Stocks and dollar off again ahead of Fed meeting

• Dollar lower for third straight day, GBP eyes 2025 high on trade news
• Wall Street weaker as investors await trade deal news, Fed decision
• FOMC to push back against calls for rate cuts, stay in “wait and see mode”
• UK closes in on US trade pact with lower tariffs for cars and steel

FX: USD turned lower again as prices dipped below the long-term pivot level at 99.57. Trade developments were mixed with Canada’s PM Carney visiting the White House and a possible start to USMCA negotiations. Trump is said to be close to announcing pharma tariffs, while the UK closes in on a trade agreement. All eyes are on today’s FOMC meeting.

EUR was mid-pack in the majors as it closed nears its intraday high. The German Parliament eventually elected Merz as Chancellor in a second round of voting. The Dax sold off on his initial failure to secure a majority before rallying, but still down on the day. There is little major eurozone data out this week.

GBP was helped by positive trade updates, both with the US, India and the eurozone too. The EU and UK agreed to hold annual summits to discuss their relationship, according to Reuters. The idea of a closer relationship with Europe may result in a boost to the OBR’s growth prospects in November, allowing the Chancellor more room to spend. The recent top and resistance is 1.3443.

USD/JPY fell for a third straight day and is back in its long-term bear channel. A narrowing interest rate differential between Treasuries and Japanese Government Bonds (JGBs) due to a strong US 10-year note auction and the risk-averse theme in the US stocks helped the yen outperform.

AUD made a fresh cycle high at 0.6501. The 200-day SMA sits at 0.6460.the next upside level is around 06550. CAD made fresh lows for the move at 1.3749. The next Fib level of the September 2024 low to February top is 1.3713. Focus is on the Trump/Carney meeting.

US stocks: The S&P 500 lost 0.77% to settle at 5,607. The tech-laden Nasdaq finished down 0.88% at 19,791. The Dow closed 0.95% lower at 40,829. The VIX remained a touch elevated at 24.7. Utilities was the big outperformer (+1.23%) with only energy the other sector in the green. Health lagged by a distance, down 2.76%, with vaccine and gene therapy names weighed on reports that a person who has previously criticised the FDA could be put in charge. Eli Lilly fell 5.6% and Moderna plunged over 12%. Amazon’s RoboTaxi unit Zoox is recalling self-driving vehicles after a crash last month in Las Vegas. Palantir released strong Q1 earnings and upbeat guidance but fell with reports citing market concerns over potential slower growth ahead.

Asian stocks: Futures are in the red. APAC stocks advanced driven by more positive US-China trade progress. China’s CSI 300 rose 1% after returning from holidays, also fuelled by robust retail and travel data. Hong Kong’s Hang Seng gained 0.7%. Markets in Japan and South Korea remained closed, resulting in thin regional trading volumes.

Gold soared again, up 2.85% and now on the week, adding 5.88%. The all-time high is $3,500. Treasury yields and the dollar fell. Safe haven status is being touted, while China, the world’s biggest bullion buyer, may have seen demand pick up after its holiday.  

Day Ahead – FOMC Meeting

We get to hear from the FOMC and Chair Jerome Powell, with its first meeting since Liberation Day. Demands from President Trump and Treasury Secretary Bessent for lower interest rates will fall on deaf ears as rate setters will keep the target range unchanged at 4.25-4.50%. The Fed is still likely to focus on near-term inflation concerns over growth and job market softness, which ultimately will limit the scope for action in the months ahead.

A “wait and see” stance is expected, with rate cuts not on the table until at least the second half of 2025. Any policy moves will be contingent on data and trade policy developments. June rate cut odds have been reined in since Friday’s solid NFP data, with a 68% chance of no move and a 32% probability of a rate cut. There are now around 81bps of policy easing priced in for 2025.

Chart of the Day – Dow Jones struggles at midpoint of 2025 sell-off

The rebound has been impressive since the tariff meltdown in early April. The “melt-up” has seen gains of more than 11% after the spike low on Monday April 7 at 36,611. That level is now a big ‘line in the sand’ for any move lower. Prices have moved up to the halfway mark of this year’s high to low move at 40,833. The 50-day SMA has also now capped the upside, at 41,191. If bulls can get past this area, the next major Fib level (61.8%) sits at 41,829. The 200-day SMa resides above at 42,223.

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