Global developments

President Biden will be speaking with Chinese leader Xi Jinping on Thursday amid fresh tensions over Taiwan. There could be a discussion over lifting of mutual tariffs which were imposed by the Trump administration as it would help tame inflation.

EU member states agreed to voluntary 15% cuts in gas consumption in winter. This would become mandatory in case of an emergency. Emergency can only be triggered by the European Council.  

We have the Fed rate decision late evening today. We see the Fed hiking rates by 75bps to 2.25-2.50%. What will matter more is whether the Fed stays focused on inflation or acknowledges growth concerns. This would drive markets expectations of future hikes and also terminal rate expectations. 

Price action across assets

US yields are higher by 2-3bps across the curve. 2s10s are at 24bps as the curve continues to remain inverted. Dollar has strengthened across the board.

Brent has eased to USD 104 per barrel. Stronger Dollar is weighing on commodities. Gold has dropped to USD 1716 per ounce. S&P500 ended 1.1% lower but futures were trading higher despite Alphabet and Microsoft earnings missing estimates. Microsoft however sounded optimistic about future sales. 

Domestic development

USD/INR

USD/INR got supported at 79.70 again yesterday. Today is the July exchange traded currency derivative expiry. We are likely to see Dollar demand at fix today.  

Cash Tom has been elevated and traded above 4% yesterday on INR liquidity stress. 1y forward yield ended 3bps higher at 3.16%. 3m ATMF implied vols fell another 10bps to 5.25% as narrow intraday ranges continue. 

USD/INR is likely to trade a 79.60-79.90 range intraday. 

Bonds and rates

Yield on the benchmark 10y dropped 2bps to end at 7.37%. The RBI stepped in to ease liquidity stress by conducting a 3 day variable rate repo auction for Rs 50000crs. 5y OIS dropped 3bps to end at 6.44%. 10y SDL cutoffs came in the 7.77-7.82% band.

Equities

Nifty dropped 0.9% yesterday to end at 16483 on weakness in IT stocks. SGX is indicating a flat open for the Nifty. Asian equities are trading with a negative bias ahead of the FOMC. 

Cross currencies

EUR/USD

Natural gas prices soared as Russia is likely to further constrict gas supply to Europe. Euro dropped on this news. 1.0115 support held well yesterday. The pair is expected to trade sideways in an intraday range of 1.0100-1.0180 levels.

GBP/USD

Pound too had dropped to 1.1960 but has recovered smartly and has bounced back above 1.20. Pound has been oscillating about the 1.20 mark. 1.2080-1.21 is proving to be a strong resistance for Sterling. The pair is expected to trade sideways in an intraday range of 1.2010-1.2090 levels.

USD/JPY

The Yen has weakened against the Dollar as US short term rates have stabilized and inched higher after Friday's drop. It is likely to trade around 137 mark heading into FOMC tonight. The pair is expected to trade sideways in an intraday range of 136.60-137.30 levels.

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