Espresso Morning Call: Markets prepare for key Fed decision

What we are looking for

• USD has given back minor gains: The USD had been gradually rebounding on major forex pairs earlier in the week but has given it all back. The USD now sits in consolidation ahead of the Fed.
• Indices steady after yesterday’s late rebound: Equities clawed back early intraday losses yesterday but are now settling in front of the Fed. US futures have eased back slightly, whilst European indices have opened marginally higher after a strong close on Wall Street last night.
• Commodities are mixed to slightly lower: Oil has held on to yesterday’s rebound, but precious metals are slightly weaker.
• Data traders: EUR traders will need to watch flash Eurozone inflation. USD traders will have plenty to keep them occupied throughout the day with the ADP and the ISM Manufacturing. However, the Fed decision and press conference will generate the most volatility.

Overview

There has been some jostling for position in recent sessions, but taking a step back, markets have been in consolidation ahead of a crucial few days of tier-one economic data and announcements. The Fed is the big focus today. Markets are firmly anticipating a small 25 basis points hike, but the key reaction will come from the message. The recent theme has been lower inflationary pressures (yesterday’s lower Employment Cost Index plays into this), whilst the labour market remains tight. Better than expected Q4 GDP is also being followed in January by relatively upbeat credit card data and encouraging corporate earnings. 

Fed chair Powell is expected to continue to toe a hawkish path (the “job’s not done yet”), with one more 25bps hike likely in March. However, how markets react to this will be the key. There could be a USD rebound, but this may only be short-lived. Equally, this could mean a pullback on equities and gold. Just how far these moves go will be the key question in the days to come.

The Fed will be crucial today, but there is plenty else on the economic calendar to keep traders on their toes today. Eurozone flash HICP inflation is forecast to reduce slightly, although with France and Spain seeing upside surprises, there is potential for similar with the euro area data. The ADP Employment Change is expected to show jobs growth reducing strongly in the US, down to 170,000 which would e a five-month low. The ISM Manufacturing PMI is forecast to continue the deterioration below 50 and at 48 would be the third consecutive month in contraction. The Federal Reserve monetary policy decision will be the key announcement. A 25 basis points hike to take the top of the Fed Funds range to 4.75% is fully expected. However, the forward guidance for March would be the key takeaway, especially after the Bank of Canada signalled a pause last week.

Today’s news

Market sentiment is one of consolidation: Markets are waiting for the Fed decision later.

US Treasury yields are mixed to slightly lower: Having eased back lower yesterday there is a mild tick lower again on the 10-year yield, whilst the 2-year yield is steady.

China Caixin Manufacturing PMI slightly disappoints: After the optimism of the official China PMIs earlier in the week, the Caixin data has slightly underwhelmed. The PMI increased to 49.2 in January (from 49.0 in December), under expectations of 49.5.

Eurozone final Manufacturing PMI in-line with forecasts: The final January Manufacturing PMI is unrevised from the flash reading at 48.8 (47.8 final December)

UK and EU reportedly reach a customs agreement: The Times newspaper is reporting that the two sides have reached an agreement that could mean the end of arguments over the treatment of Northern Ireland (the UK’s only land border with the EU).

Cryptocurrencies mixed: Crytpo is similar to most major markets, with a mix of performance. Bitcoin is a shade higher by +0.3% at $23000, whilst Ethereum is -0.4% at $1571.

Major Economic Data:

• UK final Manufacturing PMI (at 09:30 GMT) No change is expected in the data from the flash January reading of 46.7 (slightly up from 45.3 final December) 
• Eurozone Flash HICP inflation (at 10:00 GMT) The consensus is forecasting headline inflation to fall to 9.0% in January (from 9.2% in December, with core HICP to drop slightly to 5.1% (from 5.2%) 
• US ADP Employment Change (at 13:15 GMT) The ADP is expected to show growth of just 170,000 in January (from 235,000 in December)
• US ISM Manufacturing (at 15:00 GMT) The ISM is expected to fall slightly to 48.0 in January (from 48.4 in December)
• Federal Reserve Monetary Policy (at 19:00 GMT) The Fed is expected to hike by 25 basis points to 4.75%.

Major markets outlook

Forex: USD and JPY are performing well once more. AUD and NZD are underperforming.

• EUR/USD reacted well to an early pullback yesterday, but the market is essentially now looking for the Fed to break the range. There is support at 1.0765 of a higher low from mid-January. However, resistance at 1.0926 is restricting the upside. Momentum remains strong with the RSI holding in the low 60s. A breach of 1.0726 on a USD positive reaction to Fed hawkishness would also break a three-month recovery uptrend however, we look to use supported weakness as an opportunity to buy. 

• GBP/USD has eased back from the resistance at 1.2446 and is just unwinding within a four-month uptrend channel. Rising moving averages and medium-term positively configured RSI momentum all point towards using supported weakness as a chance to buy. Initial support comes in at 1.2263 with good support between 1.2170/1.2260. The bulls will still be looking for a close above 1.2445 to open 1.2600/1.2660.

• USD/JPY has been consolidating for over a week now and this has breached the three-month downtrend. This consolidation is likely to be resolved on the outcome of the Fed meeting. For now, though, the technical outlook remains negative. The falling 21-day moving average (c. 130.26) has flattened with the consolidation but is still a basis of resistance. Also, the daily RSI remains negatively configured and has failed consistently around 40/45 in recent months. If resistance at 131.55 remains intact after the Fed, we continue to favour a test of the low at 127.22. Above 131.10/131.55 opens a rally towards 133.60/134.75. 

Commodities: Gold is holding back corrective pressure, silver remains stuck in a range, and oil is looking for buyers into weakness.

• Gold has been consolidating under $1949 but after a threat to turn near-term corrective the buyers reacted well to support yesterday around $1900. However, the risk of correction remains as the market just rolled over again this morning. The rising 21-day moving average (c. $1906) is a great basis for support still. The ongoing reaction to support at $1896 will be important as it would now complete a small top pattern and imply a pullback towards $1845. Resistance has formed around $1830/$1835 in recent days. Reaction to the Fed meeting will be key.

• Silver has continued to fluctuate within the consolidation rectangle between $23.11/$24.55. Buyers have consistently returned to sustain the rectangle support in recent weeks. However, rallies have been unable to hold positive traction. The RSI is holding on to 50 but the warnings of a move lower are mounting. A closing break of the range would complete a top and imply $21.70 as a corrective target. Initial resistance is now at $23.80. 

• Brent Crude oil has seen the rally decisively roll over from $89.00 in recent sessions. An initial breach of support at $83.65 brought a positive reaction from the bulls and the market is picking up again today. However, this is now an important test of whether the weakness is a chance to buy. If this rally falls over again, under the resistance of $88.50/$89.00 it would show that there is still a corrective bias. The daily RSI needs to hold above 50. Initial support is now $83.10/$83.65.

Indices: Wall Street has reacted well to initial weakness but the Fed will be key. European indices are looking more positive. 

• S&P 500 futures have reacted well and near-term weakness has been bought into. However, the real test will come in the wake of the Fed decision later. The futures are up towards the resistance of a three-month trading band with the barrier of 4105/4140 needing to be broken. Momentum is positive but is not reflecting an imminent break higher.  Support of recent higher lows has been added to by yesterday’s bounce from 4007. Moving below the 3963 reaction low would turn the market corrective.

• German DAX has been in a consolidation range between 14910/15275 with a series of fluctuating daily candles. Yesterday’s positive close adds a more positive feel but essentially until there is a closing breach of the range, there is little to be overly excited about. The drifting nature of the RSI reflects the consolidation and is giving few clues about the next move. We would still see near-term corrective moves into support as a chance to buy with important support between 14604/14810. Above 15275 opens 15500/15600.

• FTSE 100 has started to show signs of holding up the corrective drift in recent days. A positive close in the past two sessions is reflected in a tick higher on the RSI, holding above 60. Above 7818 would be a positive move and re-open the 7884 high. Reaction to the Fed meeting tonight could be key. Recent dips into 7710/7730 have attracted buyers.

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.

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