Fed Sees Interest Rates Rising in 2023

The US dollar rallied, while equities pulled back yesterday, after the Fed signaled that interest rates are likely to start rising in 2023. Today, the central bank torch will be passed to the SNB, while tomorrow, during the Asian session, it will be the turn of the BoJ to decide on monetary policy.

USD STRENGTHENS, EQUITIES RETREAT ON HAWKISH FED

The US dollar surged against all the other major currencies on Wednesday and during the Asian session Thursday. It gained the most ground versus CHF, EUR, AUD and NZD.

The strengthening of the dollar across the board suggests that markets turned risk-off at some point yesterday or today in Asia. Indeed, turning our gaze to the equity world, we see that EU bourses traded mostly higher, but in the US, all three of Wall Street’s main indices fell, with Dow Jones losing the most. As for today, in Asia, sentiment was more mixed, with Japan’s Nikkei and South Korea’s KOSPI sliding, but China’s Shanghai Composite trading unchanged, and Hong Kong’s Hang Seng gaining.

Yesterday, the main event on the economic agenda was the FOMC monetary policy decision. The Committee kept its policy settings untouched, while there was no huge change in the language of the statement accompanying the decision. It was noted that the vaccination progress will likely continue to reduce the effects of the crisis on the economy, but risks to the outlook remain. It was also repeated that the inflation surge largely reflects transitory factors.

With no major changes in the accompanying statement, the spotlight fell on the new “dot plot”. Remember that, back in March, the median dots suggested that interest rates are likely to stay at present levels even in 2023. However, looking at the details, 4 members voted for hikes in 2022, while 7 members saw rates higher in 2023. Now, the members who wish to see interest rates higher in 2023 are 13, taking the median dot to 0.6% from 0.1%, which means two quarter-point hikes, while 7 now see at least one hike in 2022. They seem to have brought forward the pace of the expected interest rate increases by a full year in just three months. In our view, this was the trigger behind the rally in the US dollar and the retreat in equities. Remember that many high-growth companies are valued based on earnings expected years in the future, and thus, when interest rates rise, their discounted present values decline.

At the press conference following the decision, Fed Chair Jerome Powell said that there had also been a first discussion about when to start withdrawing the USD 120bln in monthly bond purchases. However, the talks will continue in the coming months as the economy continues to heal. This means, that, even if risk-sentiment stays on the soft side for a while more, investors will continue to pay attention to economic data and what Fed officials have to say, as they try to gauge the beginning and the pace of a potential QE tapering.

Today, the central bank torch will be passed to the SNB, while tomorrow, during the Asian session, it will be the turn of the BoJ to announce its decision.

Getting the ball rolling with the SNB, the last gathering of this Bank was back in March, and resulted in no fireworks. The Bank kept its policy unchanged, reiterating that the Swiss franc remains highly valued and that they are willing to intervene more strongly in the FX market. Despite the surge in inflation in other places of the globe, Switzerland’s consumer prices remain subdued, well below the SNB’s objective of 2%, and thus, we don’t believe that the SNB will risk sounding less dovish, as this may result in an even stronger franc, something they seem not to want. After all, a few weeks ago Chairman Thomas Jordan reiterated the view that the franc remains very strong and that he sees no reason to change the current policy settings. Thus, we expect policymakers to keep policy steady and maintain their willingness to intervene when deemed necessary.

Now, flying to Japan, the last time they met, BoJ policymakers did not proceed with any policy change either. They kept all their settings unchanged, revising up their growth forecasts, but downgrading their inflation ones. Since then, inflation in Japan remained in negative waters during the month of April, in both headline and core terms, while, during the first three months of 2021, the Japanese economy contracted 1.0% qoq after expanding 2.8% in Q4 2020. With all that in mind, we expect the BoJ to stay on the dovish side and keep its main policy settings unchanged. The only item of interest with regards to this Bank, is that it is considering to expand the September deadline for its pandemic relief program. According to market chatter a 6-month extension is the most likely outcome. However, the official announcement may not come at this gathering, as policymakers can still delay the decision to July.

DJIA — TECHNICAL OUTLOOK

The DJIA index drifted lower yesterday and closed the trading session well in the red. The price is currently trading well below a short-term tentative downside resistance line drawn from the high of May 10th. Although we may see some further declines in the upcoming days, these may still be classed as temporary corrections, if the index respects the medium-term tentative upside line drawn from the low of January 31st. Overall, we will stay positive.

If the price falls a bit further, it could end up testing the 33639 hurdle, or the 33473 zone, marked by the lows of May 20th and 19th respectively. Around there DJIA could also test the aforementioned upside line, which if stays intact, may attract the bulls back into the field. If so, this may help lift the index back to the 34206 territory, a break of which could open the door for a move to the 34560 area, marked by the high of June 14th.

On the other hand, if the price overcomes the previously discussed upside line and then falls below the lowest point of May, at 33286, this will confirm a forthcoming lower low and could invite even more sellers into the arena. DJIA might travel to its next support area between the 32805 and 32868 levels, marked by the inside swing high of March 23rd and the low of March 29th, where the slide may get halted for a while. However, if the bears remain behind the steering wheel, they could drag the price further south, possibly aiming for the 32355 level, which marks the lows of March 23rd and 24th.

NZD/USD — TECHNICAL OUTLOOK

After NZD/USD was seen balancing for a few days at the end of last week and then in the beginning of this week just slightly above a medium-term upside support line taken from the low of October 20th, the pair eventually violated that line and drifted south. Further declines were fuelled by strengthening USD, after the FOMC statement yesterday. The rate is now also trading below a short-term downside resistance line taken from the high of May 27th. Even if we see a rebound at some point soon, as long as that downside line remains intact, another slide might be possible. We will take a bearish approach overall.

Given that the area near the 200-day EMA provided good support, we may see the rate climbing back up a bit, where it could test the aforementioned upside line from underneath, or the downside line. If the zone surrounding those two lines provides strong resistance, the bears might take advantage of the higher rate and send it back down again. If so, NZD/USD could travel back to the 200-day EMA, or to yesterday’s low, at 0.7042. If the sellers continue to apply pressure and push the pair below the 0.7042 hurdle, this will confirm a forthcoming lower low, potentially sending the rate towards the 0.6996 obstacle, or to the 0.6943 level, marked near the lowest points of March and April.

Alternatively, if the pair rises all the way back above both of the aforementioned trendlines and then pushes through the 0.7160 barrier, marked by the current highest point of this week, this may invite more buyers into the game again. NZD/USD could move to the 0.7242 obstacle, a break of which might set the stage for a push to the 0.7316 level, marked by the highest point of May.

AS FOR THE REST OF TODAY’S EVENTS

During the Asian session, we already got New Zealand’s GDP for Q1 and Australia’s employment report for May. New Zealand’s GDP came in better than expected, diminishing the chances for a lower OCR by the RBNZ even further, while Australia’s jobs report disappointed, adding to the chances for the RBA to extend its QE purchases at the upcoming gathering.

Later in the day, we get Eurozone’s final CPIs for May, and as it is always the case, they are expected to confirm their preliminary estimates. From the US, we have the initial jobless claims for last week, which are expected to have continued to decline, to 359k from 376k.

Besides the SNB President Thomas Jordan, who will hold a press conference after the SNB decision, we will also get to hear from ECB Chief Economist Philip Lane, ECB Executive Board member Frank Elderson, and US Treasury Secretary Janet Yellen.

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