Post-FOMC news brief for June 15

The Fed’s policymakers agreed to raise their benchmark lending rate, projected additional hike in 2017 and revealed their plans on how they intend to shrink their $4.5. trillion balance sheet this year. The Fed’s decision was overshadowed by extremely soft consumer prices. Headline US CPI for May eased 0.1% (against flat expected) with core inflation also falling short of market expectations and bringing annual core CPI down to 1.7% from 1.9%. Another disappointment came after the US Retail sales release which was also lower than expected in May. Retail sales fell 0.3% against investors’ expectation for a 0.1% gain.

Political turmoil in Washington also weighed on the USD. The special council responsible for the investigation of Russia’s meddling in the 2016 presidential election is going to interview two US intelligence officials about whether the US President Donald Trump sought their help to get the FBI to drop their probe into Michael Flynn’s collusion with Russian entities.

USD/JPY popped up to 109.60 in Tokyo morning after falling sharply towards 108.80 overnight on the USD weakness. We don’t expect great swings from here in the short-term looking at the economic calendar.  The Bank of Japan will in the spotlight on Friday, as it is poised to release their rate statement which will be followed by a press conference with BoJ Governor Haruhiko Kuroda. The central bank is expected to maintain its ultra-loose monetary policy settings in order to prop up inflation and domestic demand. Japan’s economy has recently received a boost from solid global demand, but inflation rates remain well below the bank’s coveted target. The BoJ’s policymakers will unlikely tighten their policy at tomorrow’s meeting. So, traders will be focused on Kuroda’s follow-up comments, looking for some hawkish notes in his tone (pay special attention to Kuroda’s words on the reduction of bond purchases).

GBP/USD fell to 1.2730 in the opening hours of the Asian session. Further weakness is seen on the horizon but solid support at 1.2560, 1.2515 will likely prevent the sharp downfall. The Bank of England is set to deliver its interest rate later today at 2:00 pm MT time. Given the political landmines dotting the UK landscape (a hung parliament as a result of the snap election, preparation for Brexit negotiations with the EU), the BOE’s policymakers will likely look through the higher inflation print. The headline inflation was at 2.9% in May and core inflation slightly lower at 2.6% (well above the bank’s target – 2%). At the previous meeting, the BOE’s officials have already indicated that they are ready to tolerate higher inflation rates despite declining consumption.  In a case of release of the dovish statement indicating the BOE’s unwillingness to tighten their monetary policy, the GBP will be hurt.

The euro unexpectedly spiked to 1.1295 yesterday on the soft releases from the US that triggered USD weakness. In Tokyo morning, the USD recouped its earlier losses and fell to 1.1185. The undertone is still on the weak side; the quotes might slide lower to 1.1160 unless the single currency manages to reclaim the 1.1200 level.

Aussie was an absolute gainer today as Australian Labor force information hit market’s expectations (a big drop in jobless rate, an increase in hours worked). The bullish phase is still clearly intact despite the scale of recent Aussie’s gains. AUD/USD is now at 0.76005. There is a room for an extension to 0.7635 (yesterday’s high). But be ready to exit your long position, at around 0.7650, as further upside will be complicated.