Espresso Morning Call: Risk assets boosted by Fed decision

What we are looking for

• USD is at near 10-month lows: The USD has been sold on major forex pairs in the wake of the Fed meeting. The Dollar Index has broken below 101.30 support. 
• Indices are strong: The risk-positive move from the Fed has boosted equities. US futures have continued higher overnight, with the NASDAQ leading the rally. European indices are also strong today.
• Commodities are mixed to positive: Metals prices have been boosted following the Fed, with Gold breaking higher again to near 10-month highs. Oil was negative yesterday but is more supported this morning.
• Data traders: Expect volatility for GBP and EUR positions today. The Bank of England will be key for GBP, whilst the ECB is key for EUR. US Weekly Jobless Claims and US Factory Orders could generate some direction for USD.

Overview

The Fed did as expected last night. A 25 basis points rate hike with the claim of “ongoing increases” still to come did not move markets that much. However, markets had seemingly been anticipating a bit more pushback from the Fed than they got. In the press conference, the suggestion from Fed Chair Powell that “the disinflationary process has started” kicked markets into gear, with yields lower, the USD being sold and risk assets boosted. Interest rate futures still price for one more hike in March before a pause in tightening and then rates to be cut again sometime in Q4. But this seems to be further evidence that the Fed is close to the end of the tightening cycle.

This morning we see USD sustaining losses across major forex pairs. The Dollar Index is at its lowest since April 2022. Metals are higher, with gold at its highest since April. Equity markets are being supported, with the S&P 500 futures trading at their highest level since August. 

The BoE and the ECB are next up for the central banks on the economic calendar. The Bank of England monetary policy decision is expected to show a +50 basis points hike to 4.00%. The voting on the MPC for this decision is expected to be 7/9 in favour of a hike. The ECB monetary policy decision is expected to show a 50bps hike to the rates corridor with the deposit rate up to 2.50%. ECB President Christine Lagarde’s press conference should also be interesting. For the US data, the Weekly Jobless Claims are forecast to increase slightly, whilst the US Factory Orders are expected to more than recover the reduction of November.

Today’s news

Market sentiment looks positive: With no hawkish lean from the Fed, market sentiment has been boosted. 

US Treasury yields are consolidating the move lower: A sharp move lower on yields in the wake of the FOMC press conference. The 10-year yield closed -13 basis points lower, with the 2-year yield -10bps. Yields are relatively steady this morning.

Brazilian Central Bank maintains the Selic rate at 13.75%: The rate has been kept at 13.75% for the fourth meeting in a row. This is despite inflation having fallen sharply to 5.79%. The BCB remain vigilant in tackling inflation.

Cryptocurrencies supported by risk-positive bias: Crypto was up strongly yesterday and has shown further gains this morning. Bitcoin is +0.5% at $23800 with Ethereum +2.0% at $1669. 

Major Economic Data:

• Bank of England monetary policy (at 12:00 GMT) The rate is expected to be increased by +50bps to 4.00% (from 3.50%) 
• ECB monetary policy (at 12:00 GMT) The deposit rate is forecast to be hiked by +50bps to 2.50% (from 2.00%)
• US Weekly Jobless Claims (at 13:30 GMT) Claims are expected to increase to 200,000 in the past week (up from 186,000 previously)
• US Factory Orders (at 15:00 GMT) Orders are forecast to increase by +2.2% MoM in December (after a -1.8% MoM decline in November)

Major markets outlook

Forex: USD is underperforming but the losses are being contained early today.

• EUR/USD has broken through the resistance at 1.0926 following the Fed meeting. A move above 1.1000 has just faded slightly into the European session, but the closing breakout to 10-month highs has opened the next resistance at 1.1185. Momentum is strong with the RSI back above 70, although this may begin to limit the immediate upside potential once more. Old highs between 1.0865/1.0926 are now a basis of initial support. We look to use supported weakness as an opportunity to buy. 

• GBP/USD has rebounded off support at 1.2263 to hold up what looked to be a corrective drift. How the market now responds to this rebound will be key as previously the market had been on the retreat, potentially towards a test of support between 1.2170/1.2260. If this rebound just rolls back lower it would be a suggestion of mounting corrective momentum. There is plenty of resistance between 1.2415/1.2445. The bulls will still be looking for a close above 1.2445 to open 1.2600/1.2660.

• USD/JPY has started to move lower once more. The consolidation of the past eight sessions has been broken to the downside since the Fed meeting. This comes as the daily RSI remains negatively configured and has once more failed around 40/45. Resistance at 131.55 has been strengthened and we 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 broken out once more and is trading at levels not seen since April 2022. The use of the rising 21-day moving average as support is consistent and with strong RSI momentum configuration, near-term weakness remains a chance to buy. The breakout above $1949 opened $1998 as the next important resistance. The importance of $1896/$1901 support is growing, with initial support between $1933/$1949.

• Silver has rebounded back towards the top of the consolidation rectangle between $23.11/$24.55 and is eyeing an upside breakout. This is an important moment as rallies have consistently been unable to hold positive traction. The RSI has held above 50 and has swung higher with this move. However, the upside traction needs to hold. A close above $24.54 would be bullish and imply c. $1.45 of upside. Initial support is at $23.80/$24.00. 

• Brent Crude oil has seen a near-term rally fall over again with a decisive bear candle yesterday. The market has now rolled over decisively to confirm a breach of support at $83.65. It seems that rallies are once more a chance to sell. A mild tick higher in the wake of the Fed is fading this morning. The next important support does not come in until $77.50. Resistance is mounting between $85.40/$86.15. Initial support is at yesterday’s low of $82.30.

Indices: Wall Street is looking strong in the wake of the Fed, with European indices also picking up well. 

• S&P 500 futures have rallied strongly since the Fed. A breakout through the resistance of 4105/4140 at the top of a three-month trading band has taken the market to levels not seen since August 2022. Momentum is now strong and confirms the breakout. Since December, we have seen consistently seen near-term weakness being used as a chance to buy. Initial support is between 4010/4105. The next resistance is 4216 before the August high of 4327.

• German DAX has ended the consolidation with a run of strong bullish candles that has driven the market through the top of the consolidation range between 14910/15275. This now implies an initial breakout target of the next resistance around 15550 The daily RSI confirms the breakout with a move back into the 70s. The breakout at 15275 is now a basis of support, with 14910 a key higher low.

• FTSE 100 has moved higher with other indices but has lagged slightly on the returns. Technically the market is struggling to break higher, with the resistance initially at 7818 holding back the rebound. This is reflected in an underwhelming daily RSI. Initial support is at 7744 above the 7712 key low.

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