European bourses trade mixed ahead of the Fed announcement

It's Fed day, and European stocks are looking nervous. Bourses are trading mixed ahead of the Federal Reserve monetary policy announcement later today as investors question whether the Fed will start to indicate a move towards normalising policy. 

The Fed is not expected to adjust monetary policy today. However, there are growing expectations that Jerome Powell and company could start to gradually introduce the idea of reining in monetary policy. Given that the ultra-loose policy has helped drive stock markets to record highs, signs of this support being tapered back will inevitably result in a sell-off. 

The FTSE is outperforming its European peers, boosted by financials as the UK economy runs hot. UK CPI rose 0.6% MoM in May, up from 0.3% in April and double the 0.3% forecast. Annually inflation jumped to 2.1% in May, up from 1.5% and ahead of the 1.8% expected. Inflation is now above the BoE's 2% target. 

This data comes amid increasing concerns that the UK economy, like the US economy, is overheating as it rebounds strongly from the pandemic crash. The BoE, along with the Fed, have insisted that inflationary pressures will be temporary. The market is less convinced with the pound advancing and financials dominating the FTSE leader board.

Rising banking stocks are overshadowing weakness in the mining sector. Miners trade under pressure after Chinese factory orders, retail sales and investment data all missed forecasts. The soft data raised questions over the economic recovery of the world's second-largest economy and largest metal consumer.

Looking ahead, US futures are pointing to a mixed start with the Fed in focus. The direction that the market goes from here depends on the Fed and whether it starts to talk about policy normalisation. No mention of tapering could mean fresh record highs later today.

FX - USD subdued ahead of Fed

The US dollar is edging lower in subdued trade as few are sure enough to take on a big position ahead of one of the most hotly-anticipated Fed meetings so far this year. The meeting comes against a backdrop of surging inflation and a rebounding economy, but the labour market is the weaker link. 

Prices are rising, but consumer demand and job growth over the past two months have been slow. Should the Fed stick unwaveringly to its supportive stance, the US dollar could fall steeply. Meanwhile, any acknowledgement that taper talk needs to begin, and the greenback could shoot higher, with EUR/USD dropping to around 1.20.

Oil rises with stockpile data in focus

Oil prices are extending gains, with Brent rising for a fifth straight session, closing in on USD75, its highest level since 2019. Weekly gains are once again notching up as oil only seems to trade in one direction at the moment. Sentiment surrounding the black gold is already upbeat as economies re-open after the pandemic lockdown. Demand is outstripping supply, which is boosting the price of oil. Falling inventory data reflects recovering demand, providing the markets with supportive evidence to drive the next leg higher.

Oil inventories declined by 8.5 million barrels in the week ending 11 June, according to API data. Attention will now turn to EIA numbers due later today. Crude stockpiles have declined for four consecutive weeks.

WTI is looking comfortable above USD70. With oil demand expected to pick up in the second half of the year, prices could easily tick higher. The demand side of the equation looks strong. How high prices go depends largely on the next steps taken by OPEC+, which are largely unknown so far. That said, the case is certainly there for OPEC to continue removing supply constraints across the latter part of the year.

Gold's direction sits in the hands of the Fed 

Gold is clinging on to small gain after three consecutive days of declines. The precious metal came under pressure owing to a stronger US dollar on Tuesday, finding support at USD1,850. Gold has clawed back some losses, helped today by the softer tone surrounding the greenback. However, the next directional move sits in the hands of the Fed. Should the Fed give any hint that it could start to rein in its ultra-loose monetary policy, the US dollar could enjoy a boost, crippling demand for US dollar-denominated gold.

The yellow metal fell through its multi-month ascending trendline at the beginning of the week. However, it found support on the 50 EMA. Beyond here, the 200 EMA and the descending trendline dating back to August create an area of strong support, which will create a significant shift in the technical outlook if gold breaks through.