What we are looking for
- USD remains strong: A hawkish hike from the Fed is leading to fears of negative growth in the US. Several major forex pairs have broken below key supports for multi-year lows. The USD is the safe haven asset of choice.
- Indices under selling pressure again: A big risk-off surge on the Fed decision drove Wall Street sharply lower into the close. US futures have fluctuated but have engaged a minor rebound into the European session. This has initially helped European indices to find support but will be interesting to see if it can last.
- Commodities fluctuate: Precious metals fell away with the hawkish Fed decision, however, have found some support early today. Oil also fell and has rebounded. The question is for how long?
- Data trading: GBP traders will be glued to the Bank of England rates decision today, with elevated volatility expected. For USD positions, the Fed will still be fresh in the minds of traders and will still be driving moves. However, any significant surprises in the current account or jobless claims may impact too.
The Federal Reserve continues to drive a hawkish monetary policy stance. A 75 basis points hike to bring the Fed Funds Range to 3.00%/3.25% was fully expected (even if some had been looking for 100bps). However, the main moves were taken from the monetary policy projections (the “dot plots”). The remaining two meetings of 2022 could contain another 125bps of hikes towards 4.50%. The terminal rate is expected to be 4.60% in 2023 before rate cuts begin in 2024. This was all more aggressive than money markets had been pricing before the meeting. Powell also said that rates are likely to get to levels seen in the dot plot.
The market reaction to all this has been to invert the yield curve even more. The 2yr yield has jumped to 4.12% whilst the 10yr yield has dropped to 3.55%. This is the bond market seriously worried about longer-term growth prospects. Subsequently, commodities prices have fallen along with equity markets. The big winner was again the USD which has driven key breakdowns on EUR/USD, GBP/USD and AUD/USD, whilst USD/JPY has broken higher. The JPY was also volatile overnight on the Bank of Japan decision (dovish again) but is especially weak now. The Swiss National Bank hiked by 75bps as expected this morning. This has driven initial selling pressure through the CHF.
We continue the deluge of central banks today with the Bank of England being the key announcement on the economic calendar. The Monetary Policy Committee is expected to hike by 50 basis points and the message of further hikes will be the main takeaway. For the US data, the US Current Account deficit is expected to have reduced slightly in Q2. Weekly Jobless Claims are expected to have increased slightly. This would be the first weekly increase in six weeks, but interestingly claims have been lower than expectations for seven weeks in a row.
Market sentiment dives: The USD is pretty much the only asset not being sold today. Everything else, including other major forex, commodities, indices and crypto is lower.
Treasury yields are rising: Crucially though, there is a significant “Bear flattening” with the yield curve ever more inverted. The 2s/10s spread is now -55bps. This is the bond market flashing the red warning sign that recession is looming.
The Bank of Japan remains dovish: The BoJ has maintained its dovish stance of ultra-low interest rates. It left the interest rate at -0.10% and the 10-year government bond yield target at 0%. The decision was unanimous. In the statement, the BoJ said that it expects rates to “remain at their present or lower levels”.
The Swiss National Bank hikes as expected: The SNB has hiked rates by 75 basis points to +0.50%. This was where the consensus expected. The CHF has fallen sharply on this decision.
Cryptocurrencies sell off again: Risk-off trading continues to drive crypto lower. Bitcoin is now decisively below $19000 and is down -0.5% today. Ethereum is down over -3% at $1272.
- Bank of England monetary policy (at 11:00 GMT) Consensus is expecting a +50bps increase in the Base Rate to 2.25% (from 1.75% previously)
- US Current Account (at 12:30 GMT) The deficit is expected to reduce slightly to -$260.6bn in Q2 (from -$291.4bn in Q1)
- US Weekly Jobless Claims (at 12:30 GMT) Claims are forecast to increase slightly to 218,000 (from 213,000 in the previous week).
- Kansas Fed Manufacturing (at 14:00 GMT) Analysts are expecting a deterioration to -10 in September (from -9 in August)
Major markets outlook
Broad outlook: Risk appetite has dived across major markets. However, it will be interesting to see how long a minor initial kickback against this move can last.
Forex: USD has been a key outperformer, but there has been a minor unwind of this move as the European session has developed. EUR and GBP have rebounded.
- EUR/USD has closed decisively below the support of the August/September lows between 0.9864/0.9900. This is again a 20-year low and is the next step in the bear market. There has been a minor intraday rebound this morning from the 0.9807 low but we would be looking to use any rallies as a chance to sell. A conservative downside projection of a range breakdown implies a decline towards 0.9650. The initial resistance is now 0.9864/0.9900.
- GBP/USD fell decisively yesterday to move below the downtrend channel. There is no meaningful support now, with 1.10 and arguably parity the next levels of note. The market has seen an intraday rebound from 1.1211 this morning. However, we have to see any near-term technical rally as a chance to sell. The Bank of England will create more volatility today but is unlikely to be a sustainable catalyst for recovery.
- AUD/USD has confirmed the breach of the 0.6670 support and a move to the lowest since May 2020. It also leaves plenty of overhead supply with resistance between 0.6670/0.6700. Momentum remains correctively configured with further downside potential on the RSI (daily RSI is in the high 30s). We continue to look to sell into near-term strength. Initial support is 0.6575.
Commodities: Gold is choppy but remains stuck under resistance, whilst the outlook for silver is arguably improving. Oil continues to struggle with the resistance of overhead supply.
- Gold was volatile on the Fed decision and is lower this morning. Across the past week it has been trading in a choppy range from support at $1653 up towards the overhead supply now between $1680/$1691. However, there is still a negative bias to momentum and we favour downside. Below $1653/$1654 the next support comes in between $1550/$1610.
- Silver has been choppy over the past week but is holding up well. It is also arguably trading in an uptrend of the past 12 days, posting higher lows throughout this week. The trouble is breaking decisively above the resistance between $19.60/$20.00. This also caps the rebound with a five-month downtrend overhead. We watch for a close above $19.70 to be an initial sign of a potential upside break. For now, though this is a consolidation. Initial support is now Tuesday’s low at $19.05 above the key near-term low at $18.77.
- Brent Crude oil has once more failed around the resistance band between $93.25/$96.60. This is a growing near to medium-term barrier, with the falling 21-day moving average (currently around $94.50) also a basis of resistance for smaller technical rallies. With all trends and moving averages falling, we favour selling into strength to a retest of the $88.25 low once more. Initial support is at $89.00.
Indices: The bears remain in control as markets continue to sell into near-term strength.
- S&P 500 futures have fallen decisively to levels not seen since mid-July. With momentum, correctively configured rallies remain a chance to sell. There has been an initial intraday rebound as the European session has developed this morning, but there is overhead supply now between 3843/3935 to catch renewed selling. There is little reason not to expect further retreat towards 3723 in due course.
- German DAX fell away once more yesterday and has tested the long-term key lows at 12375/1242. There is continued corrective configuration on momentum indicators and it will be interesting to see how markets respond to a rebound early in the European session. This is likely to be another chance to sell. There is resistance initially between 12850/12930 as a gauge. We continue to look upon near-term rallies as a chance to sell for further tests of the long-term support.
- FTSE 100 has been under selling pressure with other major indices on the Fed decision. However, an early rebound has developed this morning. There have been intraday rallies in each of the past six sessions which have failed. The rebound has come from 7143 which was in the middle of the support band between 7127/7164 from the September lows. There is resistance between 7285/7333.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.