Traders await BoJ, EZ CPI, FOMC and Meta earnings

Headlines

* BoJ to weigh rate hike to 0.25% at policy meeting, yen strengthens

* FOMC meeting expected to lay groundwork for September rate cut

* S&P 500 and Nasdaq fall as tech struggles ahead of megacap earnings

* Microsoft falls as cloud miss overshadows earnings and revenue beat

FX: USD advanced to 104.79 before selling off into the close and finishing near its lows. Safe haven demand didn’t help the buck as Middle East tensions rose. There was also an upward revision to the May JOLTs data. All eyes are on the central bank meetings over the next 32 hours. A hike (BoJ), hold (FOMC) and cut (BoE) are likely according to market pricing. Resistance is 104.87/88 and support at 103.70.

EUR printed a doji hovering just above recent lows. EZ GDP came in better than forecast, after Germany’s unexpectedly contracted. There was also hot regional German inflation data, ahead of today’s EZ, France and Italy CPI figures. Strong support sits around 1.08.

GBP drifted lower in relatively quiet trade. Initial support resides just above 1.28 with the 50-day SMA t 1.2783. The BoE is the last of the three major central banks meetings this week.

USD/JPY was again the focus of markets as the yen jumped on a trio of reports that the BoJ is considering a 15bps hike today. Previously the market only considered 10bps or nothing. The “mother of all levels” is 152.

AUD dipped as the major consolidates near the recent low at 0.6513. Focus is now on the CPI data release today. USD/CAD pushed up to 1.3864 before closing marginally lower on the day with a doji candle. There are record net speculative and overall shorts on the loonie reflecting the BoC’s dovish bias, lagging growth and the strong chance of Trump and tariffs on Canada exports.

US Stocks: US markets were mixed with outperformance in the Dow and Russell 200 while the Nasdaq and tech underperformed. The benchmark S&P 500 closed 0.5% lower at 5,436. The tech-laden Nasdaq 100 finished down 1.4% at 18,796. The Dow Jones finished 0.5% up at 40,743. Microsoft shares fell over 6% after hours as Azure revenue growth missed expectations in its results released after the US closing bell. The world’s second biggest company by market cap reported better than expected earnings, but the cloud miss overshadowed. Meta’s earnings are published after the US close later today, with ad sales and AI spending the key focus.

Asian stock futures are mixed. Asian stocks were subdued with big risk events ahead. The ASX 200 got pushed lower by mining stocks. The Nikkei 225 was muted ahead of the BoJ meeting and likely plans to taper bond buying and mull raising rates.  The Hang Seng and the Shanghai Composite were red with the Hong Kong index testing the 17k level.

Gold jumped over 1% on rising geopolitical tensions in the Middle East as Israel launched a retaliatory strike. Treasury yields also sunk with the 10-year yield falling to levels last seen in mid-March.

Day Ahead – Australia CPI, BoJ, FOMC

Australia releases Q2 inflation data ahead of next week’s RBA meeting. Only a modest easing is expected to 3.8% in July. That causes an acceleration in the Q2 print by two-tenths to 3.8%. Core measures will be watched too, but the quarterly reading will probably mean the RBA hikes rates. Markets only price in around 7bp, which seems too dovish and could give a decent bid to AUD if we are right.

Regarding the BoJ meeting, before the late press reports about a hike, markets had priced in just under a coin toss chance of a 10bps rate rise, and analysts were a lot more divided with the majority seeing an unchanged decision. The consumption outlook is said to be crucial with plans to taper government bond purchases also watched. The latest data will inform rate setters with a sluggish economy still evident, but wage growth a concern.

The Fed will keep rates unchanged but are predicted to tee up a September rate cut. There are no new dot plots or economic projections at this meeting. Fed officials have been warning about higher unemployment while inflation has slowed in recent months. That is expected to give them more confidence to ease policy as they continue to express sureness in the growth outlook.

Chart of the Day – USD/JPY volatile ahead of risk events

The implications for global financial markets could be quite stark from the BoJ rate decison. A hawkish rate hike could add further trend strength to the yen and would be disruptive to the carry trade out of cheap Japanese borrowing costs into more attractive yields elsewhere. The unwind of the carry trade has recently been a key driver for the wider sell-off across financial markets. So, a rate rise could see yet more volaltility. The impact could also depend upon Ueda’s guidance. A hike with cagey guidance could take some steam out of the yen’s advance in time, after an intial spike higher in the yen, motivating incremental buying of higher yielding bonds abroad and stabilsing stocks.

152 is a huge level of support. The 200-day SMA is just below at 151.63. The first major retracement level (38.2) of the Janaury 2023 low to this year’s top is 148.68. Resistance above is 156.71.