Investors Lock Gaze on the FOMC Decision

European and US indices traded in the green yesterday, but today, Japan’s Nikkei and China’s Shanghai Composite lid. It seems that investors may have decided to reduce their risk exposure due to the FOMC decision scheduled later in the day. The Committee is expected to deliver a 50bps hike, and thus, if this is the case, all the market attention may quickly turn to the accompanying statement and press conference for updated information with regards to the future path of interest rates.

Will the Fed Hike by 50bp? Will it Signal More Sizable Increments?

The US dollar traded higher against all but two of the other major currencies on Tuesday and during the Asian session Wednesday, losing ground only versus CAD and EUR. The greenback won the most versus GBP and NZD, while it eked out the least gains against JPY.

Although the performance in the FX world does not paint a crystal-clear picture with regards to the broader market sentiment, we would assume that the weakening of the Aussie and Kiwi, combined with the relative strength of the US dollar and the Japanese yen, mean a risk-off trading activity. Turning our gaze to the equity world though, we see that major EU indices traded in the green, with the positive appetite rolling into the US session, albeit softer. Nonetheless, today in Asia, both Hong Kong’s Hang Seng and South Korea’s KOSPI traded in the red. Japan’s Nikkei 225 and China’s Shanghai Composite stayed closed due to holidays.

The reason why investors may have decided to reduce their risk exposure during the Asian trading may have been the looming FOMC decision scheduled for later today. The financial community is widely anticipating a 50bps rate hike, and thus, if this is the case, the attention is likely to quickly turn to the accompanying statement and the press conference by Fed Chair Powell for new information about the future rate path.

Recent hawkish remarks by several Fed officials, including Powell, have prompted investors to fully price in a double hike for this meeting, as well as a triple one in June. They even anticipate another 50bps to be added in July, with a 12% chance of a back-to-back triple hike. That’s overly hawkish and thus, the meeting statement and the press conference have to match that for the US dollar to spike higher. Anything suggesting that the financial community is too aggressive may result in a decent setback. Having said all that though, even if this is the case, as long as the Fed is expected to continue tightening at a faster pace than other major central banks, the US dollar is very likely to rebound again in the foreseeable future and continue its prevailing uptrend.

DJIA — Technical Outlook

The Dow Jones Industrial Average cash index traded slightly higher yesterday, to test the 33380 zone and the downside resistance line drawn from the high of April 21st. Despite the index’s proximity to that line, as long as it stays below it, we will consider the short-term outlook to be cautiously negative.

A clear dip below yesterday’s low, at 32900, could confirm the case of a trend continuation and we may see declines towards the 32290 zone, which provided strong support on February 24th and March 8th. If the bears don’t stop there, we may see them testing the 32060 territory, marked by the low of March 25th, the break of which could carry extensions towards the low of March 8th, at 31315.

On the upside, we would like to see a clear rebound above 34120 before we start examining the bullish case. This barrier provided resistance on April 26th. Such a move could initially target the 34320 level, the break of which could allow the bulls to climb towards the 34800 zone, marked by the high of April 22nd. If they are not willing to stop there, then a break higher could trigger extensions towards the peak of the day before, at 35490.

EUR/USD — Technical Outlook

EUR/USD has been trading in a sideways manner since April 27th, roughly between the 1.0490 and 1.0580 barriers. However, overall, the pair continues to trade below the downside resistance line drawn from the high of March 31st, and thus, we will stick to our guns that the short-term outlook is negative.

A clear and decisive break below 1.0470, the low of April 28th, would confirm a forthcoming lower low on both the 4-hour and daily charts and may see scope for large declines towards the 1.0350 zone, a territory last seen providing support back in December 2016 and January 2017.

We will abandon the bearish case only if we see the pair climbing all the way back above the 1.0760, a territory which acted as a decent support on April 14th and 19th. The bulls could get encouraged to test the 1.0845 barrier, the break of which could extend the advance towards the 1.0935 territory, marked by the high of April 21st. If that barrier doesn’t hold either, then we are likely to experience extensions towards the inside swing low of April 1st, at 1.1025.

As for the Rest of Today’s Events

From the Eurozone, we get the final services and composite PMIs for April, as well as the retail sales for March. From the US, we have the ADP employment report, the final services and composite Markit PMIs, as well as the ISM non-manufacturing index, all for the month of April.

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

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