Fed’s interest rate decision to rock the markets

On a monetary policy level, we highlight the release of the Fed’s interest rate decision, in the late American session today. The bank is widely expected to cut rates by 25 basis points and pause rate cuts in its next meeting. Hence, we place substantial attention on the bank’s forward guidance which is to be included in the accompanying statement and Fed Chairman Powell’s press conference later on. Also, the bank’s macroeconomic projections and new dot plot are to affect the market’s reaction. Should we see the bank show even more hesitation for more rate cuts, thus signaling a further slowdown of its rate-cutting path we may see the USD getting some support. Please note that volatility may extend beyond the time of the release, given Powell’s press conference, while it may also have ripple effects on other markets. For example, a possible hawkish cut could weigh on US equity markets and possibly gold’s price.

EUR/USD remained relatively unchanged well between the boundaries set by the 1.0600 (R1) resistance line and the 1.0450 (S1) support line. Hence for the time being our sideways motion bias is maintained. The RSI neared the reading of 50, implying an easing of the market’s bearish predisposition for the pair. Yet, we would switch our sideways bias in favour of a bearish outlook in the event of a clear break below the 1.0450 (S1) level, with the next possible target for the bears being the 1.0330 (S2) support line. For a bullish outlook we would require a break above the 1.0600 (R1) level, aiming for the 1.0730 (R2) resistance base.

During tomorrow’s Asian session we get BoJ’s interest rate decision. JPY OIS currently imply a probability of 82.4% for the bank to remain on hold and proceed with a 25-basis points rate hike in its January meeting. Local media highlighted yesterday that BoJ officials are leaning towards keeping rates unchanged next week. Nevertheless, we still see the risks related to the decision as tilted to the upside and a possible surprise rate hike could provide asymmetric support for the Yen. Yet should the bank remain on hold as expected, it would be kicking the can down the road, with the chances of a rate hike occurring in its next meeting being increased. Hence in such a scenario, we would place considerable weight on the bank’s forward guidance. Should the bank signal the possibility of a rate hike in the January meeting, we may see JPY getting some moderated support, while an absence of such signals in the bank’s accompanying statement could weigh on JPY considerably.

USD/JPY edged lower yesterday, avoiding a collision with the 154.65 (R1) resistance line. In its downward movement the pair seems to have broken the upward trendline which has been guiding it since the 9 of December and interrupting a six day winning streak. We see the case for the pair to stabilise and for the time being, we switch our bullish outlook in favour of a sideways motion bias, yet the Fed’s and BoJ’s interest rate decisions could sway the market’s opinion either way. Should the bulls find renewed support we may see USD/JPY breaking the 154.65 (R1) line and aim for the 158.45 (R2) resistance base. For a bearish outlook, we would require the pair to break the 151.35 (S1) line and start aiming for the 149.40 (S2) support level.

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In today’s European session, we note the release of UK’s CPI rates for November, ahead of BoE’s interest rate decision tomorrow, weighing slightly on the pound. Given today’s release of November’s CPI rates and despite the bearish effect on the pound and if combined with the UK employment data for October released yesterday, we may see BoE’s stance to remain on hold hardening. Today we also get Euro Zone’s final HICP rate for the same month. In the American session, we get from the US the number of building permits and house starts for November, while oil traders may be more interested in the release of the EIA weekly crude oil inventories figure and later we get New Zealand’s GDP rate for Q3.