Risk Aversion Continues Ahead of Fed/BoJ

We’re continuing to see a little risk aversion in the markets on Tuesday, with investors adopting come caution ahead of this week’s key risk events, the Federal Reserve and Bank of Japan meetings.

European equity markets are currently on course to open a little higher but these gains are marginal and at this stage only represent a slight paring of Monday’s losses. Weakness in commodity markets – usually associated with the risk-off trade – weighed on indices on Monday and again during the overnight session in Asia, and could continue to do so throughout trade today.

Oil is currently trading around half a percentage point higher on the day but remains down on the week after Genscape reported on Monday that inventories in Cushing rose again last week. This could be confirmed by API when it releases its figures this evening and EIA on Wednesday, which could weigh further on oil prices. Oil has been surprisingly resilient given the news flow over the last week, it will be interesting to see if it continues to do so if this rise in inventories is confirmed this evening. If so, it could send a very bullish message to the markets.

The yen is trading higher again in the run up to Thursday’s policy decision from the BoJ. Of course, the gains since the start of the week pale in comparison to Friday’s moves and in reality possibly just represent a little bit of profit taking ahead of the announcement. Given the risk-off environment that we’re seeing at the start of the week, it could also be benefiting from its safe haven status. Whatever the reason, the gains are small and come Thursday, I expect to see much larger moves. Although after the last time the BoJ eased, it’s difficult to be too confident on the direction that will take.

The pound is also building on gains again on Tuesday following what has been a very successful week or so for the “remain” campaign. Between Chancellor George Osborne’s 200-page dossier on the risks of leaving the EU, US President Barack Obama’s warning that a trade deal wouldn’t come easy or fast and the sheer lack of anything from the “leave” campaign, the odds of a “Brexit” have fallen considerably which the pound is benefiting greatly from. It’s still early doors and I’m sure an assault from the “leave” camp is imminent but so far their response has been lacklustre and unless they act soon, they may find themselves with considerable ground to make up.

Once again today, there is some economic data due out but investors may have one eye on tomorrow’s Fed announcement and Thursday’s BoJ decision. That said, durable goods orders is a key economic indicator, as is the flash services PMI and CB consumer confidence number so we could get some volatility around these events. It’s also worth remembering that earnings season could continue to play a key role in overall market sentiment and there are a number of companies due to report today including Apple, Procter and Gamble, eBay and BP.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.