Expect continued US equity and Dollar weakness ahead of the FOMC statement

Last week’s market action

Yesterday’s session saw a continuation of the recent theme of US Dollar weakness with the Dollar Index hitting 8 week lows. More disappointing economic data from the US, this time in the form of Consumer Confidence, saw expectations of a dovish Fed Statement tonight drive further weakness for the greenback. T-Notes also slid lower yesterday in a move that surprised us. Ultimately the data and the US dollar behaviour should have lead to yields pushing lower as rate hike expectations get pushed further out in time. But the opposite happened, indicating that perhaps there is mixed opinion on whether the Fed is likely to be dovish or hawkish tonight. Crude oil had another range bound session as it continues to consolidate with the six week upward trend line defining the low of the day. The S&P had a mixed session with initially further downside following Monday’s losses and helped along by some geopolitical risk on the rumours that Iran’s military had stormed a US cargo ship. But once these rumours were dismissed and following the initial downside triggered by the consumer confidence data, the index bounced strongly. This appears to be more Fed addicts pricing in a prolonged dovish central bank.

Today’s View

The most interesting move of the morning has been a technical break lower for the Bund. Between 8am and 11.00am the bund dropped a full 100 ticks. This was triggered due to a technical break of Friday’s low, but also a technically uncovered Bobl auction and more generally marginal improvement on the Grexit situation. Outside of this it has generally been a quiet morning as traders await the two biggest events of the week. 13.30pm sees the US deliver the preliminary reading for Q1 GDP and at 19.00pm the Fed deliver their monetary policy statement. EURUSD has managed to sneak up above the 1.10 handle and approaches the consolidation high of the last two months at 1.1064. We are nervous about the US GDP data. As previously reported here, the US economic surprise index is the most negative since 2009 and this does not bode well for today’s key data. We expect a figure well below 1% and so our strategy today follows the same theme we have had all week which is Dollar and equity weakness. In terms of T-Notes we are hedging ourselves to a degree by switching to a short bias for today to follow the trend from yesterday’s session. For crude oil we have a bearish bias as we see some exhaustion in the recent sharp upside of the last 6 weeks. We feel the uptrend line is vulnerable for a break. the API data last night showed a build of 4.5mln barrels and if today’s DoE numbers show a larger build then we expect a break of the trend line which should open up a move back to $54 in the coming days.