Market snapshot ahead of FOMC: EUR/USD, S&P 500, USD/JPY

Market snapshot ahead of FOMC meeting

US CPI for the month of May cooled and sent the dollar sharply lower ahead of the FOMC statement and updated forecasts due at 19:00 (UK). For real-time coverage, read our US CPI report from Chief Strategist Nicholas Cawley.

On the face of it, this was good news as overall core and headline inflation indicators are below expectations on a yearly and monthly basis. Fed officials view services inflation and supercore inflation (services excluding housing and energy) as key indicators of inflation dynamics. More recently, officials have been concerned about monthly core CPI breaking the trend of 0.4% sequential prints, which has now materialized after April’s 0.3% and now May’s 0.2%.

Source: Refinitiv, Edited Richard Snow

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The S&P 500 has another excuse to break a new path

Ahead of the inflationary press, it’s fair to say that US equity markets have been cautious and consolidating around recent highs. Now that inflation is moving in the right direction again, markets have put a second rate cut on the table – giving stocks renewed strength.

The Fed is due to update its point projection of the likely Fed funds rate for 2024. In March, officials forecast three quarter-point rate cuts, but May’s inflation data could see that revised down to just two or, in an extreme case, one. However, the prospect of lower future rates has the stock trading above 5,500, another level of upside interest.

S&P 500 Daily Chart

Source: TradingView, prepared by Richard Snow

What happened to the euro during the shocking political developments?

The euro recovered against the dollar despite the weakness seen earlier in the week as markets learned of French President Macron’s snap election.

Despite the reactionary move, euro weakness remains, but is very much in the background and is likely to resurface the closer we get to the first round of French parliamentary elections on June 30. For now, markets are focused on US data and the upcoming FOMC meeting.

EUR/USD shot higher from yesterday’s close and almost absorbed the post-NFP sell-off. 1.0855 is the nearest resistance level followed by the swing high of 1.0916 and the resistance zone around 1.0950 – but this may only be achievable if the Fed cuts not one, but two, from its March outlook. Support is at 1.0795.

EUR/American dollar Daily chart

Source: TradingView, prepared by Richard Snow

USD/JPY retreats ahead of BoJ meeting

A weakening yen and unwanted volatility have plagued Japanese officials for some time, but the latest U.S. consumer price index data provided some respite. The Bank of Japan (BoJ) is due to meet in the early hours of Friday, where it is likely to focus more on unwinding its aggressive bond buying, allowing the yield on Japanese government bonds to rise freely above 1%. This can be seen as another step on the bank’s path to normalization in a way that is unlikely to destabilize the markets.

Japan’s economy has revealed difficulties, complicating a faster upturn cycle than we are experiencing. There remains some doubt about the sustainability of inflation above 2% over the medium term, and officials have said they want wage pressures to continue beyond the annual negotiation/review. A pledge to slow the pace of bond purchases potentially supports the yen, but that all depends on whether the market sees any reduction from the BoJ as enough to illicit a reaction.

USD/JPY is heading lower, targeting the 50 SMA and the psychological level of 155.00. Resistance at 157.70.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX