Ipek Ozkardeskaya
Swissquote Bank Ltd
Equities fell and bond yields rose, as the hawkish Federal Reserve (Fed) fears resurfaced before Wednesday’s FOMC decision.
The Fed starts its two-day meeting, and expectations are mixed. The Fed could call the end of the aggressive rate tightening and signal slower rate hikes to enter the final phase of policy tightening, before pausing.
So, we are at that point, where, after this week’s 4th consecutive 75bp rate hike, the Fed could hint at a 50bp hike in December. Then, the season finale would come with a couple of 25bp hikes in the first quarter of 2023, then a pause.
But there is a risk in there. The risk is, because investors are waiting in ambush for the Fed to soften its tone, any sign of a less hawkish Fed could send both the bond and equity markets rallying.
And that’s exactly what the Fed doesn’t want to happen. A broadly cheerful market rally would boost inflation expectations, and inflation. And inflation is nowhere close to the Fed’s 2% policy target.
Therefore, if we see a determined inflation warrior that is ready to send everything under the bus to fight inflation, then we could call the end of the latest bear market rally and expect fresh lows in this selloff cycle.
If however, Powell sounds reasonably hawkish, we shall see consolidation, with hope of further recovery.
The S&P500 tests the 100-DMA to the upside for the first time in a month, and recovered around half of losses it made since the summer peak. Another selloff could send the S&P500 down to 3400 level, following an ABCD pattern since March.
The Eurozone inflation hit a record high of 10.7% in October, versus 10.2% expected by analysts, and the European Central Bank (ECB) Chief Christine Lagarde said that inflation came from nowhere, ignoring a decade-and-a-half of aggressive bond buying that threw the foundations of the present spike in inflation, boosted by the pandemic, the war and a global energy crisis
The Eurozone yields spiked on expectation that higher inflation would mean higher ECB rate hikes in the future. But the euro didn’t gain, as currency traders priced in the rising recession fears that come along with the higher interest rates. The EURUSD is now back to testing its 50-DMA, and with investors broader moving back to the US dollar, to protect themselves against a hawkish Fed statement tomorrow, we could see the pair sink below the 50-DMA, which stands near 0.9890.
The Reserve Bank of Australia (RBA) raised the interest rates by 25bp as expected and said there will be more rate hikes, but the whole thing will depend on economic data… a similar blah blah to what we heard from the ECB last week. The AUDUSD gained, because the US dollar was softer this morning.
In Switzerland, the Swiss National Bank announced a 142 billion franc loss in the first nine months of the year; melting currency valuations, especially the melting euro, was to blame.
In precious metals, gold remains under pressure. The $1615 is the next important support. If the US dollar strengthens as a result of a sufficiently hawkish Fed statement this week, gold bears could pull out the $1615 support and tip a toe into the $1500s for the first time since April 2020.
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
EUR/USD grinds near intraday high surrounding 0.9900 as buyers struggle to keep the reins during early Wednesday morning in Europe. The major currency pair defends the previous day’s rebound from the lowest level in a week.
GBP/USD eases from intraday high amid mixed concerns, cautious optimism in the market. Firmer US data, Brexit woes and the BOE’s Gilt operations test buyers. Mostly priced-in 75 bps rate hike from Fed, fresh Brexit woes keep sellers hopeful.
Gold price prints mild gains around the mid-$1,600s as the US dollar stays weak ahead of the FOMC meeting on Wednesday. In addition to the pre-Fed anxiety, softer yields and cautious optimism in the market also favor the gold buyers of late.
Luna Classic price is hovering above a stacked support structure that could induce a quick run-up. However, a breakdown of this level will indicate the presence of bears and trigger potential continuation.
Is it the Federal Reserve's last hurrah? That notion of an upcoming slowdown in US rate hikes has been supporting equities and weighing on the US dollar during the bank's blackout period. I believe these great expectations have gone too far.
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