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Ahead of the FOMC

Daily Analysis - 18/03/2015

Traders Await the Language of Today’s FOMC Statement to Determine the Rate Outlook

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Today’s main event is the Federal Open Market Committee’s Statement which will be followed with a press conference with Federal Reserve Chairwoman Janet Yellen. Expectations are high for hints towards a summer interest rate hike despite the current spate of disappointing economic releases highlighting the softness in the real economy.

All Eyes Focused on the Word “Patient”

Anticipation is high for tonight’s FOMC Statement as traders expect current interest rate language to shift from patience to a new form of guidance as probabilities of a June rate cut rise. This is in stark contrast to the latest bout of disappointing US macroeconomic data. For the second straight month, economic figures have missed estimates by a wide margin, adding to concerns that a rate hike could do more harm than good as GDP expansion sputters. The recent spate of bad housing data coupled with weakening spending and manufacturing dilutes the argument for higher rates especially with inflation well below levels targeted by the Federal Reserve. The US dollar has been consolidating against major pairs in the hours leading up to the statement with any positive guidance likely to send the currency soaring. GBPUSD could sink further as the Bank of England’s Monetary Policy Committee releases its own minutes that will likely confirm growing setbacks for the UK economy.

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gbpusd03182015

Greeks Discussing Capital Controls

As relations with Europe spiral out of control, the Greeks are considering implementing capital controls akin to what was experienced in Cyprus several years back. With the €2 billion repayment approaching on Friday, Germany looks unlikely to approve the release of any more funding, adding to the Greek Government’s woes. The President of the Eurogroup Finance Ministers Jeroen Dijseelbloem already seems to be throwing in the towel on Greece after mentioning that capital controls could be considered in order to keep Greece from leaving the Euro Area. With few places left to turn in order to fund Friday’s repayment, discussions are underway between Greek Prime Minister Tsipras and Russian Prime Minister Vladimir Putin with an anticipated meeting on April 8th. EURUSD continues to trend around 1.0600 as markets await further news of the proposed solution.

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eurgbp03182015

Crude Collapses on API Data

Although the correlation between API and EIA crude oil inventory data has broken down substantially over the last 10-weeks, yesterday’s API Crude Stocks figure expanded by 10.500 million barrels. This is well above expectations of a 3.800 million barrel build and heightens the risk that aggregate storage space will run out before June, causing producers to dump output on the open markets, driving prices even lower. Aside from today’s FOMC Statement, Energy Information Administration crude oil inventories will likely highlight a similar phenomenon as storage capacity dwindles. The kneejerk reaction in WTI crude oil was downwards, with prices sinking over $1.50 before rebounding modestly. Any larger than expected build in inventories today, which are forecast to rise 3.750 million barrels, could see prices test the $40 handle before rig count data is released later in the week.

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cl-apr1503182015

Brent Oil Descending Triangle Technical Pattern

The reversal in the trend for crude oil products has officially taken hold as inventory data and higher output levels force equilibrium prices lower. Greater supply has not been offset by growth in demand, hence the continued drop in prices. With forecasts for global economic growth shrinking and revised lower by sell-side institutions, increased output will not be soaked up by market demand. The descending triangle technical pattern setting up in Brent crude oil has a notably bearish bias, with support sitting at $52.65. The consolidation between the short-term downtrend line and support level is indicative of further downside, with any move below support to be treated as a downside breakout. Any move above the downtrend line should be treated as a reversal in prices.

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