Fed’s interest rate decision in the limelight

The scenery for the FX market this week seems to be dominated by the Fed’s interest rate decision. The bank is widely expected to remain on hold today, with Fed Funds Futures currently implying a 98% probability for such a scenario to materialize and we have no reason to doubt, yet there is a large question mark looming over the tone of the accompanying statement and Fed Chairman Powell’s press conference later on. On the one hand, the easing of inflationary pressures in the US economy as shown also by the latest release of the Core PCE price index for December and the hit on economic activity of the US manufacturing sector tend to suggest that an easing of the Fed’s tight monetary policy is possible. On the other hand, the relative tightness of the US employment market could allow the Fed to maintain rates higher for a longer period than what the market currently expects. Overall, should the bank maintain a more dovish tone indirectly reaffirming the market expectations for extensive rate cuts starting from May onwards, we may see the USD weakening as the looser monetary policy may take some of the appeal of the greenback and vice versa.

EUR/USD’s bearish tendencies seemed to intensify slightly yesterday, yet remain unconvincing for now and the pair is currently aiming for the 1.0740 (S1) support line. For the time being, we tend to maintain our bias for the sideways motion to continue, yet at the same time also note that the RSI indicator is nearing the reading of 30 implying that the bearish sentiment in the market is building up for the pair. Should the bulls take over, we may see EUR/USD breaking the 1.0740 (S1) support line and aiming for the 1.0615 (S2) support level. On the other hand, should the bulls say enough is enough hand take over, we may see EUR/USD breaking the 1.0890 (R1) resistance line and aim for the 1.1010 (R2) resistance nest.

The release of the Fed’s interest rate decision is expected to have wider effects beyond the FX market, with ripple effects extending to the equities markets as well. We expect that a possible continuance of the Fed’s more dovish approach to support US stock markets, as financial conditions in the US economy are to ease in such a scenario. Yet US stock markets are also expected to be affected by the earnings releases and today we note Boeing, Mastercard and GlaxoSmithKline.

S&P 500 edged slightly lower yesterday, yet the direction of the index’s price action seems to continue to point towards the 4950 (R1) resistance line. We tend to maintain our bullish outlook for the pair as long as the upward trendline guiding its remains intact. Furthermore, we note that the RSI indicator continues to run along the reading of 70 implying a strong bullish sentiment on behalf of the market, yet the RSI indicator may also imply that the index is still at overbought levels risking a possible correction lower. Should the index find additional buying orders along its path, we may see the index, breaking the 4950 (R1) resistance line and thus open the gates for the 5100 (R2) level. Should an intense selling interest be expressed by the market we may see the index, breaking for the prementioned upward trendline and aim for the 4800 (S1) support line.

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In the European session today, we highlight the release of France’s and Germany’s preliminary HICP rates for January and also note the UK’s Nationwide house prices for the same month. As the American session is about to start, we note the release of the US ADP national employment figure for January and Canada’s GDP rate for November, while later on, oil traders may be more interested in the release of the US EIA weekly crude oil inventories figure. During tomorrow’s Asian session, we note the release of Australia’s and Japan’s final January PMI figures for the manufacturing sector, while from Australia, we also get December’s building approvals growth rate and also note the release of China’s Caixin manufacturing PMI figure for January.