Investors Lock Gaze on the Fed Decision

The dollar traded mixed against the other major currencies, with the risk-linked ones gaining and the safe havens sliding. Equity markets traded mixed as well. EU shares rebounded, but Wall Street fell, with investors taking the sidelines during the Asian trading today, perhaps in anticipation of the Fed decision later in the day. With market expectations pointing to four quarter-point rate increase this year, it would be interesting to see what policymakers have to say, especially ahead of the March meeting, when the first lift-off is expected to be delivered.

MARKET PARTICIPANTS STEP TO THE SIDELINES AHEAD OF THE FED OUTCOME

The US dollar traded mixed against the other major currencies on Tuesday and during the Asian session Wednesday. It gained versus CHF, JPY and EUR, while it underperformed against AUD, CAD, GBP, and NZD, in that order.

The strengthening of the risk-linked Aussie, Loonie, Kiwi, and the pound, combined with the weakening of the safe-havens yen and franc, suggests that market sentiment turned around yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that all the major EU indices under our radar, as well as the UK FTSE 100, traded in the green, but that was not the case during the US session. All three of Wall Street’s main indices slid, with Nasdaq falling the most. The picture today in Asia was more on the mixed side.

The rebound in European shares may have been the result of upbeat earnings from Ericsson and Logitech, but the slide in Wall Street confirmed that investors are more worried about the Fed’s future plans. The ongoing tensions in Ukraine may have also kept weighing on market sentiment. Today, market participants took the sidelines, perhaps awaiting the FOMC decision later in the day.

As we noted yesterday and the day before, following hawkish remarks by several policymakers lately, we do expect a hawkish outcome. We believe that policymakers will confirm the case for a March hike and more to come during the year. However, with market participants already anticipating four quarter-point rate increases by December, we see ample room for disappointment. Let’s not forget that according to the latest “dot plot”, Fed officials see three hikes this year.

So, anything suggesting that policymakers may not proceed as fast as the market currently anticipates could result in a rebound in equities, and a pullback in the US dollar and other safe havens. Even if the outlook matches expectations, we could still experience a “sell the rumor, buy the fact” market reaction. In order for equities to fall notably lower and the dollar to accelerate north in the aftermath of the Fed decision, Powell and his colleagues may need to appear even more aggressive than the current pricing suggests, a case we see as unlikely.

Now, ahead of the FOMC decision, we have another central bank deciding on monetary policy, and this is the BoC. At its latest meeting, this Bank kept interest rates untouched at 0.25%, and in the statement accompanying the decision, the language was more cautious than previously, with officials expressing concerns over the economic impact of the Omicron coronavirus variant. That said, the new strain proved to be milder than initially estimated, which combined with a notable improvement in the Canadian economy and further acceleration in last week’s inflation data, allowed traders to assign a strong chance for a rate increase at this gathering.

Thus, it will be interesting to see whether officials will indeed hit the hike button at this gathering or not. We believe that they can indeed raise rates today. However, with such an action nearly fully priced in, we don’t believe that the Loonie will gain much on that. For that to happen, we believe that policymakers will need, not only to hike, but to also signal that they are ready to continue with more lift-offs in the months to come.

NASDAQ 100 — TECHNICAL OUTLOOK

The Nasdaq 100 cash index traded lower again yesterday, hit support at 13905, but then, it rebounded somewhat. Overall, the index remains well below the lower end of the sideways range that contained most of the price action between October 26th and January 18th, as well as below a downside resistance line taken from the high of January 4th. In our view, this paints a negative short-term picture.

We believe that even if we see another rebound in the aftermath of the Fed decision, this could stay limited below the aforementioned downside line, and the bears could take charge again and push for another test at 13905, or at 13715, marked by Monday’s low. A break lower would confirm a forthcoming lower low and may test the 13475 barrier, marked by the low of June 4th, the break of which could extend the fall towards the low of May 20th, at 13155.

We will abandon the bearish case only if we see the index returning back within the aforementioned sideways range, and this could be confirmed by a break above 15650. The bulls could then push the action higher, initially towards the peak of January 13th, at 15995, where another break could eventually take the index to the upper bound of the range, at 16450.

EUR/USD — TECHNICAL OUTLOOK

EUR/USD traded lower yesterday, but hit support near the 1.1263 barrier, and then, it rebounded. Overall, the pair has been printing lower highs and lower lows since January 14th, and although it is back within the prior sideways range, between 1.1234 and 1.1375, we see decent chances for the bears to take charge again soon.

The pair could extend yesterday’s rebound if the Fed does not appear as hawkish as the market anticipates, but the bears could take charge from near the 1.1335 zone and push the action back down, perhaps towards the lower end of the aforementioned range, at 1.1234. If they decide to ignore that barrier this time around, we may see extensions towards the 1.1185 territory, defined as a support by the low of November 24th.

On the upside, a break back above the upper end of pre-discussed range could encourage the bulls to climb towards the 1.1432 barrier, marked by the high of January 17th, the break of which could extend the recovery towards the peak of November 15th, at 1.1465, slightly below the highs of January 13th and 14th.

AS FOR THE REST OF TODAY’S EVENTS

As every Wednesday, we get the EIA report on crude oil inventories for last week, and expectations are for a 0.728mn barrels slide, following a 0.515mn barrels increase the week before.

Tonight, during the early Asian morning Thursday, we have New Zealand’s CPI for Q4. The qoq rate is forecast to have declined to +1.3% from +2.2%, but the yoy one is anticipated to have risen by nearly a whole percentage point, to +5.7% from +4.9%. Remember that the RBNZ has already raised rates twice in the post-pandemic era, and further acceleration in New Zealand’s CPI will confirm the case for more rate hikes, with the next one most likely to be delivered at the upcoming gathering. Something like that could benefit the Kiwi, but whether it could hold onto those gains, it could depend on the broader market sentiment, and perhaps the outcome of the Fed decision. Let’s not forget that the Kiwi is a risk-linked currency.

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Originally published at https://www.jfdbank.com.

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