Written by Lukman Otunuga, Research Analyst at FXTM
The main event risk for the Rupiah on Thursday will be the pending Bank Indonesia interest rate decision which is expected to conclude with interest rates left unchanged in June. Sentiment towards the Indonesian economy has steadily improved in 2017 as economic data stabilizes. Inflation in the nation continues to follow a positive trajectory while consumer confidence hit record highs in May.
Although the central bank may remain on standby in the short term, there still is a possibility of an interest rate increase by Bank Indonesia before year end if economic conditions stabilize further.
Focusing on the foreign exchange outlook, the USDIDR remains volatile on the daily charts ahead of the interest rate decision. Short-term bulls may utilize the current Rupiah weakness to send the USDIDR towards 13320.
Yellen dishes out hawkish surprise
Financial markets were caught completely off guard during late trading on Wednesday after the Federal Reserve adopted a firmly hawkish stance and even displayed some optimism over economic growth despite mounting concerns over weak inflation. The tone of caution investors were anticipating from the Fed was replaced by a strong determination to continue tightening in response to falling employment while accepting the prolonged periods of weak inflation this year. Although the hawkish surprise offered a temporary boost to the Dollar, markets have not bought into this newfound optimism as expectations of another interest rate increase in 2017 currently stands below 50%.
All in all, there seems to be a disconnect between what the markets anticipate and what the Fed is signaling with investors needing more persuasion on the Federal Reserve’s ability to raise rates again. This persuasion could be in the form of improving economic data but until then, the Dollar Index remains under pressure on the daily charts with further weakness opening a path towards 96.50.
Oil markets drowned by oversupply fears
WTI Crude was exposed to heavy losses on Wednesday with selling activity invading Thursday’s trading session after an unexpectedly large build in gasoline inventories fuelled oversupply fears. It is becoming quite clear that despite OPEC’s valiant efforts to rebalance the saturated markets by trimming output, the global glut continues and has left oil trading at depressed levels.
With the bearish price action on WTI Crude suggesting that those who were heavily bullish on the commodity may be having second thoughts, the upside may be limited. I believe sentiment towards oil remains heavily bearish and further losses should be expected as oversupply concerns inspire sellers to attack the commodity ruthlessly.
Commodity spotlight – Gold
Gold was under renewed selling pressure on Wednesday after the Federal Reserve shocked the markets by dishing out a hawkish surprise. It must be kept in mind that this zero-yielding metal remains dictated by US interest rate expectations and is at risk of trading lower if speculations heighten over the Federal Reserve raising rates. Although Gold is currently pressured, risk aversion from Brexit developments and political uncertainty in the US could still support prices. From a technical standpoint, the daily bullish outlook on Gold remains valid as long as prices remain above $1260.