Key Points:

• Underlying pessimism beginning to fade to a degree.
• ABC wave poised to extend gains during leg C.
• Closing above the 100 day moving average is generating some bullish sentiment.

The Cable's defiance of last session's swing back to the dollar stands as a testament to the shift in underlying sentiment towards the embattled pair. Indeed, the market's reaction to Parliament's rather unified response to the Article 50 vote could be a bellwether of easing uncertainty and the return of some much needed optimism regarding the GBP's future. As a result, the 1.30 handle may not be as far out of reach as it has been over the past few months.

From a technical perspective, there is also some fairly tangible evidence of at least an end to the relentless selling pressure that has been besetting the Cable. Notably, the pair's recent surge in popularity has seen it finally cross back above the 100 day EMA in accordance with its bullish Parabolic SAR bias. Combined with the bullish MACD readings and the configuration of the two shorter period moving averages, upside potential is certainly at its highest point in some time.

Currently, the major impediment to any real and sustainable gains is the 61.8% Fibonacci level. This retracement coincides with the old downside constraint of the sideways channel that dominated the charts in the immediate aftermath of June's referendum. Additionally, stochastics are quite heavily overbought which will be providing some resistance as the pair attempts to push higher.

Fortunately, the presence of a corrective ABC wave alongside the other technical signals should help to generate the requisite momentum to see this robust zone of resistance broken. Moreover, whilst the stochastics are overbought, the RSI reading still has some room to maneuverer which makes the Cable's overbought status somewhat ambiguous.

Ultimately, if we do see the breakout occur, we expect the rally to end somewhere between the 61.8% and 78.6% Fibonacci retracement levels. Presently, the 1.30 handle is a likely candidate for where we can expect to see this C leg complete given the slight psychological barrier it poses. However, fundamentals around this point are likely to have a large influence on just where the ABC wave ends and they should, therefore, be watched closely as this point draws nearer.

Key Points:

• RSI Oscillator trending higher despite price falling.
• ABCD pattern completes near key support zone.
• Upside move likely in the coming days.

The Loonie has been under pressure the past few weeks as the pair has reacted to slumping sentiment for the greenback, as well as rising crude oil prices which have buoyed the CAD. Subsequently, price action has continued to creep lower over the ensuing period bringing it to a relatively critical juncture. However, there are some encouraging signs appearing amongst the technical indicators that could just be predisposing the pair to a rally in the near term.

In particular, a quick technical analysis for the pair has proved relatively illuminating as the 4-hour timeframe currently highlights the current inflexion point. Price action is currently sitting right on some strong support at 1.3020 which, if broken, could take the pair sharply lower. However, an ABCD pattern has just completed which suggests that a retracement is the likely move ahead.

In addition, the past week has started to show some interesting pressure building within the RSI Oscillator. After having reached oversold territory, in the latter part of January, the oscillator is now trending steadily higher in contrast to price actions current direction. Subsequently, there is divergence evident within the indicator which is likely to predispose the pair to a retracement in the coming days.

Fundamentally, much of the Canadian Dollar’s strength against the greenback has come from the rising crude oil prices that have been seen throughout most of 2017. This was largely due to an OPEC agreement on production which seemingly cut some excess supply. However, the evidence to date is starting to suggest that Iran, Iraq, and Nigeria are likely to undermine the agreement and that we might have seen the last of the oil price rises for the quarter. Subsequently, this adds some weight to the view that the CAD might now start to retreat against the US Dollar.

Ultimately, the USDCAD is unlikely to fall much further given the depth of support around the 1.30 handle. This is especially the case given the completed ABCD pattern and the current RSI Oscillator divergence. Subsequently, watch for an upward move over the next few sessions back towards the initial take profit point around the 1.31 handle.

Daily Pivots: (S1) 1.3017; (P) 1.3060; (R1) 1.3093; More...

Overall outlook in USD/CAD is unchanged. Corrective rise from 1.2460 should have completed at 1.3598 already, after hitting 50% retracement of 1.4689 to 1.3838. Fall from 1.3598 is seen as the third leg of the corrective fall from 1.4689. Deeper decline is expected as long as 1.3168 minor resistance holds, to retest 1.2460 low. On the upside, though, break of 1.3168 minor resistance will mix up the outlook again and turn intraday bias neutral first.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg could be completed at 1.3598 and fall from there is tentatively seen as the third leg. Break of 1.2460 will target 50% retracement of 0.9460 to 1.4689 at 1.2075 before completing the correction. In case of another rise, we'd look for reversal signal above 61.8% retracement of 1.4689 to 1.2460 at 1.3838.

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Daily Pivots: (S1) 0.7558; (P) 0.7577; (R1) 0.7603; More...

AUD/USD's rebound from 0.7158 resumed by taking out 0.7608 and reaches as high as 0.7651 so far. Intraday bias is back on the upside for 0.7777 resistance next. At this point, we'd still expect strong resistance from 0.7777/7833 resistance zone to bring near term reversal. On the downside, break of 0.7448 support will indicate that rebound from 0.7510 has completed. That will turn bias to the downside for 0.7144 key support level.

In the bigger picture, AUD/USD is staying inside long term falling channel and it's likely that the down trend from 1.1079 is still in progress. Break of 0.6826 low will confirm this bearish case. We'll be looking for bottoming sign again as it approaches 0.6008 key support level. Meanwhile, sustained break of 0.7833 resistance will be a strong sign of medium term reversal.

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Dollar's decline extended overnight after Fed left interest rates unchanged as widely expected. The dollar index reaches as low as 99.42 so far is is pressing 99.43 key near term support level. Markets continued to pare back expectation on Fed higher. Fed fund futures are pricing in 17.7% chance of March hike an 69.0% only. Nonetheless, treasury yield was steady with 10 year yield closed up 0.023 to 2.474. Stocks also stabilized with DJIA closed up slightly by 26.85 pts, or 0.14%, at 19890.94. S&P 500 rose 0.68 pts, or 0.03%, to close at 2279.55. In the currency markets, Dollar remains the weakest major currency this week. On the other hand Yen stays the strongest , followed closely by Aussie and Loonie. In other markets, Gold rides on Dollar weakness and surges to as high as 1210.2 so far today, and is set to take on 1220.1 resistance. WTI crude oil stays in familiar range and hovers around 53.5.

FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of 25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. Fed's view on the economic outlook has not changed, with overall growth remaining 'moderate' and the balance of risks 'roughly balanced'. The focus will now turn to Chair Yellen's Congressional testimony on February 14-15. During the 1.5 week period, we would receive the employment report for January. More in Fed Upbeat About Employment, Next Rate Hike Data Dependent.

BoE "Super Thursday" is the main focus today. The central bank is expected to keep interest rate unchanged at 0.25% and hold asset purchase target at GBP 435b. This key focus in on the quarterly inflation report. It's widely expected that BoE would raise inflation forecast, and thus, add to the case to stand pat for the rest of the year. However, policymaker's view on the impact of Brexit to growth is still quite unclear. And the markets would hope to get some more hints on that from the latest projections. Meanwhile, markets are pricing in 50% of rate hike by the end of this year. most economists expected that BoE would be on hold until mid-2019.

On the data front, Japan monetary base rose 22.6% yoy in January. Australia trade surplus widened to AUD 3.51b in December, building approvals dropped -1.2% mom. Japan consumer confidence rose 0.1 pt to 43.2 in January. Swiss will release retail sales in December. Eurozone will release PPI. UK will release construction PMI. US will release Challenger job cuts, non-farm productivity and jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7558; (P) 0.7577; (R1) 0.7603; More...

AUD/USD's rebound from 0.7158 resumed by taking out 0.7608 and reaches as high as 0.7651 so far. Intraday bias is back on the upside for 0.7777 resistance next. At this point, we'd still expect strong resistance from 0.7777/7833 resistance zone to bring near term reversal. On the downside, break of 0.7448 support will indicate that rebound from 0.7510 has completed. That will turn bias to the downside for 0.7144 key support level.

In the bigger picture, AUD/USD is staying inside long term falling channel and it's likely that the down trend from 1.1079 is still in progress. Break of 0.6826 low will confirm this bearish case. We'll be looking for bottoming sign again as it approaches 0.6008 key support level. Meanwhile, sustained break of 0.7833 resistance will be a strong sign of medium term reversal.

Economic Indicators Update

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FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of +25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. The market has only priced in 2 rate hikes this year, although the December dot plot signaled there might be 3. CME’s 30-day Fed fund futures suggested a 17.7% chance of rate hike in March, down from 20.3% prior to FOMC meeting. Yet, they priced in a 38.8% chance in May, compared with 37.7% the day before the meeting.

As mentioned in the statement, the Fed noted that 'measures of consumer and business sentiment have improved of late'. This is a positive tweak, appearing for the first time, which indicates policymakers’ acknowledgement of the rise in consumer and business confidence. On the flip side, however, they suggested that 'household spending has continued to rise moderately while business fixed investment has remained soft'.

The Fed is comfortable with the improvement in the employment market. As suggested in the statement, 'the labor market has continued to strengthen. Job gains remained solid and the unemployment rate stayed near its recent low'. On another component of the dual mandate, inflation, the Fed acknowledged that 'inflation increased in recent quarters but is still below the Committee's 2% longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance'.

To conclude, the Fed’s view on the economic outlook has not changed, with overall growth remaining 'moderate' and the balance of risks 'roughly balanced'. The focus will now turn to Chair Yellen’s Congressional testimony on February 14-15. During the 1.5 week period, we would receive the employment report for January

EUR/USD

The EUR/USD pair closed the day marginally lower round 1.0770, not far from a daily high 1.0807 high reached ahead of London's opening, with the dollar maintaining a weak stance and poised to decline further. Majors traded within a well-limited range during the Asian and European sessions, with the pair holding a few pips below the 1.0800 threshold, even despite the EU final Markit Manufacturing PMIs for January which confirmed that growth in the region entered 2017 with a strong footing. The German manufacturing sector growth hit a three-year high in January, despite a modest downward revision to 56.4 from the initial estimate of 56.5, while for the whole region, the final reading was revised higher, up to 55.2 from 55.1 its highest in over six years.

Solid US data pushed the USD higher early US session, as the ADP employment survey came in much better-than-expected, at 246K from previous 153K and market's consensus of 165K, whilst manufacturing PMIs also confirmed an acceleration in growth's pace at the beginning of the year, with official ISM manufacturing PMI up to 56.0 from December's 54.7. As largely expected, the US Federal Reserve monetary policy meeting was a non-event, as the Central Bank left its policy unchanged, and offered no clues on what's next. Still, chances of a March rate hike have diluted after the neutral stance, putting the greenback under pressure across the board.

Technically, the pair is poised to extend its advance, given that in the 4 hours chart, the price bounced from a bullish 20 SMA, around 1.0735, whilst technical indicators recovered their bullish slopes after a modest downward correction within positive territory. The Momentum indicator in the mentioned chart heads higher at fresh weekly highs, supporting additional gains for the upcoming sessions. Still the pair faces a tough resistance between 1.0800 and 1.0840, where it bottomed for most of 2015 and 2016, while the 50% retracement of the November/January decline stands a 1.0820. An advance beyond this region is required to confirm a new leg higher, towards the 1.0930 price zone, the 61.8% retracement of the mentioned decline.

Support levels: 1.0650 1.0610 1.0565

Resistance levels: 1.0710 1.0740 1.0770

USD/JPY

The USD/JPY pair settled a few pips above the 113.00 level, recovering modestly, but still at risk of a bearish extension, given market's reaction to FOMC's latest monetary policy meeting outcome. The pair traded in the green for most of the day, supported by easing risk aversion, as stocks in Asia and Europe recovering following strong Chinese growth figures, and extended up to 113.93 following better-than-expected US employment and manufacturing data. Also, positive data coming from Japan at the beginning of the day, helped ease risk aversion among Asian investors, as the Markit/Nikkei Japan Final Manufacturing came in at 52.7, up from 52.4 in December, indicating that manufacturing activity expanded at the fastest pace in almost three years as export orders surged. But the pair retreated after the FED failed to trigger dollar's demand, and with the pair having been rejected from the 114.00 region, the risk remains towards the downside. In the 4 hours chart, the price remains well below a bearish 100 SMA, currently around 114.00, whilst the Momentum indicator heads higher within bearish territory, but the RSI indicator hovers around 43 with no clear directional strength. The pair fell down to 112.82 as an immediate reaction to the FED, being now the level to break to confirm additional declines for this Thursday.

Support levels: 112.80 112.50 112.00

Resistance levels: 113.45 113.90 114.30

GBP/USD

The GBP/USD pair advanced up to 1.2679 this Thursday, surpassing January's high by a few pips and ending the day a handful of pips below it. Pound strengthened at the beginning of the day following the release of Markit Manufacturing PMI for January, as the index came in at 55.9 for the month, below December's two and-a-half years of 56.1. According to Markit, output growth was at a 32-month high, but input costs posted a record increase, due to the sharp fall of the Sterling following the Brexit referendum. From a technical point of view, the pair could advance further this Thursday, as in the 4 hours chart, the price is well above a now bullish 20 SMA, whilst technical indicators consolidate near overbought territory, in line with the low volumes at this time of the day. Seems unlikely that the pair will move much during the upcoming Asian session, as the market will probably wait for the outcome of the BOE's monetary policy meeting, and rush to price in the Quarterly Inflation report.

Support levels: 1.2625 1.2580 1.2535

Resistance levels: 1.2680 1.2730 1.2770

GOLD

Spot gold settled at $1,209.40 a troy ounce, having trimmed most of its intraday losses after FOMC monetary policy meeting resulted a non-event, with the US Central Bank leaving its policies on hold and offering no clues on upcoming moves. The bright metal fell down to 1,198.16 early US session, as strong American data triggered some dollar demand that anyway was short lived. The absence of information on the FED statement, clearly indicates that policy makers are still uncertain about what's next for the US economy under the new administration. From a technical point of view, the daily chart shows that the price managed to end the day above the 1,204.50 Fibonacci level, but also that it is still stuck around a bearish 100 SMA. Technical indicators in the mentioned time frame indicate lack directional strength, with the Momentum stuck around its 100 level and the RSI heading modestly lower around 59, not enough to confirm a downward extension. In the 4 hours chart, technical indicators retreated from overbought readings, but the price held above the 20 and 100 SMAs, both converging around 1,202.00, limiting chances of a downward move.

Support levels: 1,204.50 1,196.10 1,187.80

Resistance levels: 1,220.05 1,229.80 1,241.35

WTI CRUDE

Crude oil prices gained on the back of the FED, with dollar's weakness helping the commodity to shrug off the disappointing news for oil's market. West Texas Intermediate crude oil futures settled around $53.50 a troy ounce, recovering from a daily low of $52.23, achieved after the release of the US EIA stockpiles report, which showed a major build in inventories. US crude stockpiles for the week ended Jan. 27 rose 6.47 million barrels, nearly doubling expectations of a 3.840 million gain. West Texas Intermediate crude futures daily chart maintains a neutral technical stance, as the commodity is above a still flat 20 DMA, whilst technical indicators turned modestly higher, but hold within neutral territory. In the 4 hours chart, the upside seems a bit more constructive, given that the price is currently standing above its moving averages, all together in a 20 cents range, and that technical indicators maintain their upward slopes within bullish territory.

Support levels: 53.20 52.65 52.00

Resistance levels: 53.90 54.30 55.10

DJIA

After trading most of the day in the red, US major indexes closed in positive territory, amid strong Apple and Facebook earnings reports, this last, released right after the close. The Dow Jones Industrial Average gained 26 points and closed at 19,890.94 while the Nasdaq Composite added 0.50% to settle at 5,642.65. The S&P closed mostly flat at 2,279.55. A FED less hawkish than expected, also supported the recovery of US equities as a rate hike seems unlikely at the time being. Technically, the Dow presents a neutral stance, as in the daily chart, the price stands around a horizontal 20 DMA, whilst technical indicators head nowhere around their mid-lines. Shorter term, the 4 hours chart shows that the 20 SMA capped the upside on an early advance, now standing at 19,929, while technical indicators head higher, but still within negative territory, not enough to confirm further recoveries ahead. Once the dust settle, seems likely that investors will keep on unwinding the Trump-trade during the upcoming days, and therefore stocks will probably resume their slide.

Support levels: 19,844 19,806 19,745

Resistance levels: 19,929 19,975 20,036

FTSE 100

London equities market advanced this Wednesday, adding 8 points to settle at 7,107.65, despite a strong Pound. The Sterling managed to advance further against its American rival at the beginning of the day, but mining-related shares gained on the back of Chinese growth data. China's official manufacturing PMI for January came in at 51.3, beating expectations of 51.4, and slightly below December reading of 51.4. Among the best performers were Anglo American, which closed up 2.89%, while Antofagasta added 2.64%. The worst performer was Mediclinic International, down 3.36%, followed by Associated British Foods which closed down 2.88%. From a technical point of view, the daily chart shows that the benchmark remains range bound below its 20 DMA, whilst technical indicators maintain their bearish slopes within negative territory, maintaining the risk towards the downside. In the 4 hours chart, selling interest kept surging on advances towards a bearish 20 SMA, while technical indicators remain within negative territory, but with no directional momentum.

Support levels: 7,104 7,057 7,011

Resistance levels: 7,154 7,183 7,241

DAX

European equities recovered ground alongside with the greenback, as local government bonds and safe-haven retreated from Wednesday's highs on the back of solid US data. Also, backing the positive mood among local investors were news indicating that the manufacturing activity in the region reached a multi-year high at the beginning of the year. The German DAX closed the day at 11,659.50, up by 1.08% or 124 points. Financial-related equities recovered from Tuesday's setback and within the DAX led advancers, with Deutsche Bank up 4.02% and Commerzbank adding 2.23%. The DAX's daily chart shows that the index settled a few points above a horizontal 20 SMA, whilst technical indicators have bounced modestly from their mid-lines, overall neutral. In the 4 hours chart, the index is below a modestly bearish 20 SMA, whilst technical indicators recovered from oversold readings, but lost upward strength and turned flat within bearish territory.

Support levels: 11,609 11,550 11,000

Resistance levels: 11,711 11,770 11,804

STOCKS

The FED has kept rates unchanged and the markets are willing to wait till March to analyze economic activity in the Trump-era. In India, although the Union Budget has brought about little disappointment to some people, many investors are still positive for the coming year.

Dow (19890.94, +0.14%) has bounced from support on the daily candles. The Dow looks potentially bullish over the medium term and could re-test 20000 levels in the near term. On the downside, we expect the crucial supports at 19500-19700 to hold in the medium to long term.

Dax (11659.50, +1.08%) has recovered after testing 11535 yesterday. While above 11400-11500 levels, we could see a rise towards 11800-12000 in the coming sessions.

Nikkei (19099.93, -0.25%) is almost stable in the 19257-18900 region and could possibly break on the downside in the near term. Immediate target of 18650 looks possible for now before any bounce is seen.

Nifty (8716.40, +1.81%) bounced back sharply towards the end of the session yesterday as the support near 8500 holds well. Note that the upside could be limited to 8750-8800 in the near term from where a corrective dip towards 8600 or lower can be expected.

COMMODITIES

Weakness in Dollar Index keeps the precious metals positive. Crude prices may rise in the near term. Copper may test crucial resistance.

Crude prices have risen slightly but may remain range-bound in the earlier mentioned 52-55 (for WTI) and 54-58 (for Brent) regions respectively for about a few more sessions in the near term. Brent (56.57) and WTI (56.56) may move towards 58 over today and tomorrow.

Gold (1214.24) is trading just below immediate resistance near 1215-1220 and while that holds, we could see a corrective dip in the near term back towards 1180. In case a break above 1220 is seen, we would have to shift our focus towards 1240-1250 levels. For confirmation we need to keep a close watch on whether the support near 99.00/50 holds on the Dollar Index.

Silver (17.57) has moved up and could test 18 in the near term. 17.50 now acts as a decent support. Although near term looks bullish, we need to see how the other assets play out to boost prices in the near term.

Copper (2.7205) looks positive and looking at the commodity-currencies like the Aussie (0.7638) there could be an upside potential in the near term. But we would like to wait and see price action near crucial resistance at 2.75. Only on a break above 2.75, would we shift our focus on higher levels. While 2.75 holds, we could see a fall back towards 2.60.

FOREX

While the Budget pleased the markets and strengthened Rupee, the global Dollar weakness remains the same as the Fed keeps rates unchanged.

Dollar Index (99.59) has not moved much as the Fed rates have been kept unchanged. Repeat - the Dollar bulls need 99.50-00 to hold to keep any bullish possibilities open. On the other hand, a break below 99.00 may damage the technical structure considerably and open up much lower levels till 97.00 in the medium term. Inflection point.

Euro (1.0781) is in a pause mode for the last 2 sessions but it may test the target/resistance 1.0820-50 soon. The price action near 1.0820-50 may be decisive in the near to medium term and needs to be closely watched.

Dollar-Yen (113.05) is in sleep mode too, just like Euro. The upside chances are still open but the pair requires a break above the resistance of 113.40 to negate the immediate downtrend and open up 114.00-50.

Pound (1.2666) is trading at a 7-week high after the strong bounce from the major support of 1.2400 and is well on its way to our targets of 1.2800.

Aussie (0.7637), contrary to expectations, has rallied above the resistance of 0.7600 with a lot of strength which may propel it higher to the resistance near 0.7750 in the coming sessions.

Dollar-Rupee (67.47) is coming closer to our immediate target/support zone of 67.40-25. It is trading at 67.38 in the NDF now, not too far away from the 2-month low near 67.30.

INTEREST RATES

Interestingly, the equities rallied and Rupee (67.47) strengthened considerably following the Budget but the 10Yr GOI yields (6.5512%) actually closed marginally higher compared to the previous close. It raises questions about the internal steam of the dominant downtrend. It needs to be seen if the downtrend reasserts itself or an attempt to rise above the major resistance near 6.60-65% is seen in the next few sessions.

The US 10-5Yr yield spread (0.55%) is shooting up sharply and if the momentum remains unchanged, then it may test the resistance near 0.575% soon.

UK yields are facing immediate resistances at their respective current levels. Pound (1.2666) needs both the 10Yr (1.55%) and the 20Yr (1.98%) to break above the downtrend resistances near 1.57% and 2.02%. While the 20-10Yr (0.43%) is in a gradual decline, the 20-5Yr (1.39%) is trading at a 3-year high.

As widely expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at between 1/2 and 3/4 percent.

The Committee was fairly upbeat on the economy indicating that activity "continued to expand at a moderate pace", job gains "remained solid" and unemployment stayed "near its recent low."

The statement highlighted consumer spending as "continuing to rise" but also reiterated that business investment "remained soft." However, it also added that measures of consumer and business investment sentiment have "improved of late" suggesting a potentially brighter outlook, particularly for the latter.

Inflation was viewed as still being low but having "increased" recently. Moreover, the Committee views that it will rise to the 2 percent target over the medium term, at the same time removing the justification that this will happen as "earlier declines in energy prices and non-energy imports" dissipate. Market based measures of inflation expectations were viewed as low, a somewhat less-upbeat assessment than in December, when they were believed to be low but having "moved up considerably."

Aside for the change in the voting membership - which became less hawkish as Bullard (St. Louis), George (K.C.), Mester (Cleveland), and Rosengren (Boston) gave up their votes to Evans (Chicago), Harker (Philly), Kaplan (Dallas), and Kashkari (Minneapolis) - not much has changed in the statement. The vote to keep rates unchanged was unanimous.

Key Implications

As expected, this was largely a status-quo statement that highlighted some of the improvement in economic data as of late with the outlook across the FOMC appearing to be relatively constructive. Notably, the statement failed to highlight any potential risks (both upside and downside) that the U.S. economic currently faces.

Interestingly, the Fed's take on inflation appears to have been somewhat more hawkish, with reaching the target now seen as more related to the labor market healing rather than dissipation of drag from energy declines and dollar rally. Having said that, the Fed still appears concerned about the low levels of inflation expectations priced into the markets.

At this point we expect the Fed to remain on the sidelines over the next couple of meetings, waiting to see how the U.S. economy performs amidst the heightened uncertainty related to fiscal and trade policies in particular. Having said that, should economic activity continue to progress at a moderate pace, as is our baseline scenario, we do expect the Fed to hike before the mid-year mark and once again in the second half of this year so as to not fall behind the curve – something that's been highlighted by Chair Yellen and many other FOMC members.

Despite the annual rotation of four new voting members to the FOMC (and departure of 4), the Committee did not make any change to the policy rate today. There was, however, a slightly more optimistic tone in the accompanying statement. The statement highlighted the economy's continued expansion and solid labour market performance adding that confidence measures had improved. The risks to the near term outlook remained "roughly balanced." The members reiterated that rate hikes are expected to be gradual and the fed funds rate is likely to remain below its long-term level for some time. That said there was nothing in the statement to suggest any change from December when the majority of policymakers forecasted the fed funds target range would be lifted three times this year.

Our Take:

Recent reports showed that the economy continued to grow at a moderate pace accompanied by a strengthening in labour market conditions in line with FOMC members' projections issued in December. Inflation measures have ticked up with both the headline and core CPI rates above 2% while the Fed's preferred PCE measures are trending higher. Market-based inflation expectations also rose markedly in recent months (see chart below) however policy makers seem unconcerned about this development stating that the implied rates "are still low" and survey-based measures are holding steady.

Friday's payroll report is forecast to show another solid 175,000 job gain to start 2017 with markets likely to price in more aggressive hikes this year on any upside surprise. However enthusiasm for tighter policy will be contained by the uncertainty surrounding the new Administration's policies on tax cuts, trade and immigration. Any policy changes that are viewed as negative for growth will quickly see markets unwind expectations of tightening. For now it is more about the degree of policy tightening that is in question, not the need to reduce today's historically stimulative stance.