Sentiment Stays Supported Ahead of Fed Decision

Although EU indices closed slightly in the red yesterday, the US and Asian ones continued to gain, with the Dow Jones and the S&P 500 hitting fresh record highs. That said, investors may adopt a cautious stance today ahead of tomorrow’s FOMC decision, but we expect officials to maintain their dovish stance, something that may keep the broader sentiment supported.

US AND ASIAN EQUITIES GAIN, INVESTORS AWAIT THE FED

The US dollar traded mixed against the other G10 currencies on Monday and during the Asian session Tuesday. It gained against GBP, SEK, and NOK in that order, while it underperformed versus CHF, NZD, AUD, and JPY. The greenback was found virtually unchanged against EUR and CAD.

The strengthening of the Swiss franc suggests that markets traded in a risk-off fashion yesterday and today in Asia, but the strengthening of the risk-linked Aussie and Kiwi points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU indices finished their session slightly in the red, with the only exception being Italy’s FTSE MIB, which gained 0.11%. That said, appetite improved during the US session, with the Dow Jones and the S&P 500 hitting fresh record highs. The optimism rolled over into the Asian session today as well, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.52% and 0.78% respectively.

Although the US Treasury yields did not pull back significantly from their Friday levels, investors continued to buy equities, perhaps as fears over high inflation in the months to come continued to ease. Yes, inflation could spike higher in some of the developed nations soon, but most central banks have noted that this is likely to prove to be temporary. For example, the Fed has clearly said that inflation is likely to rise and stay above 2% for some time — the goal for the beginning of normalization — in the years after 2023.

With all that in mind, we stick to our guns that equities are likely to continue trending north, while the US dollar is likely to stay under selling interest as inflation fears continue to ease, especially after last week’s soft US inflation data. Yes, investors may adopt a more cautious stance today, ahead of tomorrow’s FOMC decision, but bearing in mind that, when testifying before Congress, Fed Chair Powell maintained a dovish stance, we don’t expect policymakers to start hinting that tapering may start sooner than previously anticipated. We expect them to push back again on that idea, as they did at the last gathering, with Powell perhaps repeating that it’s too early to focus on tapering dates.

NIKKEI 225 — TECHNICAL OUTLOOK

In the beginning of March, the Nikkei 225 index reversed to the upside again and ended up breaking above the short-term downside resistance line taken from the high of February 16th. Now the price is seen trading above a short-term upside support line drawn from the low of March 5th. Although the index is currently on a trend to the upside, it is finding strong resistance near the psychological 30000 zone, marked by the highs of March 1st and 2nd. In order to get a bit more comfortable with the upside, a break of that resistance zone is needed.

If, eventually, the index does make a strong push through that psychological 30000 marks, this may attract more buyers into the game, potentially sending Nikkei 225 further north. We will then aim for the 30226 obstacle, or for the 30461 area, marked by the highs of February 24th and 22nd respectively. The price could stall near the latter hurdle, or even correct back down a bit. However, if Nikkei 225 stays above the aforementioned upside line, the bulls may take charge again and drive the index north, potentially overcoming the 30461 area and aiming for the 30716 level, marked by the highest point of February.

On the other hand, if the aforementioned upside line breaks and the price falls below the 29470 zone, marked by the inside swing high of March 7th, that may invite a few more bears into the game. Nikkei 225 could then drift to the 29203 obstacle, a break of which would place the price below all of the EMAs on our 4-hour chart and then target the 28961 area, marked by the low of March 10th. If the bears are still dominating the field then, the next possible target could be at 28555, which is the low of March 8th.

USD/CAD — TECHNICAL OUTLOOK

Looking at USD/CAD on our 4-hour chart, we can see that the pair is currently trading, not only below a short-term tentative downside resistance line taken from the high of March 5th, but also below all of its EMAs. The rate may retrace slightly higher, but if it struggles to get back above the 21 EMA, another slide could be possible. We will take a somewhat-bearish approach for now.

A small push higher might bring the rate closer to the area between the 1.2513 and 1.2520 levels, which mark the high of March 15th and the low of March 11th respectively. Around there the pair may also test the 21 EMA and if all that area provides a strong hold-up, the bears could take advantage of the higher rate and send it down again. If so, USD/CAD might drift to the 1.2440 zone, marked by the current lowest point of March, a break of which would confirm a forthcoming lower low. The pair might then fall to the 1.2379 level, marked by the inside swing high of January 30th, 2018.

Alternatively, if the pair climbs back to its previously-mentioned downside line and breaks it, this could signal a change of the short-term downtrend, possibly spooking some bears from the field. More buyer might join in if USD/CAD pushes through the 1.2608 barrier, marked by an intraday swing high of March 11th. The rate could then accelerate towards the 1.2683 territory, a break of which may clear the path to the area between the 1.2737 and 1.2743 levels, marked by the highs of March 5th and February 26th respectively.

AS FOR TODAY’S EVENTS

During the European morning, we get Germany’s ZEW survey for March, while later, from the US, we have retail sales for February, and the industrial production for the same month. With regards to the German ZEW survey, both the current conditions and economic sentiment indices are expected to have improved, while in the US, retail sales are anticipated to have seen a setback and industrial production to have slowed. The API (American Petroleum Institute) report on crude oil inventories for last week is also due to be released, but as it is always the case, no forecast is available.

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