Market recap & fx update 1/26/22

FX Thoughts on a Wednesday - January 26, 2022

Good morning,

Today’s the day. This is certainly the most anticipated FOMC meeting in quite awhile. The FED will conclude there meeting this afternoon at 2:00 pm, EST and the meeting will be followed by Chairman Jerome Powell’s press conference. As always, I will report the meeting results shortly thereafter. US equity markets attended another comeback yesterday but his time fell short. While the major indices closed off their earlier lows, all three ended up in the red, with the DOW falling 66 points, the S&P 500 calling 1.2% and the NASDAQ falling the most, ending the day down 2.3%. While few people expect any significant rate changes today, the accompanying statement and the comments from the press conference will be closely scrutinized. Rate hikes are coming and they are coming soon. While the futures markets have an implied expectation of just a 6% chance of a rate hike tomorrow, there is a 93% chance of a least a 25 bo hike in March, at the FED’s next meeting. And according to analysts the FED will not stop there, as there is currently a 65% chance of four increases in 2022, and a 24% chance of as many as five 25 bps increases by the end of the year. A little history here. Back in September 2021, the market was pricing in a 50% chance of zero hikes in 2022. The chance of that happening now is 0%. And according to analysts, that explains the sharp move lower in stocks. Some expect the selling pressure to ease up tomorrow after the FED issues their statement and Chairman Powell conducts his press conference. When it comes to equities, the anticipation of rate hikes seems to often be worse than the hikes themselves. This last happened in 2016 and we will see if it happens again. Besides the FED announcement, earnings reports continue today, and they are highlighted by reports from Tesla and Intel. Other companies reporting include Abbott Laboratories, AT&T, Automatic Data Processing, Boeing and Kimberly-Clark. Also today, at 10:00 am, EST the Census Bureau reports new residential home sales data. The consensus estimate is for a seasonally adjusted annual rate of 762,500 new single-family homes sold in December, 2.5% more than in November. As trading begins this morning ahead of the FED decision, US equity futures are trading higher, with DOW futures up around 300 points, S&P 500 futures up 1.24% and NASDAQ futures up around 2%. US treasury yields had little movement overnight with the 10-year note trading at 1.7851% and the 30-year bond trading at 2.1309%. The USD is stronger this morning, particularly against the EUR and JPY, as traders remain concerned over potential military conflict in Ukraine.

EUR/USD is trading at overnight lows testing support levels at 1.1280, as traders await the FED decision and remain concerned over the Ukraine. Technically, the currency pair remains under pressure, trading below the moving averages, and the RSI has moved consistently lower throughout the overnight session, currently trading at 32. ECB Council member and Lithuanian Central Bank Governor Simkus was on the wires this morning, warning that Europe’s economy could face a “huge” economic loss if tensions escalate further between Russia and Ukraine. He added that “the situation adds uncertainty; if it escalates, it will obviously have an impact on our economies, on the Lithuanian economy, on the euro-area economy.” The EUR has been trading lower over the last few trading sessions as Ukraine concerns have given added support to the USD as a safe-haven alternative. Also speaking this morning, ECB Chief Economist Lane has rejected concerns that omicron-linked inflation fears are weighing on the single currency. “The coronavirus omicron variant is not turning out to be the factor that will influence the activity levels for the year” Lane said earlier today. The IMF released their global economy forecasts for 2022, saying we are entering a “weaker position” as the spread of omicron led to reimposed mobility restrictions. Eurozone economic growth was now predicted at 3.9% for 2022, downgraded by -0.4%, while 2023 growth was changed to 2.5%, upgraded by 0.5%.

GBP/USD is trading slightly higher this morning, after testing support levels at 1.3500 earlier in the overnight session. Technically, the currency pair is trading between the 50 and 100-day moving averages, and RSI has moved from 50 to 59 during European trade. Political pressures continue to weigh on the pound as trades await the report on British PM Johnson’s lockdown parties. Scotland Yard has announced that they have launched a formal criminal investigation into eight events where lockdown rules were apparently violated. Helping support for the pound are the expectations that the Bank of England will raise interest rates at their upcoming meeting in February. Brexit concerns add pressure to the GBP, as France reiterated their dislike for the post-Brexit fishing laws. It was also noted that EU negotiator Sefcovic is “frustrated” with the UK after another week of talks with his UK counterpart Liz Truss saw no breakthrough. IMF downgrades also put pressure on the pound as the UK GDP growth forecasts came in at 4.7% for 2022, downgraded by -0.3%, while 2023 growth was upgraded by 0.4% to 2.3%.

USD/JPY is trading just below overnight highs at 114.15, after testing resistance at 114.25 earlier in the European session. Technically, the 50-day moving average has crossed the 100-day moving average, and the currency pair is trading above all three averages as the RSI level has risen throughout the overnight session, currently trading at 67. The Bank of Japan released their Summary of Opinions from their meeting last week noting that “a pick-up in Japan’s economy has become evident” and that the economy is “likely to continue recovering moderately.” The minute added that in fiscal 2022, the economy “highly likely to grow at a pace that is well above its potential growth rate.” CPI is expected to “exceed 1 percent” and may “momentarily rise to a level close to 2%” from April 2022 onward. The IMF apparently agrees with this assessment as their forecast for growth in Japan for 2022 was upgraded by 0.1% to 3.3% and 2023 growth was upgraded by 0.4% to 1.8%. Japan was the only country that had an upgrade by the IMF. USD/JPY continues to trade off of US treasury yields and that should continue moving forward.

USD/CAD is trading just above support levels at 1.2565, as traders await the rate decision later today by the Bank of Canada. Oil prices have dipped slightly as traders take some profit ahead of the FED and BoC rate decisions. Technically, the currency pair is trading below the 50 and 100-day moving averages and is close to moving below the 200-day moving average. RSI which had tested the 30 level in earlier overnight trade has risen slightly over the last few hours and is currently at 34. The Bank of Canada will release their interest decision at 10:00 am, Eat this morning and the consensus shows the central bank leaving their overnight rate at 0.35%, but some analysts believe there could be a surprise 25 bp rate hike. The IMF downgraded GDP growth forecasts for Canada by -0.8% to 4.7%, while 2023 GDP forecasts were upgraded by 0.2% to 2.8%. Oil prices eased slightly this morning as investors took some profits ahead of the interest rate releases by both the FED and BoC. Concerns over tighter supply amid tensions in the Ukraine and the Middle East capped any further moves lower. Brent crude futures were down $0.15 at $88.05 per barrel after rising 2.2% during the previous session. US West Texas Intermediate crud futures fell $0.31 to $85.29 per barrel, after rising 2.8% on Tuesday. Oil prices hit seven-year highs last week on worries that supplies could tighten due to Ukraine-Russia tensions and worries about the conflict in Yemen.

AUD and NZD are trading just below their overnight highs during the European trading session as some stability in global equity markets as well as expectations of an earlier than expected interest rate hike by the RBA have given the Aussie some support. NZD has followed the AUD higher as well. RSI levels for both currencies have been trending upward during the overnight session with AUD RSI at 62 and NZD RSI at 58, both overnight highs.

There should be no surprises from the FED later this morning. The central bank is expected to signal that it is ready to raise interest rates as soon as March. They may also announce other policy tightenings, reversing the easing policies it put into place to fight the pandemic. While expectations are for a “hawkish” statement, needless to say and wavering could create strong market reactions. I’ll be back after the announcement. Good luck, stay safe and have a great day.