FOMC minutes, sterling and WTI in focus

Wednesday’s main risk event and potential market shaker will be the release of June’s FOMC meeting minutes, which investors may closely scrutinize for clues on rate hike timings in the second half of 2017.

With the Federal Reserve speakers repeatedly sending hawkish signals, the pending Fed minutes could follow a similar school of thought, potentially supporting the Greenback. Markets will also be paying very close attention to see if the minutes suggest that the recent fall in inflation is ’transitory‘ with suggestions of higher rates still on the cards, unless the US economy decelerates.

Investors will also be seeking insight over how and when the central bank plans to reduce its $4.5 trillion balance sheet, as the precise timing still remains a riddle. While the US Dollar could find support if Fed hawks make an appearance this afternoon, the upside may face headwinds as market participants maintain a cautious approach ahead of Friday’s NFP data.

From a technical standpoint, the Dollar Index remains pressured on the daily timeframe.  The first relevant resistance level can be located around 96.50 with bears eyeing 97.00 as a secondary level to attack.

Sterling pressured from all directions

It’s quite thought provoking how today marks exactly ten years since the Bank of England raised UK interest rates. The last time the BoE’s monetary policy committee raised rates by 25 basis points to 5.75% was on 05 July 2007. Since then, the financial crisis which followed compelled the central bank to cut interest rates to 0.5% over the following two years. Rates were cut once again to 0.25% in August 2016, in an effort to shield against the impacts of Brexit.

As the second half of 2017 gets underway, the negative impacts of Brexit can be reflected in the British Pound and domestic economic data. Uncertainty over Brexit has exposed the Sterling to heavy losses and this continues to fuel inflation. With rising inflation outpacing wage growth, consumers are feeling the pinch and as such, has raised questions over the sustainability of the UK’s consumer driven economic momentum. Political risk at home has also added to the messy mix while uncertainty over the Brexit talks continues to encourage sellers to attack the Sterling at any given opportunity.

There have been discussions over the Bank of England raising UK interest rates in the coming months, with BoE governor, Mark Carney’s hawkish remarks last week almost subliminally positioning markets for a surprise. While raising rates may control inflation, it could impact business confidence and even pressure consumers further. It will be interesting to see if the BoE surprises by raising UK interest rates in August and how the markets react.
From a technical standpoint, the GBPUSD is a risk of depreciating lower if bears can break below 1.2850.

Commodity Spotlight – WTI

WTI Crude was exposed to heavy losses on Wednesday after reports of Russia opposing any further supply cuts attracted a school of sellers to attack. It is becoming clear that the fundamental reason why oil prices have remained depressed for a prolonged period lies in the high global inventories. With the increasing output from Nigeria and Libya threatening to obstruct the efforts made by the rest of the group to rebalance the markets, oil could be in store for further pain moving forward. Price action currently suggests that the unyielding dynamic of the markets have disappointed investors who were initially optimistic about OPEC’s output cuts providing a solution. WTI Crude could be vulnerable to further downside if bears break below $46.