Daily Market Outlook, July 27, 2022

Overnight Headlines

Asian equity performance is mixed this morning. In China, the overnight repo rate fell below 1% for the first time since January 2021, a signal that China will keep monetary policy loose to support growth. Reports suggest that US President Biden will speak with Chinese President Xi tomorrow. Annual Australian consumer price inflation rose to 6.1%. That was its highest rate in 21 years but less than expected, causing some forecasters to scale back their expectations for next week’s rate decision. Conservative Party leadership candidate, Rishi Sunak, promised to temporarily scrap VAT on energy bills.

Today’s US monetary policy update is the key event of the week for markets. The announcement of a fourth successive interest rate increase is seen as a near certainty. The three previous hikes since March have all seen the Federal Reserve up the ante with an initial increase of 25bp, followed by rises of 50bp in May and 75bp in June. Markets briefly discounted a 100bp hike following a larger than expected rise in June CPI to a new high for the year of 9.1%. However, subsequent comments from some officials that they are more likely to opt for a 75bp hike and signs that longer-term inflation expectations remain under control have led markets to price in the same sized hike as in June. Also of interest will be any signals that the Fed sends about its future policy intentions. Markets continue to price in further rate rises of just over 100bp by early 2023. However, rising concerns about downside risks to growth are reflected in just over 50bp of rate cuts now priced in for later in 2023. This is not one of the meetings where Fed policymakers update their forecasts, but both the press statement and Fed Chair Powell’s press conference will be watched closely for clues on whether these expectations are still justified.

Most Fed officials are still indicating that they think the US economy looks strong. However, recent activity data has mostly surprised on the downside, and this will be acknowledged to some extent today. Powell’s key message is likely to remain that getting inflation under control is the number one priority, but he is bound to be quizzed on what would cause the Fed to hold off from further rate rises and on the risks of a ‘hard landing’ for the economy.

Prior to the Fed’s policy decision, durable goods orders and the advanced trade report will provide further insight into whether growth is slowing. Elsewhere, it’s a quiet day for data with only Eurozone Money Supply of note.

EUR/USD: 1.0000 (1.18B), 1.0100 (1.84B), 1.0125 (650M), 1.0150 (497M)
EUR/USD: 1.0200-10 (1.63B), 1.0250-55 (2.13B), 1.0270 (532M), 1.0300 (1.06B)
USD/JPY: 136.24-25 (755M). EUR/JPY: 142.40 (1.42B). EUR/CHF: 1.0015 (477M)
GBP/USD: 1.2200 (404M). AUD/USD: 0.6945-50 (451M), 0.7040-50 (687M)
USD/CAD: 1.2850-55 (900M), 1.2870-80 (604M), 1.2910 (498M), 1.3000 (392M)

EURUSD Bias: Bearish below 1.0350

GBPUSD Bias: Bearish below 1.2150

USDJPY Bias: Bullish above 134

AUDUSD Bias: Bearish below .7050

Edges lower after Aus CPI soft print
AUD/USD slipped from 0.6950 to 0.6930 in initial reaction to Aus CPI
Weighted mean & headline slightly lower than forecast - trimmed mean slightly higher
Impact on AUD/USD likely to be fleeting as the numbers lined up with expectations
AUD to take its lead from USD response to FOMC
Offers sited .7000/10
AUD/USD support is at Friday's 0.6876 low and break targets 0.6840/45
20 Day VWAP is bullish, 5 Day bullish

BTCUSD Bias: Bearish above 22k