Market recap & fx update 1/27/22

FX Thoughts on a Thursday - January 27, 2022

Good morning,

The FOMC meeting has ended and the central bank basically confirmed that interest rates will rise begin in March. The reaction by the equity markets was rather interesting. Markets were higher when the FED made their announcement, but then they began to fall during the press conference by FED Chairman Powell, before recovering a bit towards the day’s end. The DOW ended down 130 points, the S&P 500 barely fell into negative territory and the NASDAQ finished in positive territory albeit very small. The moves in the equity markets were thought to reflect on what the Chairman was stating in his news conference. His comments were considered to be more “hawkish” than expected as he said that “the inflation situation is about the same, but probably slightly worse” since the Fed’s last meeting in mid-December. He also noted that "we’re committed to using our tools to make sure that inflation, high inflation, that we’re seeing does not become entrenched.” These comments have analysts thinking there could be more than the originally expected four rate increases occurring this year. There was also some concern voiced by analysts regarding the lack of detail on how the FED plans to lower its $9 trillion balance sheet, which has doubled since the start of the pandemic and now represents nearly 40% of the US GDP. The treasury yield curve “flattened”, with the 2-year note rising to 1.089%, while the 10-year note rose to 1.8450%. Following the FOMC meeting the USD trader higher against the major currencies. The FOMC will next meet on March 15-16.
Earnings releases continue today with Apple, Mastercard, McDonald’s, Robinhood Markets, Southwest Airlines, and Visa are among the companies reporting quarterly results. And we have a number of macro releases coming out this morning. At 8:30 am, EST the Labor Department reports on initial claims for state unemployment benefits for the week ended Jan. 22. That number is expected to be 260,000 after last weeks 286,000. Also coming out at 8:30 the Commerce Department reports on orders for durable goods in December which are expected to be down 0.5% after last month’s rise of 2.6%. And lastly at 8:30, the main economic event will be the release of the preliminary estimate for fourth-quarter 2021 gross domestic product by the Bureau of Economic Analysis. Expectations are for a rise of 5.4% after the previous report of 2.3%. Then at 10:00 am, EST, the National Association of Realtors will release its index of pending homes sales for December. A slight fall of 0.2% is expected after last month’s fall of -2.2%. As e begin trading this morning, US equity futures have finally moved into positive territory after spending most of the overnight session in the red. US treasury yields are mixed, with the 10-year slightly higher at 1.8495% and the 30-year slightly lower at 2.1413%. The USD begins the North American trading day stronger against the major currencies, reaching multi-week highs following the FED meeting,

EUR/USD is trading near overnight lows this morning as the currency pair dips below support levels at 1.1200. Technically, the single currency remains under pressure, trading well below the moving averages. The EUR is currently trading just above levels not seen in the last 18 months near 1.1180. RSI levels are in extremely oversold conditions, below 30, currently at 15, so a technical correction could be seen in the short-term but the bearish bias remains intact at the moment. FED hawkishness is reverberating throughout the markets, boosting the safe-haven dollar. On the macro side, German GfK Consumer Confidence fro February improved to -6.7, much better than the forecasted -7.8, and improving from the revised January number of -6.9. As the EUR sold off yesterday and broke through support levels not seen since last December, following the FED’s hawkish message, the divergence between the FED and the ECB will to increase wit the imminent start of the FED’s tightening cycle, while the accommodative-for-longer stance continues with the ECB, despite the high inflation in the Euro area. Many analysts which had been expecting the EUR to remain in the broad trading range of 1.12/1.14, which has held since November 2021 are no expecting the currency pair to settle into a new range of 1.10/1.12. Adding to the pressure on the EUR, further upside potential for US treasury yields will result in more downside for the EUR/USD.
GBP/USD is trading lower this morning, just below support levels at 1.3400. Similar reasons occur here for the fall of the pound and they also include Brexit and political concerns, which have added to the downside pressure. Technically, the pound continues to trade in a descending regression channel which began in mid-January. There appears to be no upside momentum at the moment as the pound trades below the moving averages and RSI has dropped below the 30 level, currently at 27. The move below the currency support levels should see the currency fall towards lower support at 1.3350. Adding to the pressure, the political turmoil over UK PM Johnson’s alleged lockdown-busting parties at Downing Street continue to undermine the pound. The UK PM managed a brief respite yesterday as the Sue Grey report was stopped from publishing. “Asked if Mr. Johnson would need to resign if he was interviewed under caution by police, it was reported that “people are innocent in this country until proven guilty,’ according to Sky News. Elsewhere, The Sun mentioned that Brussels will sue Britain for a breach of the Brexit trade deal in a row about wind farms. On the same line was the escalating pressure on UK Brexit Minister Liz Truss to overcome the deadlock concerning the Northern Ireland (NI) protocol, recently by Democratic Unionist Party (DUP) leader Sir Jeffrey Donaldson. What could limit losses for the pound are expectations of the Bank of England raising interest rates at their meeting next month.

USD/JPY is currently trading just below overnight highs at 115.20, as rising yields keep pressure on the JPY. Technically, the 50-day moving average has crossed both the 100 and 200-day moving averages as the currency pair has risen nearly 100 pips in the last few trading hours. RSI has risen well above the overbought 70 level and is currently trading at 85, which could indicate some profit taking in the next few hours. As the yields in US treasury bonds move higher, the 10=year JGB remains near zero due to the Bank of Japan’s yield curve control policy. The resultant widening of the US-Japanese yield differential has acted as a tailwind for the USD/JPY. The prospect of faster policy tightening by the Fed, along with political tensions between Russia and Ukraine, have taken their toll on global risk sentiment. This is evident from the slump in equity markets. This has done little to revive demand for the safe-haven Japanese yen, however, or hinder the USD/JPY pair’s strong move up. The price action favors bullish traders and supports prospects for additional gains.

USD/CAD has eased off its overnight highs, which had tested resistance levels at 1.2730, currently trading lower at new support levels at 1.2700. Technically the currency pair is trading well above the moving averages. RSI levels which had touched the overbought 70 level in earlier trading has eased a bit and is currently at 58. The not so hawkish Bank of Canada rate decision yesterday kept a lid on any meaningful gains for the Canadian dollar. In fact, the Canadian central bank decided to leave the benchmark interest rate unchanged and disappointed some investors anticipating an imminent start of the tightening cycle amid a surge in domestic inflation. Crude oil prices eased from near the seven-year highs touched in the previous day amid rising tensions between Russia and Ukraine. Oil prices eased on Thursday after the FOMC meeting yesterday. Futures pulled back amid a broader decline in financial markets triggered by the March interest rate increase telegraphed by the Fed and as the dollar climbed against its major peers. Dollar-denominated oil becomes more expensive for buyers using other currencies when the greenback gains. Brent crude futures eased $0.57 to $89.18 per barrel, after earlier falling to $89.00. Brent had risen 2% on Wednesday. US West Texas Intermediate crude futures fell $0.83 to $86.52 per barrel, after falling as low as $86.34 during the trading session. WTI had also gained 2% on Wednesday.

AUD and NZD are trading off overnight lows, but both remain below the moving averages. AUD has fallen below major support levels at .7090 and RSI levels are trading close to the oversold 30 level, with the AUD at 33 and the NZD at 37. The USD had held onto post-FED gains heading into the North American trading session.

As we head into the trading day, traders will be focused on macro reports throughout the day as investors continue to asses the latest FED update. Fourth quarter GDP and weekly jobless claims will be reported before the equity markets open and positive numbers could help the markets. Earnings reports could go a long way to helping the equity markets with a number of “biggies” reporting ahead of the opening bell. Good luck, stay safe and have a great day.