Daily Market Outlook, June 15, 2022

Overnight Headlines

Asian equity performance is mixed this morning. Chinese indices are up but most markets are down again. That follows another set of falls in European and US stocks yesterday as markets remain very nervous ahead of tonight’s US monetary policy update. Chinese equities may have been supported by better-than-expected data releases for May industrial production and retail sales, which suggested that economic activity may have bottomed out during the month.

Today’s US Federal Reserve policy announcement seems set to add to the recent spate of aggressive tightening moves by central banks. A third consecutive interest rate increase tonight is seen as a virtual certainty by markets but there has been considerable debate in the last few days over the likely size of the move. Fed policymakers have been signalling their intention to make a second consecutive 50 basis points increase today ever since their last meeting in May. However, on the back of last Friday’s higher-than-expected May CPI inflation print, markets are now speculating about a bigger rise of 75 or even 100bp. That would be an uncharacteristic move as the Fed likes to flag its policy changes well in advance but cannot be ruled out. Of almost equal interest will be what is said of the plans for future policy meetings. Since the May meeting Fed policymakers have also been indicating that rates are likely to rise by a further 50bp in July. That seems at the very least likely to be confirmed today but there is a chance of a signal that the Fed may opt for a larger increase.

Additionally Fed policymakers updated economic forecasts, particularly the ‘dot plot’ of interest rate projections, will provide indications of their policy intentions for September and beyond. The last ‘dot plot’ update in March showed a median expectation amongst policymakers of rates reaching about 1.875% by the end of 2023 (its potential level after the July meeting) and rising further to a peak of 2.875% by end 2024. Expectations now are that the Fed will raise this year’s end rate, possibly to 3.0% and project further increases in 2024. That would send a signal that another 50bp increase in September is possible and crucially that rates are likely to be pushed above their estimated ‘neutral rate’ of 2-3%. Overall, the market is braced for a hawkish policy message from the Fed with the uncertainty being just how hawkish.

According to Reuters, The European Central Bank's rate-setting Governing Council will hold an unscheduled meeting on Wednesday morning to discuss the recent sell-off in government bond markets, a spokesperson said. Bond yields have risen sharply since the ECB promised a series of rate hikes last Thursday and the spread between the yields of Germany and more indebted southern nations, particularly Italy, soared to its highest in over two years. "The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions," an ECB spokesperson said.

EURUSD Bias: Bearish below 1.07 Bullish above

GBPUSD Bias: Bearish below 1.26 Bullish above.

USDJPY Bias: Bullish above 127 Bearish below

USD/JPY retreats after push to 135.60 in early Asia trade
Low limited to 134.87 however despite Chief CabSec Matsuno jaw-boning BOJ action
Japanese importers remain in buy the dip posture
Japanese exporters on the offer above 136, market chatter of M&A activity also noted
Firm US yields also supportive, Treasury 2s @3.369%, 10s @3.426%
BoJ operations keep JGB yields pressured

AUDUSD Bias: Bullish above .7200 Bearish below