Summary:
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US indices trading mixed ahead of key Fed decision
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US central bank expected to deliver dovish message
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CAD rallies on rising inflation figures
After a solid day of gains yesterday, US stocks are set to begin little changed this afternoon as traders eagerly await this evening’s Fed decision. A dovish message from Draghi helped boost equities on both sides of the Atlantic during Tuesday’s session and the markets appear in a pretty upbeat mood going into the US central bank decision, hopeful of further dovish support.
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One aspect to keep an eye on this evening will be the latest dot-plot, with the last release showing a marked difference from the current market pricing. Source: FOMC, Ransquawk, Refinitv.
There is a concern that Chair Jerome Powell and his fellow FOMC members will be unable to meet these lofty expectations and if they do deliver a more cautious message on rate cuts and the possible end of Quantitative Tightening (QT) then investors could be in for a nasty shock. Having said that, the rate-setting committee will be well aware of the market expectations and given the additional pressure from President Trump, who was in fine form on Twitter yesterday doing his best to force the Fed to turn dovish, it would be surprising if the tone of the update isn’t at least a bit more dovish.
The move higher above 2911 sent the S&P500 up to a 6-week high and the subsequent period of consolidation has seen a bull flag form. Source: xStation
While the Fed look set to follow the ECB in turning dovish, there could be an interesting monetary policy divergence opening up in North America with the latest Canadian data suggesting the BOC could find it difficult to follow suit in the coming months. The inflation data for May came in as follows:
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CPI Y/Y: +2.4% (7-month high) vs +2.1% exp. +2.0% prior
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Median: +2.1% vs +1.9% exp. +1.9% prior
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Common: +1.8% vs +1.9% exp. +1.8% prior
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Trimmed: +2.3% vs +2.1% exp. Prior +2.0%
Inflationary pressures are on the rise in Canada and the BOC could find themselves in a tricky position with rising prices at a time when many of their peers are cutting rates. Source: xStation
USDCAD dropped around 40 pips after the data dropped with the market now trading back near where it was before Friday’s strong rip higher. The Fed decision this evening could be a major event for the USD side of this pair. Source: xStation
