The feel of markets before the Fed meeting

It was the day before FOMC meeting and the markets are erring on the cautious side, with funds massaging exposures, amid a backdrop of a sub-expectations US consumer confidence print and likely frustrating fiscal negotiations in the wake of learning the GOPs’ fiscal plan. Other than major differences in starting points between unemployment benefits, a major sticking point is liability protections for business - Mitch McConnell has detailed he will not pass a bill through Congress that doesn’t include liability protection, while Senate minority leader Chuck Schumer said including this in the bill is a radical change.

The prospect of this bill passing through Congress by next week is hit and miss, but let’s not forget we then see Congress head to summer recess on the 8^th August-  so we’d want to see it passed by then or markets could price higher economic risk and volatility would pick up.  

Near-term risks to tech

Tech is finding sellers, with the NAS100 -1.3%, with some anxiety ahead of tonight’s Congressional Tech hearing and the post-market super earnings report on 

Thursday (Friday for Asia based traders), with c.40% of the NAS100 reporting in a short window. The US500 closed -0.7 and eyes key support into 3199, which has held the move on Thursday and Friday. Asian equities will be offered on the open, with futures down smalls, but it will be interesting to see if traders look to reduce exposure as the session wears on.

The risk off tone can be seen in fixed income, where we’ve seen a bid in US Treasury markets, with the long-end outperforming (US10s and 30s -4bp), which has led to a flatter Treasury yield curve. There will be a focus on the 2 to 5-year part of the Treasury curve through the Fed meeting, as this the area the Fed will likely target through Yield Curve control, although the prospect of the Fed suggesting this is something they are looking at right now is low. In fact, while the market expects dovish narrative it feels like the market is positioned for this, where we can take a simple sense check at moves in Treasuries and the fact that 1-year swaps are below zero.

Little is excepted from this meeting in terms of actual changes. What we are looking for are signs that major change is coming in September, or perhaps in the November meeting, which seems less likely in my view as the Fed try not to be political.  One has to ask, we know it’s coming, so why wait?

For the first time in a while, the USD is actually up on the session, albeit very modestly. EURUSD fell from 1.1774 to 1.1699 during yesterday gold dump, with gold futures firmly rejecting $2000, with the move lower causing an algo run in other markets, notably in USD short covering. We see EURUSD now sitting in the 28th percentile of this mentioned range and looking a little directionless. Gold (XAUUSD) has fared somewhat better, finding a good bid from 1905 (currently 1760), with price holding the 5-day MEA, which has defined the move from 16 July. We watch for a re-test of yesterday’s high of 1980, with a close in the futures above 2k clearly a sign the gold bulls have full control still. 

GBPUSD has worked well, with GBP the best performing major currency on the day and we see the pair hugging the upper Bollinger band and trending nicely here. 1.30 seems a realistic target for cable bulls, although it won't come today. We’ve also seen good outperformance from JPY and CHF, with USDJPY testing the 105-handle. USDCHF has taken out the March low, trading into 0.9152, where again the 5-day EMA contains rallies. A daily close above here would suggest this trend has been exhausted and choppy price action and consolidation is on the cards. 

Aussie CPI in play 

Eyes on AUD pairs today, with Aussie CPI coming in line with expectations at-1.9%QoQ -   consider the FOMC too and it could be a big day for the AUDUSD. For insight, daily implied volatility sits at 16.36% which isn’t overly high and offers a daily implied range of 0.7216 to 0.7119 (with a 68.2% level of confidence). By way of a genuine outlier and where I’d be very keen to work orders options market see a 10% probability of 0.7250 to 0.7075 in play, so any outsized moves into here seems a high probability mean-reverting levels to work into.