US open: Futures edge cautiously higher ahead of the Fed rate decision

US futures

Dow futures +0.3% at 30480

S&P futures +0.4% at 3750

Nasdaq futures +0.6% at 11386

In Europe

FTSE +1.36% at 7264

Dax +1.05% at 13450

Euro Stoxx 1.14% at 3496

50 or 75 bp hike?

US stocks are heading higher after another broadly weak session yesterday and as all eyes are focused on the Federal Reserve interest rate decision due later today.

Whilst 10-year bond yields have eased slightly, pulling the USD lower and lifting stocks, the mood remains cautious.

The big question is whether the Federal Reserve will hike rates by 50 basis points or whether it will go all guns blazing and hike 75 basis points? Given that inflation remains, around a 40-year high, PPI is still high at 10.8% and oil prices remain around $115 per barrel, there are few signs that inflation is slowing meaningfully.

The market is 98.1% pricing in the probability of a 75-basis point hike. There is of course the argument that if the market is pricing it in maybe the Fed should just go for it. A 75-basis point rate hike, if the Fe gives a solid idea of what to expect in the upcoming meetings and also adds consistent projections surrounding GDP & CPI then the market reaction could be fairly muted or even a dovish reaction with the USD falling lower and Nasdaq rising.

If the Fed hikes by 50 basis points they could simply promote the argument that it is not enough given the data and high inflation expectations.

In addition to the rate decision attention will be on the new forecasts with GDP expected to be downwardly revised and CPI revised higher. The dot plot will also provide some clues on the Fed’s future policies.

Where next for the Nasdaq?

The Nasdaq found support at 11200 the 2022 low, and has edged up slightly. The fall through the 20 sma and the bearish RSI, not yet in oversold territory, suggests that there could be more downside to come. Sellers will look for a move below 11200 to continue the bearish trend towards 10960, the November 2020 low. Resistance can be seen as 11500 with a break over here, opening the door to 11700, the May 12 low before exposing the 20 sna at 12200.

FX markets – USD eases, EUR rises.

USD is falling, snapping a five-day winning run. The greenback is tracking 10-year bond yields lower ahead of the Fed rate decision. A 75 basis point hike is priced in, so any less could see the USD fall lower.

EUR/USD is rising on news that the ECB is holding an emergency meeting to discuss market conditions and fragmentations and consider the option of yield spread reinvesting Pandemic Emergency Purchase Program bonds to aid weaker countries. PEPP can be used flexibly across jurisdictions. How this would impact the medium-term outlook for the euro is difficult to say, but, it is likely to positively impact risk sentiment, which would be EUR positive.

GBP/USD is rebounding despite headwinds that appear to be building. GDP and labor market data this week highlighted the deteriorating outlook for the UK economy, with the economy contracting for a second straight month and unemployment rising. This comes ahead of the BoE rate decision tomorrow, which is expected to hike rates for a fourth straight meeting. Furthermore, trouble is also brewing in Scotland again with Nicola Sturgeon aiming for another vote of independence.

GBP/USD  +0.6% at 1.2110

EUR/USD  +0.67% at 1.0595

Oil falls ahead of the Fed

Oil prices are trading lower, extending the selloff from the previous session. An announcement from US department of Energy yesterday that it was selling 45 million barrels of oil from the Strategic Petroleum Reserves appeared to be the catalyst for thesell-offf, although this was part of the previously announced release of stockpiles.

Attention is firmly on the Fed. An aggressive Federal Reserve will raise concerns that the US economy is heading for a recession, which will weaken demand. The move may also push investors away from riskier assets such as oil and toward safe-havens, such as the USD.

Further COVID breakouts in China are adding to the downbeat mood towards oil. Although OPEC+ stuck to its forecast that global oil demand will exceed pre-pandemic levels in 2022.

API data revealed a build of 0.736 million barrels for the week ended June 10. EIA data is due later.

Where next for WTI crude oil

WTI crude trades -1.3% at $114.30

Brent trades -1.2% at $117.80

Learn more about trading oil here.

Looking ahead

15:30 EIA crude oil inventory

17:20 ECB’s Lagarde speech

19:00 FOMC rate decision

1930 FOMC press conference