There has been a considerable swing in sentiment in the wake of the FOMC meeting. Initially, markets sold off and the USD strengthened on what was seen as a hawkish confirmation of accelerating the tapering of asset purchases. However, everything turned on the press conference where Fed Chair Powell did not back up these hawkish assertions. He was cautious about the timing of rate hikes and wary of the labor market. Cue a big turnaround and risk assets have since rallied strongly. This has continued into today. There is a whole raft of central banks reporting today (including the Bank of England and the ECB), but the feeling is that maybe the glass is half full after all.
- Main drivers: Markets turn risk positive; the FOMC accelerates the taper with a slightly cautious press conference; Australian unemployment lower than expected; SNB holds rates as expected; Economic calendar: flash PMIs, Bank of England and ECB meetings and US Industrial Production.
- The broad sentiment is risk positive: In the wake of the FOMC meeting (and especially after Chair Powell’s press conference) not being as hawkish as feared, risk assets have jumped. Indices are strongly positive and the USD is pulling back lower. Oil moving higher with commodities positive.
- The Fed moves hawkishly along the tightening cycle: yesterday’s FOMC was seen as mixed and arguably not as hawkish as it could have been. The statement was as hawkish as expected, increasing the pace of the taper of asset purchases to -$30bn means that QE will have ended by the March 2022 meeting. The dot plots implied 3 rate hikes in 2022 (up from 2 previously). In the projections for 2022, inflation is up, unemployment is down and growth is up. However, in the press conference Fed Chair Powell was relatively cautious and said that no decision had been made on when to raise rates and the participation rate was disappointingly subdued. [near term supportive for risk appetite]
- Australian unemployment improves: Unemployment fell much more than forecast in November, to 4.6% (5.0% forecast, 5.2% in October). The participation rate also increased strongly. [AUD supportive ]
- SNB holds rates: the Swiss National Bank has held its policy rate at -0.75%. This was unanimously expected by the consensus. [CHF neutral]
- Central bank speakers: the FOMC members are now out of the blackout but no speakers are scheduled today.
- Eurozone Flash PMIs (at 0900GMT) manufacturing expected to drop to 57.8 (from 58.4) and services to fall to 54.1 (from 55.9)
- UK Flash PMIs (at 0930GMT) manufacturing expected to drop to 57.6 (from 58.1) and services to fall to 57.0 (from 58.5)
- Bank of England monetary policy (at 1200GMT) no change on interest rates is expected at =0.25%, with 7-2 in favour of keeping rates steady
- ECB monetary policy (at 1245GMT) no change to the deposit rate of -0.50% is expected, interest to come from how the PEPP asset purchases are wound down.
- US Industrial Production (at 1415GMT) is expected to grow by +0.7% in November (after +1.6% in October)
- US Flash PMIs (at 0930GMT) manufacturing is expected to improve slightly to 58.5 (from 58.3) with services to also improve to 58.5 (from 58.0)
Broad outlook: a complete swing in sentiment as risk appetite has improved significantly. Indices testing lower, higher beta forex outperforming, and commodities pushing higher.
Forex: USD under negative pressure. Commodity currencies (NZD, AUD, CAD) performing well, safe havens (JPY especially) underperforming
- EUR/USD outlook is improving within the range again. Bouncing off 1.1221 yesterday and now looking towards a test of 1.1325 initial resistance. The range highs at 1.1382 remain key resistance.
- GBP/USD is now breaking through key resistance around 1.3275/1.3290. A close above 1.3310 confirms a bullish break. For today, the risk is that this move becomes a false break ahead of the Bank of England. Initial support is at 1.3245.
- AUD/USD is testing key resistance at 0.7185. A close above would complete a key base pattern and open c. +200 pips of further recovery. Initial support at 0.7145.
Commodities: precious metals recovering, oil. drifting higher.
- Gold has rebounded from $1752 and is now edging towards $1790 again. This is where intraday rallies have repeatedly failed in recent weeks, so will be a key test. The bulls need a break above $1815 to suggest real traction in a recovery.
- Silver Signs of technical improvement on the daily chart as the price rebounded off key support at $21.40. However, initial resistance at $22.41 is the first lower high and an important gauge. However, it is difficult to see serious recovery traction until $22.60 is breached. Initial support at $21.90.
- Brent Crude oil has ticked above $74.20 to improve the near-term outlook, but a move above $75.53 is needed to suggest a sustainable recovery is forming. Beyond there $76.80/$77.20 remains a key barrier.
Indices: with a complete switch in sentiment markets are pulling sharply higher again.
- S&P 500 futures with a huge bull candle yesterday and further gains this morning, the market is eyeing resistance at 4730/4740. A breakout would be an all-time high. Initial support is now 4696/4711.
- DAX has pulled strongly higher since the Fed meeting. The market is now eyeing the initial resistance at 15,796. A move through the resistance opens the more important barrier of 15,868. There is initial support around 15,655/15,695.The initial resistance at 15,796.
- FTSE 100 has rebounded although is not quite as all-out bullish as other indices. There is a more positive outlook now with support between 7227/7256. The bulls need a move above the first significant resistance at 7302 to build on positive traction.