The Fed’s interest rate decision in focus

The USD tended to remain relatively unchanged against its counterparts yesterday and the market’s focus tends to turn towards the release of the Fed’s interest rate decision in the late American session today. The bank is widely expected to remain on hold keeping rates in the range of 5.25-5.50% and Fed Fund Futures (FFF) tend to imply a probability of 99% for such a scenario to materialise, rendering the interest rate part of the decision as an open and shut case for the markets. It should be noted that FFF also imply an expectation of the market for the bank to proceed with four rate cuts in the coming year, starting from May onwards. Attention is expected to shift towards the Fed’s accompanying statement and Fed Chairman Powell later on. Given the tightness of the US employment market as reported in November’s employment report and the persistent inflationary pressures as reported in November’s CPI rates, we tend to see the risks as tilted towards the hawkish side and if so, could provide some support for the USD. On the flip side should the bank opt to maintain a more cautious tone allowing for an intensification of the market’s expectations for extensive rate cuts, we may see the USD weakening. Thus we also highlight the release of the Fed’s new dot-plot, which is to show the Fed policymaker’s expectations about where rates are to land in the following year and 2025. Should the dot plot contradict the market sentiment and imply a slower pace in rate cuts than the market expects we may see some bullish tendencies for the USD and vice versa. Overall we expect the release to have ripple effects beyond the FX market and a hawkish Fed could have bearish tendencies on US equities markets as the decision may signal that tight financial conditions are to be maintained, beyond the market’s expectations, which could weigh especially on highly leveraged companies. A possible strengthening of the USD could also weigh on gold’s price, given the negative correlation of the two trading instruments and given that US bond yields may benefit from a possible hawkishness of the bank.

USD/JPY edged lower yesterday relenting some of Monday’s gains, yet overall remained well between the 144.45 (S1) support line and the 146.30 (R1) resistance line. Given that the price action on Monday broke the upward trendline guiding it and that the RSI indicator runs along the reading of 50, implying a rather indecisive market, we tend to maintain the sideways motion to be maintained, yet the Fed’s interest rate decision may force the pair to alter direction. Should the bulls gain control over the pair, we may see USD/JPY breaking the 146.30 (R1) resistance line and aim for the 148.25 (R2) resistance level. Should the bears take over, we may see the pair breaking the prementioned upward trendline, in a first signal that the upward movement has been interrupted, breach the 144.45 (S1) support line and aim for the 143.00 (S2) support base.

AUD/USD remained in a sideways motion between the 0.6620 (R1) resistance line and the 0.6515 (S1) support line. We tend to maintain our bias for the sideways motion to continue for the time being, yet note that the RSI indicator remained below the reading of 50 implying some bearishness in the market sentiment. Should a selling interest be expressed by the market, we may see the pair breaking the 0.6515 (S1) support line and aim for the 0.6400 (S2) support level. Should the pair find extensive buying orders along its path, we may see the pair breaking the 0.6620 (R1) resistance line and aim for the 0.6725 (R2) resistance nest.

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Today in the European session, we note the release of UK’s GDP and manufacturing output rates for October and the Eurozone’s industrial output rate for the same month. In the American session, we note the release of November’s PPI rates and after the release of the Fed’s interest rate decision, we note the release on New Zealand’s GDP rate for Q3, while in the Asian session, we get Japan’s machinery orders for October and Australia’s employment data for November.