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Rates: Fed to deliver soft message
Fed chair Powell is expected to announce the end of the balance sheet run-off by the end of the year. Communication on the future composition of the BS is a wildcard. We expect the total amount of rate hikes in the dot plot to fall from 3 to 1. Most should be discounted on rate markets, but this soft message creates space for more bonds gains over the MT.

Currencies: Dollar has discounted by and large a soft Fed
Today's currency price action will be driven solely by the Fed. Recent dollar weakness suggests that a dovish Fed is probably discounted. We anticipate sideways trading ahead of the Fed with some risks of EUR/USD profit taking afterwards. UK PM May is running out of time to find consensus on the length of the brexit deadline extension

The Sunrise Headlines

• US equities started strong but eventually closed unchanged following reports that some US officials are concerned China is pushing back against American demands. Asian bourses are mixed with China (-0.5%) underperforming.
• Despite concerns of Chinese stalling in trade talks, US Trade representative Lighthizer and Treasury Secretary Mnuchin are to travel to China next week for another round of high-level discussions with Chinese Vice Premier Liu He.
• Chinese President Xi Jinping will sign agreement with Italy and France over the next days to enhance synergies and trade relationships with the EU on its Belt and Road initiative.
• Czech National Bank's vice governor Mora told Bloomberg yesterday that he expects one more rate hike this year, but it probably won't happen at next week's policy meeting (Mar 28).
• RBA Bullock worries that the large influx of supply on the Sydney apartment market might exacerbate declines in housing prices and worsen households' financial positions. She called on banks to loosen lending conditions.
• Canada's Liberal government presented a pre-election budget including over $10bn in spending to counter the worsening economic backdrop and prop up voter support for the scandal-hit PM Trudeau and his government.
• Today's economic calendar centres on the FOMC's verdict. The US central bank is expected to join the ECB's dovish swing. UK inflation data and a German Bobl auction are the other items on the agenda.

Currencies: Dollar Has Discounted By And Large A Soft Fed

Soft Fed discounted after recent USD weakness?

EUR/USD was well bid yesterday. The couple eked out gains as investors avoided excessive USD long exposure ahead of a cautious expected Fed meeting (tonight). At the same time, euro buying found support in a positive surprise of Germany's ZEW confidence (expectations component) and an overall constructive risk climate. However, the latter was shaken by conflicting reports on trade later on. Some US officials are concerned China is resisting US demands. China also stepped back from earlier trade promises it made, saying they do so because there haven't been any assurances from the US that tariffs would be lift. The EUR/USD uptrend stalled. The pair closed at 1.1352 (from 1.1337). USD/JPY closed a choppy trading session stable at 111.39.

Asian markets are trading mixed this morning. Chinese equities underperform following the trade reports. The Chinese yuan opened slighty lower but has recovered most losses soon after. The Aussie (AUD/USD 0.708) similarly staged a turnaround after slipping as the RBA said that risks to financial stability have become 'elevated'. Minutes of the BoJ showed disagreement among its members over monetary easing. One member said the BoJ should avoid market expectations of no change in policy to be fixed to 'an excessive degree'. USD/JPY is trading at 111.55, up from 111.40.

Today's economic calendar is extremely thin. The Fed meeting tonight will have market's undivided attention. We expect the central bank to reduce its anticipated 2019 rate hikes from 2 to 1 with no hikes penciled in for 2020 (vs. 1 in December). Powell will probably also announce the end of the balance sheet run-off by the end of the year. We believe the dollar at the current levels has discounted a soft Fed. That might result in sideways EUR/USD trading ahead of the Fed with some risks of profittaking afterwards. More so because any further sustained rebound in EUR/USD probably needs better EMU data first.

Sterling entered calmer waters yesterday after the UK's Speaker of the House thwarted May's brexit strategy. Markets are now awaiting the PM's next steps which would consist of asking the EU to extend the deadline. Reports suggest she seeks at minimum a 3m extension. It is unclear however how the EU will respond at the summit tomorrow. We don't expect the brexit process to be clarified soon and stay cautious on sterling. The 0.8490/0.85 area might become a ST floor for EUR/GBP.

EUR/USD: dollar has by and large discounted a soft expected Fed

Gold prices have managed to achieve a rebound from the sub-$1,290 levels seen earlier this month to challenge $1,305 at the time of writing. What can be watched as a potential positive driver for Gold over the coming trading sessions is that risk-off sentiment appears to be creeping back into the markets, amid reports that China is pushing back against the United States in trade negotiations. The initial headlines making way in the early hours of Wednesday morning suggest that Chinese officials appear reluctant to cede ground on intellectualproperty policies and other data-related issues, until they’ve been assured that the Trump administration will lift tariffs on China.

Such reports underline the complexities of the ongoing negotiations between the world’s two largest economies, despite President Trump’s most recent comments that “talks with China are going very well”. Markets can expect several more twists and turns ahead in what has already been a long, drawn-out process, and this isstill seen as potential fuel for safe-haven assets like Gold.

Investors do still hold on to optimism that a US-China trade deal can be signed by the end of April. There’s a clear impetus on both sides to secure a deal – Trump wants to boost his re-election chances heading into the 2020 Presidential campaign, while Chinese officials understandably want to focus ontheir own economic priorities.

For the time being, markets are expected to remain cautiously optimistic until a deal has actually been signed. The eventual conclusion to the long-standing trade tensionswill hopefully help drive another round of risk-on sentiment for financial markets. The removal of trade tensions between the United States and China still remains as one of the best catalysts for improved emerging market sentiment and global stock market momentum, while it is also a leading factor to monitor heading into Q2 of 2019 for potential weakness in the US Dollar.

Dollar Discounts Dovish Fed

The US Dollar appears to be discounting the risk of a downbeat narrative being provided following the ongoing FOMC meeting. If this momentum for the Greenback remains intact, the Dollar Index will attempt to conclude a 3-day losing streak and rebound away from levels that have seen the Dollar hit its lowest level since the end of February.

It is considered by many as a foregone conclusion that the Fed will leave interest rates unchanged for a while, but investors want to know if the central bank will offer more guidance on the US monetary policy outlook for the remainder of the year. Markets will be keen to find out the latest readings on the Fed dot-plot, and whether they may justify the emergence of recent speculation that the Federal Reserve will consider cutting US interest rates down the road. I would be very surprised if this materialised, and expect the tone of the Federal Reserve once againto acknowledge that global economic conditions are weakening and that the US central bank is aware of the potential risks external headwinds are presenting to the global economy. This is the same narrative that has been provided by a wide range of different officials throughout the developed and emerging markets in the past couple of months.

There has been some recent softness in momentum through economic data releases from the United States, however the economy is overall performing with a level of resilience and I maintain my view that a US interest rate increase for later 2019 is still on the table.

Market movers today

Today's highlight is the Fed meeting tonight. We expect the target rate will remain unchanged at 2.25-2.50% and no major changes to the statement. The big question is what the Fed will signal about being 'patient'. We expect the Fed to lower its 'dot' signal to one rate hike in 2019 (down from two). We expect them also to be revised lower for 2020 and 2021 and would not be surprised if the Fed signals 'one and done'. That said, the Fed has begun downplaying the importance of the dots, so we would be careful putting too much weight on them going forward. Our current base case is two rate hikes (in June and December) based on our overall positive economic outlook, but if the Fed continues focusing on inflation expectations, a June hike seems less likely, as market-based inflation expectations are well below the historical average.

The Brexit discussion continues to draw market attention and in particular the letter that PM May is likely to send to EU council president Tusk later today (more below). The UK CPI inflation for February is unlikely to drive the GBP.

Selected market news

Yesterday, we found out that today PM Theresa May is likely to send EU council President Tusk a letter explaining why the UK wants an extension. This letter is expected to be received today, where hopefully we will also get to know the content. According to Bloomberg , the EU is likely to say that May has to get the Brexit deal through Parliament by mid-April, otherwise the choices are a long extension into 2020 or leaving without a deal. While May's hope is that Brexiteers and DUP will back her deal in order to get Brexit going, the risk is instead prominent Brexiteers in her Cabinet will quit and Brexiteers will make life difficult for her in Parliament (and perhaps even vote for no confidence in her).

As we outlined yesterday, our base case is a long extension (60% probability versus 30% for a short extension). Yes, Brexit may be annoying and time-consuming for the EU leaders and an extension is not only for the better, but probably still better than adding a no deal Brexit to the current mix of a slower economy and high political uncertainty in other EU countries as well. We attach a 10% probability of the EU leaders not agreeing on the principles of an extension, which would be negative for markets, but we think the probability of a no deal scenario has declined. EU leaders are known to be more hawkish on Brexit than Tusk, Juncker and Barnier. One clear problem is that the EU leaders want an explanation for why to give an extension in the first place. For more details see Brexit Monitor: 60% probability of a long Brexit extension , 19 March.

The road to a ceasefire to the US-China trade war was dented yesterday, but remains on track to a solution. Senior officials were said to have reported that Trump-Xi may only meet in June and not, as recently reported, April. However, talks are still ongoing and the discussions at this final stage are difficult. Next week, the US' Lightizer and Mnuchin are travelling to Beijing and similarly, the following week China's He is going to the US in an attempt to solve the disputes, which are currently said to focus on the intellectual property rights, drug data and patents as well as the enforcement metrics.

On the eve of his visit to Italy, Chinese President Xi Jinping wrote in Corriere della Sera newspaper saying that the country is ready to strengthen a "global strategic partnership". Xi added that "with my visit I wish to set out together with Italian leaders the guidelines for bilateral relations and take them into a new era." Additional, China like to coordinate more closely with Italy in multilateral organizations like UN, WTO and GD20. And both countries could develop joint projects in ports, shipping, telecoms and pharmaceuticals.

Separately, Vice Foreign Minister Wang Yi said "it is hard to avoid misunderstandings occurring during the process of advancing the construction of the Belt and Road. But he emphasized that "facts are the best proof". Italy is set to send a high-level delegation to the second Belt and Road summit in Beijing next month. And they would be the first G7 nation to join the initiative, which could upset the US and alert EU.

Daily Pivots: (S1) 1.1335; (P) 1.1349; (R1) 1.1364; More.....

Outlook in EUR/USD remains unchanged. Further rise could be seen with 1.1294 minor support intact despite loss of upside momentum. But upside should be limited below 1.1419 resistance to complete the corrective rebound from 1.1176. On the downside, below 1.1294 minor support will turn bias to the downside for 1.1176 low first. Break of 1.1176 will target 100% projection of 1.1814 to 1.1215 from 1.1569 at 1.0970 next.

In the bigger picture, down trend from 1.2555 medium term top is still in progress. Bearishness is affirmed by sustained trading below falling 55 week EMA. 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 is met. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1569 resistance will now indicate completion of such down trend and turn medium term outlook bullish.

Daily Pivots: (S1) 1.3226; (P) 1.3269; (R1) 1.3306; More....

GBP/USD is staying in consolidation below 1.3381 and intraday bias remains neutral. For now, with 1.2960 support intact, further rise is expected. On the upside, firm break of 1.3381 will target 61.8% retracement of 1.4376 to 1.2391 at 1.3618 next. However, on the downside, firm break of 1.2960 will indicate that rebound from 1.2391 has completed earlier than expected. Deeper fall would then be seen to 1.2773 support for confirmation.

In the bigger picture, medium term decline from 1.4376 (2018 high) should have completed at 1.2391. Rise from 1.2391 is now seen as the third leg of the corrective pattern from 1.1946 (2016 low). Further rise could be seen through 1.4376 in medium term. On the downside, though, break of 1.2773 support will dampen this view. Focus will be turned back to 1.2391 low and break will resume the fall from 1.4376 to 1.1946.

Daily Pivots: (S1) 0.9978; (P) 0.9998; (R1) 1.0011; More....

As long as 1.0052 minor resistance holds, intraday bias in USD/CHF remains on the downside for 0.9936 support. Decisive break there will carry larger bearish implication. In that case, deeper decline could be seen back to 0.9716 support first. On the upside, though, break of 1.0052 minor resistance will turn bias back to the upside for retesting 1.0124 instead.

In the bigger picture, USD/CHF drew strong support from medium term trend line and rebounded. That suggests rise from 0.9186 is still in progress. Further break of 1.0128 will confirm up trend resumption and target 1.0342 key resistance. Nevertheless, break of 0.9926 support will be the first signal of medium term reversal and bring another test on the trend line.

Daily Pivots: (S1) 111.21; (P) 111.34; (R1) 111.55; More...

Intraday bias in USD/JPY remains neutral first and consolidation from 112.13 could extend. As long as 110.35 support hold, near term outlook remains bullish. Rise from 104.69 is expected to extend higher. On the upside, break of 112.13 will turn bias to the upside for 114.54 resistance next. However, firm break of 110.35 should confirm near term reversal and turn outlook bearish for 108.49 support and below.

In the bigger picture, strong rebound from 104.69 argues that decline from 118.65 (2016 high) has completed with three waves down to 104.69, after failing 104.62. More importantly, the rise from 98.97 (2016 low) could be resuming. Decisive break of 114.54 resistance will add more credence to this bullish case and target 118.65. This will now be the favored case as long as 110.35 support holds. However, firm break of 110.35 will mix up the medium term outlook again and turn focus back to 104.69 low.

Daily Pivots: (S1) 0.7079; (P) 0.7095; (R1) 0.7107; More...

Intraday bias in AUD/USD remains neutral first. With 0.7121 minor resistance intact, further decline is still expected. On the downside, break of 0.7003 will extend the fall from 0.7295 to 61.8% retracement of 0.6722 to 0.7295 at 0.6941 and below. However, firm break of 0.7121 will argue that decline from 0.7295 has completed at 0.7003. In that case, further rise should be seen to 0.7206 resistance to confirm. More importantly, in that case, corrective three wave structure of the fall from 0.7296 to 0.7003 would suggest that rise from 0.6722 low is extending through 0.7295.

In the bigger picture, as long as 0.7393 resistance holds, we'd treat fall from 0.8135 as resuming long term down trend from 1.1079 (2011 high). Decisive break of 0.6826 (2016 low) will confirm this bearish view and resume the down trend to 0.6008 (2008 low). However, firm break of 0.7393 will argue that fall from 0.8135 has completed. And corrective pattern from 0.6826 has started the third leg, targeting 0.8135 again.

Daily Pivots: (S1) 1.3268; (P) 1.3308; (R1) 1.3366; More...

USD/CAD dipped to 1.3250 overnight but quickly recovered. With 4 hour MACD crossed above signal line again, intraday bias is turned neutral. Further decline remains in favor as long as 1.3371 minor resistance holds. Below 1.3068/3112 support zone. Decisive there will indicate larger reversal and turn outlook bearish. On the upside, though, break of 1.3371 minor resistance will turn intraday back to the upside for 1.3467 resistance. Further break of 1.3467 will revive near term bullishness for 1.3664 key resistance.

In the bigger picture, structure of the medium term rise from 1.2061 (2017 low) to 1.3664 is not clearly impulsive. Hence, we'd stay cautious on strong resistance from 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685 and 1.3793 resistance to limit upside, and bring medium term topping. But in any case, medium term outlook will stay bullish as long as channel support (now at 1.3157) holds. Sustained break of 1.3793 will pave the way to retest 1.4689 (2015 high). Firm break of the channel support should confirm reversal target 1.2061 low again.