A strong feeling of
anxiety engulfed the financial markets on Wednesday as investors awaited the
heavily anticipated Fed and BoJ central bank policy meeting decisions which
have the ability to create explosive levels of volatility. Asian markets
rallied this morning with the Nikkei lurching +1.91% higher as of writing after
the Bank of Japan overhauled its policy framework. European markets were flat
on Tuesday and this could rollover into the new trading day if market
participants remain on the side-line ahead of the Fed meeting. Although Wall
Street painted a similar static picture to Europe, some direction could be
achieved if the Fed takes action or provides further clarity on US rate hike
timings.
The praised stock
market rally which repeatedly seized the limelight this year continues to
display signs of exhaustion as the mixture of uncertainty and concerns over the
global economy sour risk appetite. Depressed oil prices have heavily weighed on
sentiment while the uncertainty ahead of the US elections could encourage
investors to scatter away from riskier assets. With the ingredients of a bear
market ripening by the day, stocks could be poised for a steep decline in the
future if provided the correct catalyst.
Will the Fed take action?
The Dollar has been
on a chaotic rollercoaster ride this month with prices recently displaying an
incredible rebound as optimism grows over the Federal Reserve potentially
raising US interest rates before the end of 2016. Although expectations that
the central bank may take action in September has been thoroughly discounted
following the uncertainty and soft domestic data, the glimmer of hope for
December being a live meeting could keep the Dollar buoyed. Attention may be directed
towards the FOMC meeting where Yellen could potentially tilt towards the hawks
which could leave the door wide open for the Fed to break the trend of central
bank caution before year end.
Bank of Japan keeps rates unchanged
Yen bears were
unleashed on Wednesday following the Bank of Japans decision in setting a long
term interest target in an overhaul of its monetary stimulus programme. The
central bank left negative rates unchanged at 0.1% but discarded its base money
target which was replaced with a yield curve control. Although the markets
warmly welcomed this unexpected change in policy framework, questions may be
asked on the sustainability of both the positivity and Yen selloff.
Japan remains
entangled in a fierce battle with slowing economic growth while static
inflation has left the Bank of Japan under noticeable pressure. If this policy
overhaul fails to improve Japan’s situation in the medium term, then the Yen
could regain ground as optimism fades over the central bank’s ability to revive
growth.
Sterling gripped by lingering Brexit jitters
Sterling was left
vulnerable to heavy losses on Tuesday with the GBPUSD sinking towards 1.294
after news highlighting the UK’s uncertain future relationship with the EU
enticed sellers to attack. Sentiment remains bearish towards the Sterling with
further declines expected as the post Brexit jitters haunt investor attraction
towards the currency. It seems like investors are slowly digesting the impacts
of Brexit to the UK economy with fears heightening over the potential long-term
economic damages. Although the Bank of England decided to leave UK interest
rates unchanged in September’s policy meeting, the bias towards further rate
cuts in the future could keep the Sterling pressured.
From a technical
standpoint, the GBPUSD is bearish on the daily timeframe as prices are trading
below the daily 20 SMA while the MACD has crossed to the downside. Previous
support around 1.3000 could transform into a dynamic resistance which
encourages a further decline towards 1.2900.
Commodity spotlight – WTI Oil
WTI Oil rebounded
from six week lows on Tuesday with prices lurching towards $44.50 after
comments from OPEC sparked discussions that a production freeze deal could last
longer than anticipated. Regardless of the short term gains, Oil remains
heavily pressured and could be destined for steeper declines as the oversupply
concerns haunt investor attraction. Oils main focus will be the pending
informal OPEC meeting which if concludes unsuccessfully could leave prices
exposed to steep losses. From a technical standpoint, bears need to break back down below $44 to
trigger a steeper decline towards $41.
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risk involved with trading leveraged products such as forex and CFDs. You
should not risk more than you can afford to lose, it is possible that you may
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Lukman Otunuga,
Research Analyst at FXTM
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