Fed’s interest rate decision in the spotlight

The USD remained relatively unchanged against its counterparts yesterday as the market awaits the Fed’s interest rate decision later today. The bank is expected to proceed with a 25-basis points rate hike and currently, Fed Fund Futures imply a probability of 96.8% for such a scenario to materialize, while the market seems to be pricing in another 25-basis points rate hike in the bank’s March meeting before pausing. Should the bank proceed with the 25-basis points rate hike as expected then the market’s attention may be drawn to the accompanying statement and any forward guidance the bank may provide about its future intentions. Should the bank actually adopt a more hawkish tone which could imply more rate hikes to come, with the final rate being above 5% which is the market’s expectation for the level of the final interest rate before the bank pauses its rate hiking path, we may see the USD getting some support as the intentions of the bank to tighten its monetary policy, extend beyond the market’s expectations, while US stock markets which are considered to be riskier assets may suffer. The next item of the event which is expected to come under the market’s magnifying loupe is expected to be Fed Chairman Jerome Powell’s press conference half an hour later. In a similar mode should the Fed Chairman actually adopt a more hawkish tone possibly pushing back any market expectations for any rate cuts within the year that could provide some support for the USD and weaken US stockmarkets, as the bank Chairman would be signaling that the bank is to keep interest rates at high levels for a prolonged period.

Overall, the Fed’s interest rate decision today is expected to have rippling effects in other markets beyond the FX market, including US stock markets and the price of gold and given that there could be surprises in the Fed’s interest rate decision, we may see wide swings, hence caution should be exercised should one decide to trade in those hours. Other than that, we note that European growth data for Q4 were not as bad as expected, which may imply that the area’s economy may be able to avoid a recession, or that it may be a shallow one, yet the tightening on ECB’s monetary policy may reverse such assumptions. Also, China’s Caixin manufacturing PMI figure for January was below 50, implying another contraction of economic activity for the Chinese manufacturing sector, increasing the doubts of the market. EUR/USD maintained a sideways motion yesterday breaking slightly the 1.0855 (S1) resistance level, now turned to support. We expect the sideways motion to continue given the relative stability of the pair and the RSI indicator which runs along the reading of 50. Should the bulls take over, we may see EUR/USD aiming if not breaking the 1.1000 (R1) resistance line. Should the bears be in charge we may see EUR/USD breaking the 1.0855 (S1) support line and aiming if not breaking the 1.0715 (S2) support level.    

USD/JPY maintained a sideways motion between the 131.40 (R1) and the 128.60 (S1) levels. We maintain our sideways motion bias for now. Should a buying interest be expressed by the market, we may see the pair breaking the 131.40 (R1) and aim for the 134.80 (R2) resistance line. Should sellers take over, we may see USD/JPY breaking the 128.60 (S1) and aim for the 126.50 (S2) support line. 

Other highlights for the day:

Today in the European session we note the release of UK’s Nationwide house prices for January, Germany’s final manufacturing PMI figure for January and Eurozone’s preliminary HICP rate for the same month. In the American session, we note from Canada the release of the manufacturing PMI for January and from the US we get the ADP National employment figure for January, the ISM manufacturing PMI figure for the same month and the JOLTS job openings figure for December, while oil traders may be more interested in the release of the weekly EIA crude oil inventories figure. During tomorrow’s Asian session we note Australia’s building approvals growth rate for December.  

EUR/USD H4 Chart

Support: 1.0855 (S1), 1.0715 (S2), 1.0585 (S3)

Resistance: 1.1000 (R1), 1.1180 (R2), 1.1325 (R3)

USD/JPY H4 Chart

Support: 128.60 (S1), 126.50 (S2), 124.00 (S3)

Resistance: 131.40 (R1), 134.80 (R2), 138.15 (R3)

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