it's important to note that upcoming events scheduled for this week could influence the market outlook and potentially lead to changes in the current analysis.
XAUUSD
Soft consumer inflation figures released from the United States reaffirm market expectations of a pause in the Federal Reserve's rate-hiking cycle, providing some support to the price of Gold. In May, the Consumer Price Index (CPI) showed minimal growth, with the year-on-year rate slowing to its lowest level since March 2021. However, the annual inflation rate of 4.0% remains twice the Fed's target, keeping hopes alive for further tightening of monetary policy.The markets are still pricing in the possibility of an additional 25 basis point increase at the July Federal Open Market Committee (FOMC) meeting, leading to a sharp rise in US Treasury bond yields. This acts as a tailwind for the US Dollar and a headwind for Gold, which lacks yield. However, cautious trading prevails as market participants wait for key central bank events.The Fed's policy decision is expected to be announced later in the US session, and it is widely anticipated that the Fed will maintain its current stance. Traders will pay close attention to Fed Chair Jerome Powell's comments during the post-meeting press conference for any indications of future rate hikes. The focus will then shift to the European Central Bank (ECB) policy meeting on Thursday, followed by the Bank of Japan's (BoJ) monetary policy update on Friday. In the meantime, if risk sentiment remains weak, it may continue to support the safe-haven appeal of Gold.
Gold prices have remained within the same range for the past month. The outcome of today's Federal Reserve (FED) meeting could potentially determine the future direction of the precious metal. On the 4-hour chart, the 200-day moving average (200MA) stands as a significant resistance level, while on the daily chart, the 100-day moving average (100MA) is providing support for the price of Gold.
DAX40
European markets opened with mixed performance as investors awaited the U.S. Federal Reserve's monetary policy decision. The benchmark Stoxx 600 index showed a 0.23% increase, with sectors experiencing both gains and losses. Auto stocks rose by 0.7%, while travel stocks dipped by 1%.In the UK, April's economic growth met expectations, with a 0.2% increase driven by the services sector.Entain, the owner of Ladbrokes, saw a significant drop of 10.0% and landed at the bottom of the STOXX 600. This decline followed the announcement of its acquisition of Poland-based sports betting operator STS Holdings for £750 million ($946 million).Traders have largely priced in the expectation of the Fed keeping rates within the 5.00%-5.25% range later in the day. However, there is a 63% chance of a rate hike in July, according to the CME FedWatch tool.
The European Central Bank is set to hold its policy meeting on Thursday, and it is widely anticipated that rates will be raised by another 25 basis points in an effort to tackle persistent inflation.The DAX index started the session positively, aiming to reach the last resistance level at 16,320. Global equity sentiment remains positive, and there is a significant slowdown in inflation levels. Investors should closely monitor the next resistance level at 16,800, as it could pose a significant challenge for further upward momentum. On the other hand, if the index experiences a decline, support is expected around the 15,900 level.