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As we discussed the potential for a rebound in our report yesterday, the markets have in fact gone up from oversold levels. Europe was doing particularly well this morning, with the major indices being up more than 2% each, as travel stocks and banks rallied. The positive sentiment also helped cryptos come off their recent lows, while crude oil extended its rally for a second day after its recent pause. The key question remains though as to whether this is the start of another major rally, or just a short-squeeze bounce, before we see further volatility. Either way, I am continuing to expect outperformance from European markets – whether that means they will rise faster or fall slower than their US counterparts in the short-term outlook.

Over to you, Powell

Investors’ attention will now turn to on one of the main sources behind all this the volatility: The US Federal Reserve. At 19:00 GMT, we will get to hear exactly how hawkish the Fed and its chairman are in their determination to rein in on surging inflation. There has been some speculation that Jay Powell could tone down his hawkishness in light of the big stock market sell-off. But how likely is that? I certainly don’t expect to see too much of a walk back from Powell on the Fed’s hawkish intentions. My feeling is that Powell is not going to change its tone in the slightest, despite the recent volatility observed in US stock markets. He has a job of managing expectations and there is no point in talking down the prospects of three or four rate hikes this year if they then end up having to tighten policy aggressively anyway. Indeed, if a March hike is on the cards, it is better to prepare investors for such a move now rather than later. Mind you, this on its own won’t come as much of a surprise. But should the fed go a step or two further – for example, by providing hints on shrinking its huge $8.87 trillion balance sheet – then that could spook the market.

More tech earnings to come: Tesla tonight and the Apple

Microsoft’s upbeat forecast for the current quarter saw its shares reverse a 5% drop in after-hours trading last night to turn higher, after its fourth quarter results failed to impress investors initially. Tesla and Intel will enlighten us with their results tonight, while bellwether Apple is set to release its results on Thursday. These companies better deliver some positive surprises to provide confidence that the latest rebound is not on a shaky footing.

Indeed, expectations are sky-high for Tesla. The electric carmaker saw its share jump to $1200 at the start of the year after it delivered more than 308,000 vehicles in the fourth quarter, well past the 270,000 units that were expected. Subsequently, analysts have boosted their earnings and sales expectations in recent weeks. For the fourth quarter, Wall Street is now expecting earnings of about $2.33 a share and sales of $17.10 billion. TSLA has come back down in recent weeks along with the tech sector. But following this week’s rebound, the stocks is set to open around $957 today.

European markets could cheer stock market bulls

Providing boost to the stock markets is optimism that the economic recovery is going to speed up in the months ahead. Travel restrictions continue to ease across Europe as omicron cases decline and more people get double or tripled vaccinated. There is a lot of pent up demand for holidays within Europe. Hopefully, we will see confidence returns and people start going on holidays more often this year. So, I certainly am feeling positive towards the European stock markets compared to Wall Street. Indeed, European markets are more likely to suffer smaller setbacks going forward because unlike the Fed, the ECB is going to keep printing more QE money for longer.

Daily Pivots: (S1) 1.1268; (P) 1.1298; (R1) 1.1334; More...

Intraday bias in EUR/USD remains mildly on the downside and outlook is unchanged. Corrective rebound from 1.1185 should have completed at a.1482. Deeper fall would be seen back to 1.1185 first. Firm break there will resume larger down trend from 1.2348 to 61.8% projection of 1.1908 to 1.1185 from 1.1482 at 1.1035. On the upside, above 1.1368 minor resistance will turn intraday bias back to the upside, and extend the consolidation from 1.1185 with another rise.

In the bigger picture, there are various ways of interpreting the fall from 1.2348 (2021 high). It could be a correction to rise from 1.0635 (2020 low), the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1703 support turned resistance holds. Sustained break of 61.8% retracement of 1.0635 to 1.2348 at 1.1289 would pave the way back to 1.0635.

Daily Pivots: (S1) 1.3455; (P) 1.3487; (R1) 1.3537; More...

Intraday bias in GBP/USD remains neutral at this point. As noted before, rebound from 1.3158 could have completed at 1.3748 already. More importantly, larger fall from 1.4282 is probably not over yet. Deeper fall would be seen and break of 1.3435 will target 1.3158 low. On the upside, though, above 1.3571 minor resistance will turn bias back to the upside for retesting 1.3748.

In the bigger picture, strong support was seen from 38.2% retracement of 1.1409 to 1.4248 at 1.3164. The development suggests that up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9114; (P) 0.9136; (R1) 0.9164; More....

USD/CHF is still bounded in range of 0.9090/9276 and intraday bias remains neutral. On the downside, firm break of 0.9084 support will argue that choppy rise from 0.8925 has completed. Fall from 0.9471 might be ready to resuming. Further decline would be seen back to 0.8925 support first. On the upside, above 0.9276 will target 0.9372 resistance instead.

In the bigger picture, the corrective structure of the rebound from 0.8925 argues that fall from 0.9471 is not complete yet. It could either be the second leg of pattern from 0.8756 (2021 low), or resuming larger down trend from 1.0237 (2018 high). We'd pay attention to the downside momentum and assess the odds later. But for now, medium term outlook will be neutral at best as long as 0.9471 resistance holds.

Daily Pivots: (S1) 113.63; (P) 113.89; (R1) 114.12; More...

USD/JPY recovers today but stays in range above 113.47. Intraday bias remains neutral first. On the downside, break of 113.47 will resume the fall from 116.34. As a corrective to whole up trend from 102.58, break of 112.52 will target 38.2% retracement of 102.58 to 116.34 at 111.08. However, break of 115.05 resistance will bring stronger rebound back to retest 116.34 high.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 110.91) holds.

Markets are gradually stabilizing, despite the fact that Russia-Ukraine tensions remain high. The two-day FOMC meeting concludes this afternoon.

FOMC meeting ends today

The Fed is widely expected to keep a hawkish stance as it prepares the market for a rate lift-off on March 15-16. This year's three quarterly rate increases have already been factored into the market. In the absence of any new macro projections or Dot Plots, we expect Fed Chair Powell to make a very clear message that the Fed is looking beyond recent stock market volatility and is instead focused on the tight labor market.

The resurgent pandemic is likely to have both slowed economic growth in 2021 and kept key inflation indicators well above the Fed's 2% target, according to newly revealed data expected later this week.

US stock index futures rose on Wednesday after two days of turbulence following Microsoft's excellent earnings, while investors awaited the outcome of the Federal Reserve's policy meeting. Tesla will release its earnings today after market close.

FX news

In the FX, the US dollar index is showing some minor gains around 96.00, while dollar/yen is edging notable higher after the flat Tuesday session. Euro/dollar is still pointing down below 1.1300, approaching yesterday’s lows, while sterling is climbing above $1.3500 today.

BoC decision on the calendar

Additionally, the Bank of Canada meets today. The BoC is expected to maintain a hawkish stance, and it may alter its forward guidance to prepare markets for a potential lift-off sooner rather than later. Currently, the BoC has designated Q2 as a possible launch window. Recent Canadian data, on the other hand, have been good, prompting markets to revise up the anticipated timeline. March 2 is completely priced in as well. Dollar/loonie dived below 1.2600 with immediate support at the 200-day simple moving average (SMA) around 1.2500.

In other currencies, aussie/dollar is rising near 0.7170; however, kiwi/dollar is having weak momentum today, standing around 0.6700.

WTI crude oil futures are hovering near the seven-year high of $85.54/per barrel, suggesting a strong positive day, while gold prices are looking steady at $1,845/per ounce.

US exports of goods rose USD 2.2B to USD 157.3B in December. Imports of goods rose USD 5.1B to 258.3B. Goods trade deficit widened to USD -101.0B, versus expectation of USD -96.1B.

Whole sale inventories rose 2.1% mom to USD 789.4B. Retail inventories rose 4.4% mom to USD 643.8B.

Full release here.

The German government lowered 2022 growth forecast to 3.6%, down from October's projection of 4.1%. That's still notably higher that 2021's preliminary figure of 2.7%.

"The consequences of the corona pandemic are still noticeable and many companies still have to struggle with them," Economy Minister Robert Habeck said . "Nevertheless, our economy is still robust."

"During the still-difficult economic rebound phase, we will continue aid programs for companies and furlough policies," he noted. "With an increasing vaccination rate, it should soon be possible to contain the pandemic in a sustainable manner and to reduce crisis aid. Then the economic recovery will accelerate noticeably."

We're seeing a strong start to trading on Wednesday after what has been a very turbulent start to the week.

We've seen some sharp sell-offs already this week but investors appear to be encouraged by just how quickly and strong markets have bounced back. Monday looked like it was going to be a bloodbath in equity markets but rather than panic, investors poured back in and seized upon the lower valuations.

We saw this again after the close on Tuesday, when Microsoft earnings caused another wobble but reassurances around decelerating cloud growth were enough to trigger another wave of bargain hunting and we're seeing that carry through to Europe today. US futures also look very healthy ahead of a crucial Fed decision later.

Fed misstep could have severe consequences

The Fed could have a big role to play in whether stock markets will build on these encouraging signs. As ever, every word will be poured over so I expect the central bank will take a very careful approach in its communication later on.

They need to be careful to find the right balance between taking inflation seriously and not overdoing it. These markets will be easily spooked so today is all about finding just the right balance. That means sending a clear signal about a March hike and alluding to discussions around balance sheet reduction towards the middle of the year.

We probably won't get any specifics from Powell on when that will start or how fast it will happen, nor on how many hikes we'll get this year. He will probably be keen to stress how seriously they're taking it though and how they'll do whatever is necessary. Ultimately, we may learn very little but the important thing is we don't see a misstep as the consequences could be severe.

BoC expected to start aggressive tightening cycle

The Bank of Canada is unlikely to wait until March, with markets quite heavily pricing in a rate hike today and as much as six this year. This comes as inflation has risen to the highest level in 30 years and far above its 1-3% target range. With the labour market also tightening following a strong recovery from the pandemic, the time has arrived for accommodation to be removed.

The only question now is just how fast they'll move and whether they'll look to reduce their balance sheet, rather than just aggressively raise rates. The loonie has performed well recently, buoyed by very hawkish rate expectations and we could get more clarity on how accurate they are today.

Oil eyeing triple figures after brief pullback

Oil prices are continuing to edge higher after a brief pullback last week. The move followed some turbulence at the start of the week and came as API reported an 872,000 barrel draw which exceeded expectations. Crude prices are once again closing in on $90 and at this point, it doesn't look like we'll be waiting long.

So immediately it becomes a question how long we'll be waiting for triple figures. The supply/demand dynamics remain favourable and the potential for conflict in Ukraine can only be supportive, as additional risk premiums are priced in. It's still unlikely that oil and gas will be used as a weapon any time soon but if it was, it could lead to a serious surge in prices given how tight the markets are.

Gold awaits Fed decision

Gold is continuing to hold up ahead of the Fed meeting, close to $1,850 where it has seen some resistance recently. The central bank will have a big role to play on whether the yellow metal breaks above here or below $1,830 support.

It has been rising recently even as the market has priced in four hikes and balance sheet reduction which may suggest we're seeing some inflation hedging in case more tightening is needed. Risk aversion may also be supporting the gold price. Either way, we should have more clarity later today.

Cause for optimism?

The recovery in bitcoin over the last couple of days has been really encouraging. After falling to around $33,000, more than 50% from its highs, the cryptocurrency has performed extremely well and finds itself 4% higher on the day around $38,000. It's not out of the woods yet though and if broader risk appetite takes a hit, I'd expect bitcoin to suffer more. Whether that will see it test the crucial $30,000 region, only time will tell, but traders will be very relieved at what they've seen this week. The key test above is $40,000, a break of which could see momentum accelerate to the upside.

USD is moving slightly lower today, ahead of the important FOMC press conference. Stocks slowed down ahead of the even but it might be just a temporary intraday rally before the market hits resistance, especially if the FED will stick with the current hawkish "tone".

EURUSD moved south yesterday, but then it found a base as stocks found some buyers. As such, corrective rally can still be coming here on the EURUSD, ideally higher into wave c back to 1.1360/70 resistance.

EUR/USD 4h Elliott Wave analysis

GOLD came higher yesterday, ideally into the fifth wave of an ending diagonal which is now already facing some limited upside at 1850 area. We see a risk for a sharp reversal, especially if metal would also break and close below 1834 today.

Gold 4h Elliott Wave analysis