23.07.201908:30 Forex Analysis & Reviews: Low market volatility in anticipation of FOMC decision, small positive on Tuesday morning supports in AUD and NZD

Stock indices on Tuesday morning are trading higher, which reflects positive expectations following the FOMC meeting on July 31. There is no clear direction since there is no understanding of which trend will be dominant in the markets. The outcome will either be a positive effect from the alleged mitigation of financial conditions by a number of large central banks led by the Fed or a slowdown in the global economy, which will lead to a recession.

The Japanese Nikkei adds more than 1% at 6.00 UTC+0. Meanwhile, gold goes into the side range and the Japanese yen is declining. There are signs of positive growth, which gives a chance for a slight increase in commodity currencies during the day.

NZD/USD pair

Despite the fact that inflation data in Q2 did not bring any surprises, the prospects remain bleak. The resumption of recession in the New Zealand economy leads to a decrease in consumer activity and a decrease in inflation expectations that generates a whole chain of negative risks.

ANZ analyzed the risks and came to the conclusion that inflation can stabilize near the 2% level, and this will happen if the RBNZ aggressively reacts to the deterioration in the dynamics of inflationary expectations.

Also, ANZ notes that the risks of lowering inflation expectations remain very high. In fact, the annual inflation rate was kept at current levels, largely due to the temporary increase in gasoline prices, plus the April wage increase in average wages played a positive role. At the same time, a number of other factors suggest that the effect achieved will be short-lived given the slow economic growth, global trade in a serious threat and steadily decreasing production capacity.

Low inflationary expectations imply that real interest rates will be higher for the current nominal rate, which actually means a tightening of financial conditions. Hence, the RBNZ will react proactively and not wait for this tightening to lead to an economic slowdown. These are precisely the market expectations that will restrain the growth of kiwi.

Previously, we assumed that the NZD/USD pair would test the level of 0.6720 and continue its growth to the border of the channel at 0.6805/15. This forecast is confirmed but the momentum is weak. More likely, the pair will trade range-bound in anticipation of the FOMC decision on the rate. The support will be at 0.6720/25 and the resistance at 0.6790 and 0.6820.

AUDUSD pair

Forecast of indicators, such as the Ai Group's business research, show that employment growth will slow in the coming months. Same results were obtained in the in-depth quarterly study of NAB, which notes a decline in employment growth amid worsening business conditions, as well as declining trade and corporate profits.

Both the NAB and the Ai Group adhere to similar forecasts regarding the RBA's rate plans. In their opinion, the Central Bank will first monitor all of the situations on the labor market and only secondary on inflation. The employment trend has already led the RBA to cut rates in June and July, stating that these cuts are aimed at supporting employment and pushing inflation towards the medium-term goal of 2-3%.

Recently, the RBA revised its estimate of the downward unemployment rate, which means the intention to maintain lower unemployment and underemployment without creating additional inflationary pressure (that is, without raising the average wage). This position of the RBA means that there are no plans to reduce the rate in the coming months since this step will not have a positive effect.

What then awaits an Aussie? If the Fed starts the rate reduction cycle, the Aussie will respond with growth, provided that both stock indices and commodity prices will respond to the meeting with an increase. In this case, commodity currencies may experience the positive effect of the Fed's decision. If in the comments there is a clear concern about the approaching recession, then the rate reduction can be perceived by the players as a shot of a starting pistol, after which the collapse of markets and flight into defensive assets will begin.

Thus, the fate of an Aussie is currently in the hands of the Fed. There are no internal reasons for reducing the AUD/USD pair. So until July 31, trades will be in the range with a slight upward trend. The immediate goal is the resistance of 0.7080/85 with the prospect of a breakthrough to 0.72 and the support at 0.6995 and 0.6965.