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The Fed has raised rates 7 times in a row, and the consensus among analysts is that it will do so again at the end of the month. At the moment, the majority of economics expect a 25bps hike, which would continue the "leveling off" trend from the Fed.

But, after the last meeting, Fed Chair Powell was adamant that rates would keep going up, and that the market was misreading the Fed's attention. This hawkish tone didn't have as much impact on the markets after the Fed raised at a slower pace. And it's a scenario we've seen play out before, with Powell and the minutes of the meeting not exactly being in line. Which is why there could be some riling up in the markets tomorrow with the release of the minutes. Some analysts are wondering if there will be a repeat.

What could happen again…

Back in November, there was quite a bit of discussion about when the Fed would pivot. There was expectation that following that month's FOMC meeting, Powell would drop some hints that the next meeting would have a smaller rate hike. Instead, he came out quite adamant that rates would keep going up.

But, two weeks later, the FOMC minutes came out, and were decidedly more dovish. And the Fed did ultimately make a smaller raise at the next meeting in December. Given the hawkish tone out of Powell following the last meeting, and the general market expecting the Fed to level off rates now, there is speculation that the minutes this time around could be more dovish.

Market reaction and surprises

The minutes could have an even bigger impact this time around, because FOMC members have been largely silent since the meeting. Of course, the last couple of weeks have been the year-end holidays, so it's expected that there wouldn't be much Fed commentary. Now, traders are looking to set up for the coming year, and the minutes are the first explanation of what the Fed is thinking about the current inflation trends.

The thing is, Powell wasn't the only hawkish sign from the last meeting. We also got the quarterly update with the dot-plot matrix, which shows where members see policy rates in the coming months. And there, the median rate expectation was boosted from 4.5% to 5.0%, meaning that the consensus among Fed members is more hawkish than it was at the end of the third quarter.

Figuring out where things are going

The market is currently pricing in a terminal rate of under 5.0%, while the Fed is insisting that the terminal rate will be over 5.0%. Who turns out to be right will likely depend on the data, but it doesn't take much for the Fed to prove the market wrong. With rates at 4.5% at the moment, all the Fed would have to do is raise rates by 50bps at the next meeting, repeating what they did in December, and the market would have to adjust. Almost a third of economists are forecasting that, as a matter of fact.

The takeaway from the minutes, therefore, is likely to be around how confident the members sound in their projection that rate hikes will keep coming. If they emphasize being more data dependent than anchoring expectations, then the market might believe them to be more dovish than Powell communicated most recently.

GBPUSD has been marching higher since September when the pair recorded an all-time low of 1.0324. However, in the short-term, the price appears to be stuck in a tight range around the 200-day simple moving average (SMA), with the narrowing Bollinger bands reinforcing the case of a potential impending spike.

The short-term oscillators currently suggest that near-term risks are tilted to the downside. Specifically, the RSI slid below its 50-neutral mark, while the stochastic oscillator is set to post a bearish cross.

If the negative momentum strengthens and the price extends its pullback below the 200-day SMA, immediate support could be met at the 1.1904 congested region, which includes the 50-day SMA and the lower Bollinger band. Sliding beneath that floor, the October resistance of 1.1645 may curb further declines. Failing to halt there, the 1.1260 barrier could prove to be a tough one for the price to overcome.

To the upside, bullish actions could propel the pair towards the recent resistance region of 1.2241.Violating this zone, the price might retest 1.2445, which rejected the pair’s medium-term rebound. Even higher, the bulls could aim for the May peak of 1.2666.

Overall, GBPUSD is experiencing a moderate downside correction since its uptrend encountered significant resistance. Therefore, a clear dive beneath the 200-day SMA may accelerate the downfall.

EURJPY stretched its bearish wave into the new year, tumbling to a three-month low of 138.20 on Tuesday.

Previously, the support trendline drawn from March lows turned into resistance, squeezing the price below the 200-day simple moving average (SMA). While the RSI and the stochastics have yet to confirm oversold conditions, the lower boundary of the bearish channel could soon halt the sell-off around 137.50.

If the above scenario materializes, the price may reverse up to retest the 140.00 mark. A decisive close higher and beyond the 200-day SMA could bring the ascending trendline back under examination near 142.60. Yet only a sustainable extension above the channel and the 50-day SMA at 144.00 would motivate new buying.

In the event the bears enhance their momentum below the channel, the next pivot point could develop around the 136.00 handle. Another negative correction here may take a rest near 134.80 before the way clears for the August low of 133.40.

Summarizing, although the short-term risk is tilted to the downside, EURJPY is currently approaching a key support area, raising hopes for a bullish rotation.

A mixed start to trading on Tuesday as traders return following the festive break to some rather gloomy forecasts for the coming year.

The IMF is among those warning of a tough year, more so than the one we've just left, as the simultaneous slowing down of the US, EU, and China takes its toll. Of course, all forecasts at this moment are subject to enormous uncertainty around the war in Ukraine, inflation, interest rates, and China's Covid response, among others, but it seems almost everyone is going into 2023 with a healthy dose of trepidation.

And following a series of nasty shocks last year, who can blame them? There is the potential for surprises this year to be of a more positive nature, of course, but as it stands, the outlook is understandably gloomy and will remain so unless something significant changes, either on the war in Ukraine or inflation.

If inflationary pressures remain stubborn - and a strong, successful transition from zero-Covid to zero restrictions could enable that - then central banks will have little choice but to continue tightening monetary policy in order to bring it down. That is something the IMF strongly urged them to do, with stubbornly high inflation deemed a far greater risk over the longer term.

As far as the economic calendar is concerned this week, we're easing ourselves back in today with mostly revised PMIs and other tier-three data. Things will pick up on that front from tomorrow, with the December Fed minutes being released alongside some more significant data and that will continue into the end of the week when we get the first jobs report of the year.

One interesting release this morning came from China, where the Caixin manufacturing PMI painted a less pessimistic picture than the official number over the weekend. While the surveys are different in the kind of firms they cover, it was interesting that the official number pointed to greater concern around the sector at the moment. That said, there does seem to be some promise in the Caixin future output index which suggests firms are more optimistic about the longer-term outlook since Covid-zero was abandoned despite the prospect of near-term difficulties.

Oil recovery continues

Oil prices are a little higher this morning as they continue to rebound strongly from their lows. Brent and WTI have recovered almost 15% from the lows a few weeks ago as traders continue to price in stronger Chinese demand. At the same time, the US is looking to refill the SPR after huge withdrawals during last year's oil price spike.

The outlook remains highly uncertain though which should ensure oil prices remain highly volatile. The G7 price cap has had little impact so far, the same can be said of Russia's response, but that could change if oil prices keep moving higher, nudging Russian crude ever closer to the cap level and forcing some very difficult decisions.

Finding momentum

Gold is rallying strongly on Tuesday, up more than 1% and gathering momentum after seeing it slip in recent weeks. The yellow metal appeared to be stuttering around $1,800 but that's suddenly changed, perhaps buoyed by the mild risk-aversion we're seeing in the markets and the expectation that the environment is looking more favorable.

This could be a year in which global growth slows significantly and traders are questioning whether that will warrant monetary policy to be loosened later in 2023. Central banks have pushed back strongly against the idea and I imagine the IMF would too at this point but we could see markets moving in that direction if the data doesn't continue to haunt us.

Range-bound

Bitcoin has remained quite stable recently, hovering in the $16,000-17,000 range over the last few weeks. That may come as a relief to the crypto crowd after another rough few months. The new year no doubt has plenty in store for cryptocurrencies but in the short term, the community may just be hoping for no new scandals that will drive investors away.

Looking at the 1H timeframe for the NZDUSD currency pair, we see that the market has already completed the formation of a cycle actionary wave y.

Thus, in the last section of the chart, we can see the formation of a new bullish trend. Most likely, there is a construction of the primary wave Ⓐ , which may take the form of an impulse of the intermediate degree (1)-(2)-(3)-(4)-(5). An approximate scheme of possible future movement is shown on the chart.

It is assumed that the bulls will push the price to 0.671. At that level, intermediate wave (5) will be at 50% of intermediate impulse wave (3).

An alternative scenario suggests that the primary wave Ⓐ is fully completed. It represents an intermediate impulse (1)-(2)-(3)-(4)-(5), and a bearish correction is already under development.

The primary correction Ⓑ may take the form of an intermediate zigzag (A)-(B)-(C). Currently, impulse (A) and correction (B) look formed as part of this zigzag.

Most likely, the price in the last intermediate wave (C) will fall to 0.601. At that level, it will be at 50% of primary impulse Ⓐ.

Gold price started a decent increase from the $1,795 zone against the US Dollar. The price was able to settle above the $1,810 level on FXOpen to move into a positive zone.

The pair even climbed above the $1,815 level and the 50 hourly simple moving average. The price is now trading above the $1,820 level and is showing positive signs. An immediate resistance on the upside is near the $1,830 level.

The first major resistance is near the $1,832 level. The next main resistance could be near the $1,840 level, above which the price could start a steady increase towards the $1,850 level.

On the downside, an immediate support is near the $1,819 level. The next major support is near the $1,810 level, below which the price might decline towards the $1,778 support level in the near term. Any more losses might call for a test of $1,760.

The Dow Jones ebbs and flows as investors probe risk appetite at the start of the year. The index has been struggling to hold onto the critical floor at 32500. The horizontal consolidation is a sign of a fragile balance and a breakout would heighten volatility due to increased pressure from both sides, shaping a new trading range for the days to come. A close above 33450 may carry the index back to 34100. However, a bearish breakout could trigger a new round of sell-off towards 31500 with more buyers abandoning ship.

The Australian dollar edges higher as traders shun safe haven assets like the greenback. The pair has clawed back a big chunk of its losses from the liquidation in mid-December. The bulls have shifted their focus to the previous peak at 0.6900. A bullish breakout would extend the aussie’s recovery in the medium-term. In the meantime, they may consolidate their holding above 0.6800 with 0.6760 as the closest support. That would attract more buying interest. 0.6710 is a second layer of defence in case of further hesitation.

The pound underperforms as market participants remain worried about the UK’s economy in 2023. The pair continues to drift lower due to buyers taking profit after a two-month long rally and new sellers getting into the game. The psychological level of 1.2000 sits at the origin of last December’s rally and the sideways action is a sign of little buying. Though the price would remain depressed as long as it is under 1.2140, sentiment may only turn around if the bulls reclaim 1.2280. 1.1900 is a critical level to keep Sterling afloat.

Markets

With Japanese, UK and US markets still closed, EMU markets took a constructive start to the new year. Last week, the post-ECB bond sell-off propelled German yields to close 2022 at cycle peak levels across all maturities. The 10-y testing/briefly surpassing the psychological barrier of 2.50% apparently was a good enough reason for investors to take a more cautious approach awaiting key data evidence in the US (ISMs, payrolls, Fed Minutes) and EMU (CPI) later this week. The Dutch (February) gas contract dropping below levels last seen before the start of the Ukraine war, raised hope that the negative supply shock of exceptionally high energy prices might gradually turn less aggressive. The EMU December CPI estimate on Friday serves as a first reality check. Admittedly, oil keeps a modest upward path ($85.9 p/b). Even so, the German curve bull flattened with yields easing between 5.5 bps (2-y) and 14.5 bps (30-y). Contrary to what often happened of late, the bond rally this time was mainly driven by a decline in inflation expectations rather recessionary fears. This supported European equities with most major indices gaining 1.0%+ (EuroStoxx50 +1.65%). With other major markets still closed, moves in the major FX cross rates stayed modest, despite the repositioning on the EMU yield markets. After opening near 1.07, EUR/USD closed modestly lower at 1.0667. EUR/GBP held near the 0.8867/77 resistance/recent top, but we await the reopening of UK markets today to drawn any conclusions on sterling momentum.

This morning, Asian markets are starting the day mixed. Hong Kong gains about 1.65%. The CSI 300 only shows a marginal gain as the China Caixin manufacturing PMI dropped further below the 50 mark (to 49.4), confirming even more negative readings in the official PMI’s published on Saturday. The Australian S&P/ASX 200 cedes 1.31%. The yen still outperforms. USD/JPY (129.75) dropped below the 130.58/41 key support area (Japanese market is still closed). EUR/USD (1.067) trades little changed. Treasury futures also suggest a correction in US yields at the open.

Today, we look out whether US (and UK) markets will join yesterday’s positive start in Europe, but the reopening comes amid an almost empty UK and US calendar. In Europe, preliminary German December inflation data are expected to confirm the gradual easing that started last month, with the HICP expected at -0.8% M/M bringing the y/y measure to 10.2% (from 11.3%). French HICP shows somewhat of a different dynamic and is expected to rise 0.4% M/M and 7.3% Y/Y (from 7.1%). With the ECB keeping a close eye on the risk of potential second round effects/wage inflation, German labour market data also deserve some attention. In a day-to-day perspective, we see room for the correction in EMU/German yields to go still somewhat further even as the ECB probably gives more weight to (still stubbornly high) core inflation rather than to an energy-driven decline in the headline. EUR/USD recently held a tight range just below the 1.0735 post-ECB peak. A break/ further USD losses, probably need soft US data (ISM’s tomorrow/Friday; payrolls on Friday).

News Headlines

A CoreLogic report showed that Australian house prices dropped by 1.1% in December, taking values 5.3% lower over the 2022 calendar year. The re-acceleration in the downtrend was driven by a worsening in the monthly decline rate across Melbourne, Sydney, Adelaide, Darwin and Canberra. The yearly price drop was the first one since 2018 and the largest one since 2008 (6.4% fall). Prices are now 8.2% lower than the peak in early May. CoreLogic’s research director Lawless pointed to the RBA’s record-breaking tightening pace as the key reason for the cooling housing market. The central bank lifted policy rates by 300 bps from May through December with more to come.