FED decision day

MORNING OVERVIEW

The Fed’s interest rate decision is set to take place during today’s American session and will most likely be the dominant market narrative for the day. Across the pond, the UK’s CPI rates released earlier today confirmed the markets expectations of an acceleration of inflationary pressures. We should note the BoC’s minutes are also due out today which could lead to interest in the Loonie as well.

MARKET SNAPSHOT

MARKET	CURRENT	CHANGE	COMMENT
S&P 500	7600	+0.20%	Fed decision today
DXY	99.57	-0.04%	Fed decision today
EUR/USD	1.1550	+0.06%	Fed decision today
Gold	4333	+0.94%	Fed decision today
Brent Crude	104.12	-1.64%	API came in vastly greater than expected

KEY MARKET THEMES

01 — FED decision today

The Fed’s interest rate decision is set to take place later on today, during the American trading session. The majority of market participants are currently anticipating the bank to hike rates by 25 basis points, with FFF currently implying a  91.1% probability for such a scenario to materialize. In turn attention turns to Fed Governor Warsh’s press conference speech following the decision and the bank’s accompanying statement for any clues as to what the bank’s next steps may be. In our view, we wouldn’t be surprised to see a more hawkish sentiment emerging from the Fed, such as implying further rate hikes down the line and possibly of a greater magnitude should it be required to do so. In turn any hawkish comments may aid the dollar and vice versa.

Market implication (USD): Bullish

02 — US oil inventory buildup

The API weekly crude oil inventories figure was released yesterday evening and vastly exceeded expectations. Specifically, the markets were anticipating a drawdown of -1.8 million barrels, whilst the true figure came in at an increase of 7.14 million barrels, vastly dwarfing expectations. In turn, the significantly larger than expected buildup of oil inventories may have weighed on oil prices. Yet, such an impact on oil prices may be temporary in the long run.

Market implication (OIL): Bearish

03 — Bank of Canada’s decision minutes to be released today

The Bank of Canada’s monetary policy minutes surrounding their decision are set to be released today. The minutes may be monitored by Loonie traders as they may be looking for clues into the bank’s willingness to raise interest rates again this year, which in turn may provide support for the Loonie. However, any hesitation could have the opposite effect. In our view, considering the rise in energy prices which was evident during the BoC’s monetary policy decision, the tone in the minutes could be perceived as hawkish.

Market implication (CAD) : BULLISH

WHAT MATTERS TODAY

FED monetary policy decision

Time (GMT+2): 21:00

Expected: 3.75-4
Previous: 3.5-3.75

Potential market reaction:
Could provide support for the USD

BoC to release monetary policy deliberation minutes

Time (GMT+2): 20:30

Expected: N/A
Previous: N/A

Potential market reaction:

Any hawkish commentary from the BoC i.e implying rate hikes could aid the BoC

WHAT MATTERS TOMORROW MORNING

New Zealand’s GDP rates

Time (GMT+2): 01:45

Expected: 0.1%
Previous: 0.8%

Potential market reaction:

Could weaken the NZD

ASSET FOCUS

[GOLD / COMMODITIES]

Gold appears to be moving in a sideways fashion. The commodity has tested and validated our 4320 (S1) line yesterday, yet during todays session it appears to be breaking above it, resulting in a re-evaluation of our support line. We’d opt for a sideways bias at the time of this report as long as gold’s price remains above our $4320 (S1) support level and below our 4520 (R1) resistance line. The RSI indicator below our chart currently registers a figure close to 50 implying a neutral market sentiment. Yet considering the Fed’s decision today, gold’s price may experience heavy volatility.

KEY LEVELS

• Resistance (R1): 4520
• Resistance (R2): 4695
• Support (S1): 4320
• Support (S2): 4180

Technical View: NEUTRAL

CROSS-ASSET VIEW

ASSET CLASS	BIAS	KEY DRIVER
Equities	Bearish	FED
USD	Bullish	FED
Gold	NEUTRAL	US 10YR Yields
Oil	Bullish	Mid-East

RISKS TO THE VIEW

FED decision

Any deviation from what we’re currently expecting from the Fed could result to volatile price moves across the board.

TRADING SPHERE VIEW

Bearish for Gold

Our base case:
Considering the heightened inflation risks and the persistently high energy prices, we wouldn’t be surprised to see the Fed adopting an even greater hawkish stance which could aid the dollar.

What would change our view:
A dovish market sentiment emerging from the Fed

TODAY’S WATCHLIST

01 FED decision

02 BoC minutes release