EURUSD has been trading sideways for week now and yesterday’s data didn’t have much impact on the pair and it moved only slightly higher in yesterday’s trading. The US NAHB homebuilder sentiment index jumped to 59 in June versus 54 in May and 56 in April. It’s the highest since September. The single family sales index popped to 65 from May’s 58 (revised from 59), the best since 2005. The future sales index rose to 69 versus 63 (revised from 64). The index of prospective buyers rose to 44 was from 39. This is a solid beat, but it may not erode the gains in Treasuries much given the weakness in equities and the flight to safety nature behind some of the demand for bonds.
It’s not likely that there will be run-away moves in EURUSD as markets are likely to be on a wait and see mode going into the FOMC meeting. No policy changes are expected from the Fed, but the statement, economic forecast revisions and it has been argued that Yellen’s press conference should leave market participants with a stronger sense that a rate hike will come in October. Forecast revisions from the FOMC on Wednesday will be one of the key results of the meeting and will be used to assess rate hike probabilities for later in the year, as well as the likely trajectory. Despite the bounce in growth optimism in recent weeks, the FOMC will likely trim the official GDP estimates for 2015. But, it is also expected to increase the 2015-16 PCE chain price projections as energy prices have partly recovered from early-2015 lows. We expect a 0.1%-0.2% downward shift in the 2015 GDP and 0.4% boosts in the 2015 PCE chain price with likely additional upward nudge of 0.1% in the low-end inflation estimates for 2016. The core price central tendencies should remain roughly unchanged. The Fed may sidestep the usual downward bumps in the jobless rate estimates, given the flat jobless rate trend since February. The aggressive high-end near-term Fed funds rate estimates should be lowered as views converge toward the market expectation of a September or October start for Fed tightening. See our policy outlook page for a table of our assumptions for the Fed’s revised forecasts.
European court clears ECB’s OMT program. Draghi’s masterplan to safeguard financial stability and limit contagion finally won the backing of the European Court of Justice today, after a lengthy way through the courts in Germany and now the EU. The ECJ said in today’s ruling the OMT program doesn’t exceed the powers of the ECB, under certain conditions, which have been met. So the ECB can count on the OMT to help contain the fallout of a possible Greek default.
EURUSD has been range bound over the last few days. Upside has been limited by the resistance levels at 1.1326 and 1.1380 while the reaction lows from resistance have been higher than before. This has created higher daily lows and suggests upward bias but the resistance above has stood firm. Stochastics is indicating poor upside momentum while price is creating a bearish wedge. Therefore the line of least resistance should be on the downside over the coming days. This should bring the 1.0819 support into play. We’ve just seen a rally to 1.1326 resistance rejected which indicates weakness intraday. Today’s price movement is more likely range bound between 1.1152 and 1.1380. It is unlikely that EURUSD will have strong directional movements before FOMC meeting is over.
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