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The US dollar plunged after the Fed’s 25 bp hike raised hopes that the peak rate is getting closer. On the daily chart, the euro has bounced off the 20-day SMA (1.0800) as it sought to preserve its gains above last May’s high of 1.0780. A sharp break above 1.0910 has attracted momentum buyers, sending the pair towards 1.1100 which sits in the supply zone from the April sell-off. As the RSI ventures into the overbought area, more buyers may see a pullback as an opportunity to tag along with 1.0900 as a fresh support.

Daily Pivots: (S1) 1.3245; (P) 1.3313; (R1) 1.3358; More…

Intraday bias in USD/CAD remains on downside at this point. Choppy decline from 1.3704 would target 1.3224 keys support level. Strong support is still expected there to bring rebound. On the upside, above 1.3470 minor resistance will turn intraday bias back to the upside for 1.3519 resistance. However, decisive break of 1.3224 would carry larger bearish implication.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Daily Pivots: (S1) 0.7067; (P) 0.7106; (R1) 0.7175; More…

Intraday bias in AUD/USD is break on the upside with break of 0.7141 resistance. Current up trend from 0.6169 should now target 0.7304 fibonacci level. On the downside, break of 0.6982 support is needed to indicate short term topping. Otherwise, outlook will stay bullish in case of retreat.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.7304. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Daily Pivots: (S1) 0.9042; (P) 0.9113; (R1) 0.9155; More…

Intraday bias in USD/CHF is back on the downside with break of 0.9084 support. On the downside, sustained break of 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056 will resume the whole fall from 1.0146 to 100% projection at 0.8754, which is close to 0.8756 long term support. Nevertheless, strong rebound from current level, followed by 0.9287 resistance, should confirm short term bottoming.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 should be a medium term down trend itself. Next target is a test on 0.8756 low. Strong support should be seen there to bring rebound. Still, further decline will now be expected as long as 0.9407 resistance holds, in any case.

Daily Pivots: (S1) 128.21; (P) 129.31; (R1) 130.07; More…

Intraday bias in USD/JPY remains neutral for the moment. On the downside, break of 127.20 will resume the whole decline from 151.93 and target 121.43 fibonacci level. Nevertheless, on the upside, break of 131.56 resistance should confirm short term bottoming, and turn bias back to the upside for stronger rebound to 55 day EMA (now at 133.75) and possibly above.

In the bigger picture, the break of 55 week EMA (now at 131.39) raises the chance of medium term bearish reversal, but that’s not confirmed yet. Strong support could be seen around 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 75.56 to 151.93 at 122.75 to bring rebound. But break of 131.56 resistance is needed to indicate bottoming first. Otherwise further fall will remain in favor.

Daily Pivots: (S1) 1.2300; (P) 1.2347; (R1) 1.2420; More…

Intraday bias in GBP/USD stays neutral as it's still bounded in tight range below 1.2445/6. On the downside, firm break of 1.2252 minor support will turn bias to the downside, and extend the corrective pattern from 1.2445 with another falling leg. On the upside, decisive break of 1.2445 will confirm resumption of whole rise from 1.0351. Next target will be 1.2759 fibonacci level.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Markets

The Fed unanimously decided to raise its policy rate by 25 bps to 4.5%-4.75%, in a second consecutive downshift (+75 bps in November; +50 bps in December). In its new policy statement, they still commit to future increases (multiple) in the policy rate, but a reference to pace (magnitude of hikes) is changed by one to extent (amount of hikes), indicating that the final steps before hitting the peak rate will definitely be 25 bps moves. The Fed characterizes inflation as remaining elevated, but added that it has eased somewhat. Russia’s war against Ukraine contributes to elevated uncertainty instead of putting upward pressure on inflation (December statement). In the space between the release of the statement and Fed Chair Powell’s press conference, front end yields added around 5 bps. Stocks faced moderate selling pressure while EUR/USD tried to dive back below 1.09. All from the point of view that multiple hikes from the current level imply a higher peak rate than discounted. (>5% vs <5%).

Enter Powell. Known for his pragmatic communication style, he actually pulled a(n early) Lagarde. He lacked his usual fire (not fully recovered from his Covid-infection?) to talk up the market to the Fed’s projected rate path and at sometimes it even felt as a capitulation trade: “Certainty is just not appropriate here. I’m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer”. While we think that the Fed will deliver two more 25 bps rate hikes in March and May, Powell did seem to prepare markets for a potential change in dots going forward by making them data-dependent on fresh reports of hiring, inflation and activity before that meeting. On inflation, he mentioned for the first time that the disinflationary process has started. Finally when it comes to the unwanted easing of financial conditions since the previous meeting (weaker dollar, lower/stable rates, tighter credit spreads, stronger stock markets) he said that “the Fed’s focus is not on short-term moves”. For the record: Powell stuck for most of the press moment to his hawkish views, saying that the inflation battle isn’t won, that the labour market remains extremely tight, that the risk/consequences of underdoing it are way bigger than the ones around staying the course and that policy will remain restrictive for some time to come. We give outsized weight to these small “dovish” twists during the Q&A session because they sparked the market reaction that followed: a U-turn. US yields tanked 9 to 11 bps in the 2-10yr bucket of the curve with the very long end underperforming (-6.6 bps). YTD lows are still out of reach for now. Fed Funds future lost around 5 bps from H2 2023 onwards and around 10 bps early 2024 (Dec23 at 4.5%).US stock markets turned losses into gains, rallying by up to 2% for Nasdaq. EUR/USD took out 1.0942 (50% retracement on 2021-2022 decline) to currently trade above 1.10 for the first time since April of last year. The pair is testing the topside of the upward trend channel in place since the end of November. EUR/GBP joined the rise higher, testing the high 0.88-resistance zone. The euro/ECB is about to outhawk both USD/Fed and GBP/BoE. Both ECB and BoE will likely deliver a 50 bps rate hike today, with Lagarde hopefully succeeding where Powell failed: convincing markets of a tighter policy ahead. BoE Bailey will likely sound more cautious, helped by slightly better growth and slightly lower inflation forecasts. We expect German Bunds to sell-off, underperforming US Treasuries and UK Gilts. A tougher risk climate can amplify worries for GBP while creating some breathing space for USD.

News Headlines

Central Bank of Brazil left its Selic interest rate unchanged at 13.75%, as expected. Still the communiqué was rather hawkish. Policy committee Copcom said that while ‘recent set of indicators continues to be in line with the scenario of deceleration,...consumer inflation as well as the various measures of underlying inflation are above the range compatible with meeting the inflation target’. Inflation in January was 5.87%. The bank targets inflation of 3.25% for this year and 3.0% from 2024/25. The Bank also refers to uncertainty on fiscal policy as a factor that requires further attention when evaluating risks. In this respect, the bank ‘remains vigilant, assessing if the strategy of maintaining the Selic rate for a longer period than in the reference scenario will be enough to ensure the convergence of inflation’. ‘The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected’. The Basilian real rose further against the dollar (USD/BRL 5.05) but this was mainly due to the decline of the dollar post-Fed.

‘It is gratifying to see the disinflationary process now getting underway’ said the Federal Reserve (Fed) President Jerome Powell at his press conference yesterday.

‘Disinflation process is getting underway’

That was the major - and the only take - of his speech yesterday, and sent the markets rallying. The US yields fell, the S&P500 reversed course and rallied more than 1% higher, while Nasdaq jumped more than 2%. The dollar index slumped.

But besides the ‘disinflationary process’, things went quite according to the plan at yesterday’s FOMC meeting. The Fed increased the interest rates by 25bp, as expected. Powell said that they are happy with the falling inflation, but warned that the US jobs market remains tight, and wages growth is still too strong.

Powell didn’t call the end of the rate hikes, just yet. On the contrary, the US policymakers signaled that there might be two more rate hikes before a pause, and that the tightness in the jobs market is a risk on inflation.

But all that fell on deaf ears after investors heard that ‘disinflationary process started’

Maybe the surprisingly low ADP report – that revealed that the US economy added a little more than 100’000 jobs last month, suggested that the labour conditions in the US might be easing just before Powell announced the latest FOMC decision? But the weakness in ADP report was mostly due to harsh winter conditions, and the job openings jumped past 11 mio.

Anyway, the Fed meeting was a boon for risk investors

Note that, at the wake of the meeting, activity on Fed funds futures gives around 83% chance for the next FOMC meeting to deliver another 25bp hike, which would take the rates to 5% mark, as promised by Fed members.

But for equities, there is no reason to think that the bullish sentiment would reverse anytime soon. The S&P500 will certainly make an attempt on its 100-week moving average which stands a couple of points above the 4200 mark, and the 20% rally in Meta shares in the afterhours trading could keep the rally going today.

Apple, Amazon, Google, Ford and Qualcomm are due to announce their earnings today.

Market movers today

While markets found Powell's comments to be on the dovish side yesterday, we expect Lagarde to strike a more hawkish tone today and guide the market towards further hikes in the spring, as the ECB is widely expected to hike its policy rates by 50bp. See our full ECB Preview (26 January).

We also expect the Bank of England to hike the Bank Rate by 50bp, although the hike will likely be accompanied with more dovish communication. Markets are also leaning towards a larger hike with 46bp priced in, see our full BoE Preview (27 January).

Today's data calendar is thin, US factory orders will be released for December. In addition, the Chinese Caixin Services PMI is due for release overnight, the official PMI released earlier pointed towards a strong uptick in activity.

The 60 second overview

The Federal Reserve hiked rates by 25bp yesterday as expected. Powell sounded more optimistic about the prospects of a soft landing, as inflation figures have begun to ease while the growth outlook has turned less negative. Fed is still looking for 'ongoing rate increases' in the coming meetings and no cuts in 2023 in the baseline scenario, but Powell sounded more open to the idea of lowering the policy rate if inflation cools faster than anticipated. The terminal rate pricing was little affected, but markets responded by pricing in even more cuts for late 2023, US Treasury yields declined and EUR/USD reached new cycle highs around 1.10. That said, we still think the current combination of very tight labour markets and the turnaround in the global manufacturing cycle leave Fed with little room to turn more dovish. We maintain our Fed call unchanged, and continue to expect 2x25bp hikes at the March and May meetings. See our full Fed review: Powell sees a higher chance of a soft landing, 1 February.

Today, the ECB and BoE both have their monetary policy meetings where 50bp from ECB seems to be a done deal. QT details should not rock the market. We expect the ECB to continue to sound very hawkish and signal that further rate hikes are coming, in particular giving guidance for another 50bp hike in March. We expect the Bank of England (BoE) to hike the Bank Rate by 50bp. We pencil in an additional 25bp hike in March, now expecting the Policy Rate to peak at 4.25% in March 2023.

Finally, we expect that the Danish central bank will hike some 10bp less than the ECB, such that the gap between ECB and the Danish central bank will be -35bp. However, we acknowledge that is a 50:50 option whether they will widen the policy gap.

FI: The US Treasury market rallied on the back of the FOMC meeting and the comments from Fed Chairman Powell that the disinflationary process had begun. Hence, the market "ignored" the risk that more rate hikes were to come as 2Y yields declined as much as 10Y yields. The focus is now on the ECB and BoE meetings, where we expect both central banks to hike by 50bp.

FX: Markets, including FX, interpreted Powell as dovish and sent EUR/USD above 1.10 for the first time since April last year. Today, all eyes turn towards Lagarde who is expected to be considerably more hawkish, and could thus add additional fuel to the EUR/USD rally. Despite the favourable risk sentiment on the back of Powell, Scandies continue to struggle with NOK and SEK close to cycle highs.

Credit: It was a relatively quiet day in EUR credit markets yesterday as market participants awaited the FOMC decision and CDS indices tightened modestly (iTraxx Main by 1bp to 78bp and Xover by 7bp to 408bp). Nonetheless, the primary market saw some interesting prints with Greece's Alpha Bank pricing a EUR400m PNC5.5 Additional Tier 1 that attracted some EUR1.7bn of orders. Investors were likely lured by the rare double-digit coupon of 11.875% on offer and reception thus seems testament to the generally strong demand seen this year for higher-yielding deals. Also, Stena was in the market with a new EUR325m 5NC2 senior secured note as part of a tender offer.

Daily Pivots: (S1) 1.0894; (P) 1.0948; (R1) 1.1043; More…

EUR/USD's up trend resumed by breaking through 1.0928 resistance and intraday bias is back on the upside. Current rally from 0.9534 should target 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164 next. On the downside, break of 1.0800 support is needed to confirm short term topping. Otherwise, outlook will remain bullish in case of retreat.

In the bigger picture, current development suggests that the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rise is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.