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The FOMC Is Set To Raise Its Benchmark Rate Today

By OFX

US President, Donald Trump and North Korean President, Kim Jong-un’s Singaporean summit made headlines around the world yesterday and lifted risk appetite in the markets. Although the meeting was short on ink-to-paper commitments, it seems to have opened doors to more friendly and open dialogue between the countries going forward, possibly laying the path to a denuclearized Korean peninsula at some point in the future. Although Kim is unlikely to lay down his nukes anytime soon the fact that the two leaders met at all is progress and further talks, possibly in Washington, could be on the horizon before the end of the year.

The US dollar traded higher through trade overnight edging upward and enjoying modest gains against a basket of major trading counterparts. With attention directed mainly to the Kim/Trump summit investors brushed aside elusive promises of denuclearization and were reserved in extending risk appetite moves. Instead, a stable CPI inflation report and somewhat hawkish commentary from Fed Chair Jerome Powel drove optimism leading into today’s FOMC rate announcement and saw the world's base currency tick 40 points higher against the JPY and force the euro back below 1.1750.

The Federal Reserve is set to raise its benchmark interest rate today at 2 pm. The statement will be followed by Chairman Jerome Powell’s press conference which will give guidance on future interest rate hikes. The committee hinted back in March that three hikes were coming this year, market participants now think that any sign of a hawkish Fed will signal a fourth hike is in the cards.

With no economic data released from Canada, the loonie will trade on demand. WTI crude oil prices reached a high yesterday of 66.69 and are currently trading at 65.98. Crude price is expected to remain elevated but not increase as sharply as in 2017, the IEA’s monthly report states. The agency expects 2019 demand to stay in line with this year's 1.4 million barrels per day.

As trade tensions between Trump and Trudeau remain elevated and oil prices edging lower short-term outlook for the loonie is for it to trade lower against its counterparts. The loonie weakened more than 0.2% versus the USD, on the back of broad greenback strength. USDCAD rose back above 1.30, ending the session trading around 1.3015 following recent rumors surrounding the next FOMC meeting, which helped to boost the USD.

From a technical perspective, USDCAD will need to break above first resistance around 1.3040 for it to reach March highs of 1.3125. On the downside, a break of 1.2910 (the 20-day moving average) should act as support, and if broken we could see the loonie strengthening towards 1.2850.

We can expect a holding pattern in the markets today ahead of tonight’s Fed rate decision. However, the key event this week will be tomorrows European Central Bank interest rate decision. There is a growing expectation we will see the ECB announce a reduction/taper of its Quantitative Easing program however the scale and timeline of the reduction is the real area of debate. Should the ECB decide to stop its asset purchases in September, then we can expect the euro to soar however an extension at a reduced rate possibly ending at the end of the year is the more likely outcome.

The one data-set of note yesterday was German ZEW Economic Sentiment figures which showed a further drop into negative territory to -16.1 from last month’s -8.2. EUR/USD trades at 1.1750 and EURCAD sits at 1.5300.

Sterling traded at the top and bottom of its daily range yesterday as the UK parliament voted on the EU Withdrawal Bill’s amendments that had been tabled by the House of Lords. The critical vote over giving parliament the power to decide the terms of Brexit should no agreement be reached with the EU was voted down by 324 votes to 298 however the government conceded MPs should have input in the decision making if we reach an impasse. Sterling rose on the win however the bill now heads back to the House of Lords for further debate/amendment, so the rally was short lived as uncertainty returned to grip the pound.

Data-wise, wage growth numbers (including bonuses) printed in-line with expectations showing an annualized 2.5% increase in pay. Today’s big event from the UK is CPI numbers with inflation expected to hold at 2.4% y/y with a gradual move back to the 2% target by year-end likely as sterling post Brexit-vote depreciation is washed out of the calculations. Cable trades around the 1.3350 handle.

The Australian dollar fell through trade on Tuesday edging back below the 0.76 U.S cent handle and touching intraday lows at 0.7566. Having found support early after a mostly positive NAB business confidence report and improved risk appetite on preliminary reports out of Kim/Trump summit appeared favorable the Australian Dollar touched highs at 0.7625 before moving lower. As investors absorbed news from Singapore and brushed aside the vague promises of denuclearization and peace, the AUD moved lower as attentions turn to the FOMC and its June rate statement.

Attentions now turn to commentary from RBA Governor Lowe and June consumer sentiment as drivers of domestic direction while the FOMC policy announcement remains the headline item driving the agenda today

The New Zealand Dollar remained relatively unchanged in overnight trade despite a resurgent Greenback. Opening this morning at 0.7006, the Kiwi sits at the lower end of its past 24-hour range. With little on the macroeconomic calendar to drive direction, the New Zealand Dollar remains flat against its counterparts with NZD/JPY and NZD/EUR mostly stable.

Across the Tasman, the Aussie was one of the worst underperformers during trade on Tuesday allowing the NZD to creep higher, edging through 0.9250. The domestic macroeconomic calendar continues to have little to excite moving into Wednesday. Traders now turn their attention to the Federal Reserve and the USD for momentum.