Article by ForexTime
Market risk is very high this week as there are several events that could generate volatility within the capital markets. The outcomes of the FOMC meeting and the Scottish referendum will dominate, although ongoing geopolitical tensions and possible upheaval in the Mid-East and Ukraine have the potential to create a market that whipsaws.
The possibility of a hawkish outcome from the Fed, and a “yes” vote for Scotland to leave the U.K. have weighed heavily on bonds worldwide. Global bond yields posted their largest 2-week increase in over a year. Concurrently, U.S. and European equities broke recent winning streaks of at least 4-weeks, while the Asian equity index has had its worst losing streak in about four years. Asset markets are likely to remain vulnerable to further selling pressure this week.
OECD cuts growth forecast for the largest developed countries, with Eurozone growth now seen at just 0.8% this year, versus 1.2% expected back in May. The forecast for the U.S. was cut to 2.1% from 2.6% expected previously. The organization warned that “the bullishness of financial markets appears at odds with the intensification of several significant risks” and that “continued slow growth in the euro area is the most worrying feature of the projections”. The forecasts for Germany, France and Italy were cut to 1.5%, 0.4% and -0.4% respectively.
Market participants now expect the FOMC to drop the “considerable time” language from the policy statement. Both hawks and a few doves have suggested it’s time remove the date-dependent commitment as the economy nears the growth and inflation goals. The one big hurdle to a shift in language, however, is Fed Chair Yellen, who still worries about the labor market, housing, and prices, and fears the bearish effects or rising rates.
The USD/JPY currency pair continued to move higher, as the greenback gains traction from higher interest rates. The yield differential continues to move in favor of the greenback, pushing the currency pair to 6-year highs. Momentum on the currency pair remains positive with the MACD printing in positive territory with an upward sloping trajectory. The RSI is printing a reading of 79, which is well above the overbought trigger level of 70 and could foreshadow a correction.
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