Markets Await Important FOMC Meeting Today

Essential Insights

• US equities lower amid continued uncertainty
• AUDUSD higher as CPI falls by less than expectations, indicating a stronger than expected economy which is a positive sign considering the recent COVID-19 outbreaks in state Victoria
•  Focus is on the FOMC meeting tonight at 19:00 BST, where we will know what the stance of the FED is. The market has rallied on the expectation that Chairman Powell will keep rates low for a longer than expected period, if this expectation is not met, we could see a sharp rebound in the dollar index.

Noticeable Events/News

US

US equities traded lower yesterday as weak earnings, coupled with continued economic uncertainty, dampened investor sentiment. The USD 1tn pandemic relief package proposed by Senate Republicans has encountered intense resistance from Democrats, who oppose cutting enhanced unemployment benefits from $600 a week to $200. Since then it has been proposed that this cut will be temporary, though this has not been formally addressed and therefore uncertainty remains. As jobless claims high in the US, unemployment benefit support packages are crucial.

Focus is on the FOMC meeting at 19:00 BST tonight, it is expected that the Fed will stay on hold. The FED is likely to acknowledge the improved data from May and June, but continue to highlight downside risk and uncertainty (as usual). It is unlikely that there will be any expecting any shift in forward guidance, as it will likely occur after the review on its policy framework is completed.

Australia 

AUD/USD extended its rally overnight after moving 0.4% higher yesterday amid USD weakness. The currency traded an additional 0.3% higher, moving above 0.7170, after consumer prices fell less-than-expected in the region. Headline CPI in Q2 declined by 1.9% q/q (consensus: -2.0% q/q). On a y/y basis, prices fell by 0.3%, from a 2.2% y/y increase in Q1. However, this was better than the RBA’s forecast of 1% y/y decline.

However it is worth noting that Australia has responded to COVID-19 outbreaks aggressively when cases were only just in double digits, 100 troops were immediately deployed. Now that cases have exceeded 500, there is a high risk we may see further aggressive moves to which economic recovery may be hindered.

EU

According to European policymaker Stournaras, the ECB’s decision to unwind its pandemic stimulus programme “will depend on the evolution of inflation, mostly”, suggesting emergency asset purchases may continue longer than initially anticipated with CPI below target.