Tuesday, 18 June 2019

MARKETS TURN DEFENSIVE AHEAD OF CENTRAL BANK DECISIONS

Lukman Otunuga,
Research Analyst at FXTM

The mood across financial markets is set to remain cautious as investors find comfort on the sidelines ahead of several major central bank decisions over the coming days.

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When factoring in how the US Federal Reserve, the Bank of England and the Bank of Japan will all be under the spotlight this week, market players will prefer to sit on the sidelines and await the outcome of these meetings in anticipation, before deciding what move to make in their portfolios.

Persistent US-China trade tensions, heightened geopolitical risks in the Middle East, Brexit uncertainty and concerns over decelerating global growth are clearly the enemies of central banks at present. The increased potential of another round of central banks easing monetary policy to counter a global slowdown continues to offer investors something to fall back on, but the key question is - for how long?

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Global equity markets have overall performed well in June, although the gains have been built on shaky foundations. Should central bank policymakers sound less downbeat than the market is expecting and soften speculation of monetary easing, stock markets face the risk of tumbling like a house of cards.

Dollar bulls to be tested by Federal Reserve
Where the Dollar concludes this week will be heavily influenced by the outcome of the Federal Reserve policy meeting scheduled over the next two days.

While it is widely expected that US interest rates will be left unchanged this month, investors should not be quick to label this policy meeting as a non-event. Markets will be closely scrutinizing the meeting for confirmation of an interest rate cut occurring as early as next month. Should the Federal Reserve disappoint those expectations, or create a frenzy by not offering any hints about upcoming action to be taken in spite of persistent global headwinds, King Dollar should make a return and will look to shoot to the moon.

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Currency spotlight – GBPUSD
Investors who were looking for a fresh opportunity to attack the Pound were given the thumbs up yesterday on rising concerns that the leading candidate Boris Johnson, risks steering Britain towards the path of a no-deal Brexit should he become Prime Minister.

The past few days have certainly not been kind to the battered Pound which tumbled to a fresh 2019 low below 1.2520 earlier this morning. With the terrible combination of Brexit uncertainty and political risk in the UK haunting investor attraction towards Sterling, the path of least resistance points south.

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Taking a look at the technical picture, the GBPUSD is under intense selling pressure on the daily charts. A breakdown below 1.2500 is seen opening a path towards 1.2430.

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