- USD and JPY gain as pre-FOMC nerves loom over the market
- GBP: Focus on whether UK can win a transition period deal at EU summit
- JPY: rally extends on political focus and general risk-off tone
- Gold and silver down ahead of Fed meeting
- Corn and soy becoming a pain trade for many recently established longs
- Crude oil remains stuck with rising US production being offset by robust demand
- US yield curve risks further flattening if Powell mentions a 4th rate hike
By Clare MacCarthy
Monday morning and the market's attention is fixed squarely on Wednesday's Federal Open Market Committee meeting where Jay Powell will make his debut as Fed chairman. Expectations ahead of the event include a near-certain rate hike and also that Powell will lean as hawkish as possible to optimise his room for manoeuvre in future policy setting.
"There's a bit of a risk-off tone in forex markets on the fear that as long as economic fundamentals remain strong that the Fed will want to hike as much as possible in order to give it some room to work with when it needs this," says John J Hardy, Saxo's head of FX strategy. The risk-aversion ahead of the FOMC sees the US dollar and the Japanese yen trending higher, with the latter getting an additional positive boost from Prime Minister Shinzo Abe's deepening corruption scandal. "We've also seen a pretty decent sterling rally as there's a lot of focus on Brexit this week, including a meeting and press conference by the British chief negotiator, David Davis and his EU counterpart, Michel Barnier, at some stage today," Hardy notes.
That said, the FOMC meeting remains the week's chief focus and is affecting the tone across all markets, including bonds. "The main risk is whether Powell will hike three or four times this year. If he actually mentions the possibility of a fourth hike there is the risk of further flattening of the yield curve and possibly even an inversion," says Althea Spinozzi, from Saxo's fixed income trading desk. The US yield curve is already close to its flattest since 2007, she points out.
Finally today, commodities, where gold and silver and behaving according to form and are softer ahead of the anticipated rate hike, a pattern they've followed in four out of the last five rate hikes – fall back before, then rally strongly afterwards, says Ole Hansen, Saxo's head of commodity strategy. "Post FOMC the attention is likely to return to political uncertainty with Washington shifting further towards protectionism to trade wars to lower growth," Hansen says.
Crude oil remains stuck with rising US production being offset by robust demand and high OPEC+ compliance, largely driven by Venezuela, and grains and soybeans are exposed to corrections after an eight-week long buying spree.
The Battle of Brexit grinds on this week. Pic: Shutterstock