21 September, 2016
A strong feeling of anxiety engulfed the financial markets on Wednesday as investors awaited the heavily anticipated Fed and BoJ central bank policy meeting decisions which have the ability to create explosive levels of volatility. Asian markets rallied this morning with the Nikkei lurching +1.91% higher as of writing after the Bank of Japan overhauled its policy framework. European markets were flat on Tuesday and this could rollover into the new trading day if market participants remain on the side-line ahead of the Fed meeting. Although Wall Street painted a similar static picture to Europe, some direction could be achieved if the Fed takes action or provides further clarity on US rate hike timings.
The praised stock market rally which repeatedly seized the limelight this year continues to display signs of exhaustion as the mixture of uncertainty and concerns over the global economy sour risk appetite. Depressed oil prices have heavily weighed on sentiment while the uncertainty ahead of the US elections could encourage investors to scatter away from riskier assets. With the ingredients of a bear market ripening by the day, stocks could be poised for a steep decline in the future if provided the correct catalyst.
Will the Fed take action?
The Dollar has been on a chaotic rollercoaster ride this month with prices recently displaying an incredible rebound as optimism grows over the Federal Reserve potentially raising US interest rates before the end of 2016. Although expectations that the central bank may take action in September has been thoroughly discounted following the uncertainty and soft domestic data, the glimmer of hope for December being a live meeting could keep the Dollar buoyed. Attention may be directed towards the FOMC meeting where Yellen could potentially tilt towards the hawks which could leave the door wide open for the Fed to break the trend of central bank caution before year end.
Bank of Japan keeps rates unchanged
Yen bears were unleashed on Wednesday following the Bank of Japans decision in setting a long term interest target in an overhaul of its monetary stimulus programme. The central bank left negative rates unchanged at 0.1% but discarded its base money target which was replaced with a yield curve control. Although the markets warmly welcomed this unexpected change in policy framework, questions may be asked on the sustainability of both the positivity and Yen selloff.
Japan remains entangled in a fierce battle with slowing economic growth while static inflation has left the Bank of Japan under noticeable pressure. If this policy overhaul fails to improve Japan’s situation in the medium term, then the Yen could regain ground as optimism fades over the central bank’s ability to revive growth.
Sterling gripped by lingering Brexit jitters
Sterling was left vulnerable to heavy losses on Tuesday with the GBPUSD sinking towards 1.294 after news highlighting the UK’s uncertain future relationship with the EU enticed sellers to attack. Sentiment remains bearish towards the Sterling with further declines expected as the post Brexit jitters haunt investor attraction towards the currency. It seems like investors are slowly digesting the impacts of Brexit to the UK economy with fears heightening over the potential long-term economic damages. Although the Bank of England decided to leave UK interest rates unchanged in September’s policy meeting, the bias towards further rate cuts in the future could keep the Sterling pressured.
From a technical standpoint, the GBPUSD is bearish on the daily timeframe as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support around 1.3000 could transform into a dynamic resistance which encourages a further decline towards 1.2900.
Commodity spotlight – WTI Oil
WTI Oil rebounded from six week lows on Tuesday with prices lurching towards $44.50 after comments from OPEC sparked discussions that a production freeze deal could last longer than anticipated. Regardless of the short term gains, Oil remains heavily pressured and could be destined for steeper declines as the oversupply concerns haunt investor attraction. Oils main focus will be the pending informal OPEC meeting which if concludes unsuccessfully could leave prices exposed to steep losses. From a technical standpoint, bears need to break back down below $44 to trigger a steeper decline towards $41
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