GENEVA — Asian trading session lacked a clear direction, after mixed European and bearish US trading. Chinese stocks (+1.05%) rose following a soft start, while Japanese equities (-1.02%) edged lower as Fitch revised the country's sovereign debt rating outlook from stable to negative. US and European equities slid, treasuries gained, and the US dollar index steadied above the 93 mark before the Federal Reserve (Fed) decision announcement. The Fed is not expected to bring any significant changes to its policy stance at this month's meeting. US policymakers will likely emphasize the lingering risks on the US economy and maintain an ultra-supportive monetary policy to provide support to its economy ravaged by the pandemic. While investors will continue looking for clues regarding alternative policy tools, including the yield curve control, we do not expect to hear any material progress before September. While there is little room left for enhanced forward guidance, the Fed will follow a clear strategy to support lending and liquidity. The market already digested the Fed's endeavor to keep the short-term rates low for long. Combined with a solid fiscal support, the Fed won't move more dovish on its policy for now. Speaking of the fiscal support, the Republicans released their additional fiscal stimulus proposal. Nomura analysts expect a final package of around 1.5 to 2 trillion dollar to pass within the next two weeks. The US has already spent $2.8 trillion to tackle the negative implications of the Covid crisis. The mounting US debt isn't reflected in the US treasury yields, in contrary, the US 10-year yield remains below the 0.60% mark before the Fed decision. But the US dollar suffers from the skyrocketing government debt and mounting stagflation worries in the US. This being said, 60% of the world's currency reserves are held in US dollars, meaning that the greenback won't lose its reign anytime soon. Meanwhile, the US earnings continue coming in. So far, the second quarter results have beaten the analyst expectations by 15%. This doesn't mean that the US companies did well during the pandemic, it only means that they did better than analyst expectations. But since the beginning of the US-China trade war in 2018, the earnings expectations tend to be systematically lower than the actual results, which in turn result in an abnormal positive push in US stock prices and enhance the decoupling between the market and the company fundamentals. In the FX, with dollar steadying, the major pairs that have been sent to overbought territories have started retracing a part of their latest gains. The EURUSD tested the 1.17 support on Tuesday and a deeper downside correction could drag the pair towards 1.1640, the weekly support before the German GDP data, expected to confirm an almost 10% decline in the second quarter on Thursday. Gains in sterling remain resilient above the 1.29 mark, the 200-week moving average, as CBI retail sales hit the highest since April 2019. Traders focus on post confinement recovery as they take advantage of a weak US dollar. The pair is set to challenge the 1.30 mark, where the bulls will be fighting the bears who will bring the risks of a no-deal Brexit on the table. In Australia, the inflation fell for the first time since 1997 as the pandemic took a toll on economic activity and demand. Fall in transport prices and sharp decline in housing pulled the quarterly CPI to -1.9%, a touch better than -2.0% penciled in by analysts but enough to keep the Reserve Bank of Australia's (RBA) supportive policy in place. The AUDUSD consolidates gains near the highest levels since April 2019. Trend and momentum indicators remain supportive of a further rise in Aussie, although the technical indicators point at overbought market conditions and the possibility of a minor downside correction before a further advance. Support is seen at 0.70. Gold futures bounced lower from $2,000 and spot price steadies near the $1,950 per oz. Although gold is a powerful hedge against inflation, and low US yields keep the opportunity cost of holding gold at fairly low levels, it is uncertain whether a move above the $2,000 per oz could be sustainable in the medium term. Given the accumulation of speculative long positions in gold, there is a rising risk of a sizeable unwind and a sharp downside correction in the foreseeable future. Elsewhere, WTI crude has a steady grip on the $41 per barrel. The API report revealed a surprise draw in US oil inventories last week of 6.8 million barrels versus the expectation of a timid inventory build of 357'000 barrels. The more official EIA data is due today. Any decline in oil inventories should provide support to oil prices. But the prospects of slower recovery in global oil demand and a probably premature unwinding of the OPEC production cuts could tilt the balance to the downside in the coming weeks and weigh on the $40 support. — The writer is senior analyst at Swissquote Bank
