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

Market snapshot ahead of the FOMC meeting

The US CPI for the month of May cooled, causing the dollar to fall sharply ahead of the FOMC statement and updated forecasts due at 7pm (UK). For real-time coverage, read our US CPI report from senior strategist Nicholas Cawley.

On the face of it, it was a good report, as annual and monthly core and headline inflation figures came in below expectations. Fed officials view services inflation and supercore inflation (services excluding housing and energy) as important gauges of inflation momentum. More recently, officials have been interested in the core monthly CPI breaking the trend of consecutive 0.4% prints that has now emerged from April’s 0.3% and now May’s 0.2%.

Source: Refinitiv, Prepared by Richard Snow

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S&P 500 once again gets an excuse to break new ground

In the run-up to inflationary pressures, it’s fair to say that US equity markets were cautious and consolidated around the recent high. With inflation heading back in the right direction, markets have put a second rate cut on the table, giving stocks new strength.

The Fed will soon update its dot plot projection of the likely 2024 Fed Funds rate. In March, officials forecast interest rate cuts of three quarter points, but May inflation data could see this revised down to just two or, in an extreme case, one. Still, the prospect of lower future interest rates has shares trading higher by 5,500, the next interest rate level up.

S&P 500 daily chart

Source: TradingView, prepared by Richard Snow

What happened to the euro woes amid the shocking political developments?

The euro has recovered against the dollar despite weakness at the start of the week as markets caught wind of French President Macron’s early election announcement.

The euro’s weaknesses persist despite the reactionary action, but are very much in the background and are likely to resurface as we get closer to the first round of the French parliamentary elections on June 30. For now, markets are focused on US data and the upcoming FOMC meeting.

EUR/USD has skyrocketed since yesterday’s close, nearly swamping the post-NFP sell-off. 1.0855 is the nearest level of resistance, followed by the swing high of 1.0916 and the resistance zone around 1.0950. However, this could only be feasible if the Fed deviates from its March outlook with not one but two rate cuts. The support is at 1.0795.

EUR/U.S. dollar Daily chart

Source: TradingView, prepared by Richard Snow

USD/JPY retreats ahead of BoJ meeting

The yen’s depreciation and unwanted volatility have plagued Japanese officials for some time, but the latest US CPI data provided some breathing room. The Bank of Japan (BoJ) will meet in the early hours of Friday morning. There will likely be more focus on easing aggressive bond buying, which would allow Japanese government bond yields to rise above 1% unhindered. This can be seen as the next step towards normalization of the Bank, in a way that is unlikely to destabilize markets.

Japan’s economy has shown hardship, complicating a faster rate hike cycle than is currently the case. Some doubts remain about the sustainability of inflation above 2% in the medium term, and officials have expressed their desire for wage pressures to continue beyond annual negotiations/reviews. A promise to slow the pace of bond purchases is potentially supportive for the yen, but this all depends on whether the market sees any cut by the BoJ as enough to make such a response illegal.

USD/JPY is moving lower with the 50 SMA and the psychological 155.00 level in focus. Resistance at 157.70.

USD/JPY daily chart

Source: TradingView, prepared by Richard Snow

Learn the ins and outs of trading USD/JPY – a pair that is crucial to international trading and a well-known facilitator of the carry trade. Additionally, this collection of guides provides valuable insights that all traders must have when trading the most liquid markets:

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX