Fed Likely to Stay Patient on Its Rate Path

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Fed may disappoint traders this week in its FOMC meeting, sell USD/JPY?


There are very small odds that FOMC may cut rates on Wednesday


When too many things are unpredictable at one time, USD/JPY should be the first currency pair in your mind.


This Monday looks seems to be a grim one for Asian traders. The US-China spat is still simmering. Trump and Ross over the weekend made it clear that no one should get their hopes up for a resolution at the G-20 at month's end. The Middle East is on tenterhooks after Saudi Arabia joined the US in blaming Iran for attacking its two tankers – charges that Tehran rejects. On the other hand, Hong Kong rose up in defiance, with as many as 2 million people taking to the streets to demand Carrie Lam’s resignation a day after she suspended the extradition bill.


With that as the backdrop, this week's procession of central bank decisions and pronouncements stands out as risk assets’ best hope for a turnaround. Even after Friday's good news on the US data front, sizzling retail sales could spark concerns that the results might push the Fed to remain patient.


There are very small odds for an FOMC rate cut when it announces its decision on Wednesday, but a July move is around 85% priced in. That means the focus will all be on the commentary and whether Chairman Powell is really ready to pull the trigger next month. Furthermore, looming this week are decisions from the BOJ, BOE, central banks in Indonesia, Taiwan, Norway and Brazil, and then there's the ECB's Sintra forum.


The current year of trading looks to be building towards a pivotal few days right before mid-2019. The G-20 meeting in Osaka on 28-29 June will be crucial, especially with markets betting so strongly that the Fed will cut rates on 31 July for the first time since 2008. Brexit, Italy, and the Middle East are also in play. With stocks and bonds close to record highs in a number of markets, investors may soon be scrambling for hedges and protection, and that would send implied volatility gauges back toward some of the highs hit in 2018.


Second half of 2019 will be a year of heightened volatility. While volatility promptly evaporated in 1Q, it's come roaring back since. Many of the concerns the market focused on then are still around and there have been new ones turning up too. If there is going to be fresh volatility moving forward, where will the break-out be focused? Will it be bonds as central banks step up easing, or disappoint some of those bets on rate cuts? Will stocks go back into meltdown mode, or will the FX complex finally wake as Brexit hits the pound again? Nothing is predictable for now.


Our Picks
EUR/USD – Slightly bearish

This pair will drop towards 1.1165 as Fed may not hint at any rate cuts in the near term.
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USD/JPY – Slightly bearish

Risk off may push this pair towards 108.10 this week.
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XAU/USD (Gold) – Slightly bearish.

We expect price to drop towards 1326 this week.
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U30USD (Dow) – Slightly bearish.

Index may further lower towards 25883 this week.
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