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Risk assets are generally higher again today; however it's getting harder to explain why. Perhaps the markets don't believe that the UK is back in recession and experiencing the first double-dip since the 1970'S (more on that later) or maybe the latest results from Apple is buoying markets. The tech giant sold more than 35m iPhones in the first quarter and it sold 150% more iPads than at the same point last year. This has dispelled fears that the company that represents 7% of the entire S&P 500 is reaching its peak sales growth.

Can the market get one more bite of the Apple?

Even though the Chinese economy is slowing, Tim Cook and co will be happy that consumers in China are still buying up the latest iPhone products. This is one of the benefits of rising wages, however the current US companies' foreign-earnings tax code means that the benefit isn't really felt by the US Treasury. That is a story for another day; the focus now is on the stock market and whether or not Apple can prolong the recent rally especially if the Fed (who concludes its meeting later today) suggests there won't be any more accommodation when Operation Twist rolls offline in June. Right now 1,380 is acting as stiff resistance in the S&P on the way to a re-test of 1,400, but until we get more clarity from the Fed on the future of monetary policy then we believe stocks are range bound, with 1,350 acting as good support during this consolidation phase.

We expect the FOMC to remain in wait-and-see mode later today. The all-important phrase in the statement is whether or not the Fed commits to keeping interest rate policy accommodative until late 2014. Some Fed members, including Vice-chair Yellen, have shifted to a slightly more hawkish stance in recent months so there may be some tweaking of expectations for monetary policy and inflation/ growth trajectory, but on balance we believe the ultra-accommodative stance will remain in place and the Fed will continue in wait-and-see mode to see what the effect of the end of Operation Twist will have on Treasury yields. There is likely to be some expectation of more QE from the FOMC today, so if the Bank performs as we expect then we may see some upward pressure on the dollar, especially versus the yen.

The ECB doesn't offer more support

 

Mario Draghi sounded more worried about growth at a speech to the European Parliament this morning. He said demand for credit was still weak and that growth risks were on the downside with the exception of Germany. However, he didn't suggest that the Bank will offer more support to Europe's struggling sovereigns or banks anytime soon. He said that the SMP is not eternal or infinite and that the ECB shouldn't fund banks indefinitely, dampening hopes for another round of LTRO. Crucially for the euro, he added that the Eurozone's monetary policy was not too tight. While Draghi also said that monetary accommodation won't be removed any time soon, the Eurozone can't rely on the Bank for another LTRO or SMP-fuelled liquidity binge.

UK back to the 1970's?

That didn't seem to worry the euro bulls, and the single currency has tested near-term resistance at 1.3320 today. However, some of the uptick in the euro is down to the recovery in EURGBP post the UK growth data. We wrote an update on UK GDP already here however, the fact the UK has re-entered a double-dip recession for the first time since the 1970'S and the recovery/ recession cycle is the worst it has been in 100-years makes, combined with the government's on-going fiscal consolidation efforts, suggests that the BOE may not be as hawkish as some had imagined even though the dovish camp lost its most important member earlier this month. The BOE needs to fill in the growth gaps caused by a sluggish recovery and fiscal consolidation efforts, so although we don't think there will be more stimuli next month; it could be forthcoming later this year, which is pound negative.

Market Moves

 

The pound has been a major decliner this morning as the weak GDP data weighed on sterling. GBPUSD dipped from 1.6160 - a key Fib resistance level and the high from Nov 2011 - but has found good support at 1.6090. Below here 1.6060 is the next support of note. The trajectory of this pair will depend on the Fed this evening. If it is considered more hawkish than expected we could see the dollar move higher weighing on GBPUSD even more.

EURUSD has managed to brush off any bad news and climb towards 1.3220 - the recent high. However, this pair is also dependent on the outcome of the FOMC meeting, so we expect it to remain range-bound until then. The single currency has seen its range vs. the dollar contract recently and it has been stuck in a fairly tight 1.3120 - 1.3220/30 range in recent days. This seems unsustainable to us and we could be about to break-out. A dovish Fed could see EURUSD test 1.3330, whereas a more hawkish Fed could see a test of 1.3056 - the bottom of the daily Ichimoku cloud chart and the start of a technical downtrend.

The Aussie and the Kiwi are recovering in line with risky assets, but both look vulnerable to further decline. The recent government rhetoric talking down Kiwi strength may cause the Kiwi to weaken more vs. the Aussie, potentially to 1.2765 - 50-day sma resistance - in the coming days.

USDJPY is in a 50 pip range as we lead up to the FOMC. This pair could be particularly volatile this evening and, in our view, will follow the direction of US Treasury yields.

Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: kbrooks@forex.com| w: www.forex.com/uk

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