Cautious trade ahead of FOMC meeting and rate hike

Overnight Headlines

*Fed poised to accelerate pace of tightening with 50bp increase

*RBNZ’s Orr: Cannot rule out a global recession in coming months

*Position squaring ahead of FOMC, DXY pauses in a narrow range

*US equity futures waver after positive day on Wall Street

USD is contained and holding just below last week’s 20-year DXY high at 103.92. EUR saw a high of 1.0578 before pulling back to 1.05. GBP slipped back below 1.25 after hitting 1.2567. EUR/GBP climbed above 0.84 and looks to be heading towards resistance at the 200-day SMA at 0.8441. AUD spiked higher to 0.7147 on the RBA hike before selling off to 0.71. Aussie retail sales surprised to the upside supporting the major. USD/CAD found selling ahead of 1.29; Monday’s top was 1.2913.

US equities rose in a relatively subdued session with trading volumes below average. The S&P500 gained 0.48%, the Dow 0.2% and the tech-laden Nasdaq 0.22%. It was a holiday in Japan, and China again, so thinner liquidity. Futures show a marginally higher open in Europe and the US. All eyes are on the Fed meeting.

Day Ahead – FOMC expected to show inflation-fighting credibility

Tonight’s Fed meeting is set to deliver the first 50 basis-point rate hike in over twenty years. At least the next two meetings in June and July are expected to deliver additional half-percentage point rate moves. This would be the first time the FOMC has delivered more than one move of this magnitude at consecutive meetings since 1994. This year is priced for the Fed to end with a policy rate of 2.75-3.00%. 

All eyes will be on the Powell press conference, his comments and tone. More detail regarding quantitative tightening and the running down of the Fed’s balance sheet may also impact markets. Official have been keen to emphasise the front-loading of rate hikes.

Anything less will be a big disappointment and lead to a dollar selloff. A short-term rally in tech and cyclical stocks would also take place. But over $1 trillion of liquidity is being taken out of the system and the economy is expected to slow going forward.

Chart of the Day – DXY hits resistance  

The Fed’s policy stance plus the current geopolitical backdrop have been helping keep the dollar supported. However, there does seem to be a lot of good news priced into USD. Focus should be on growth momentum with sentiment data edging lower, and a possible cyclical slowdown in the seocnd half of this year. Peaking inlfationary pressure could also represent another downside risk for the greenback – if markets start to reprice Fed tighening risks.

Technically, the dollar is naturally consolidating its recent gains after such a major bullish move. We’re on to five straight weeks of gains with last week’s high hitting resistance at the January 2017 high at 103.82. Initial support sits at the 2020 pandemic spike high at 102.99. Long-term trendline support is below here at 101.06. Bulls will target an upside breakout to 104.88. That would mean EUR breaking down towards 1.0340 and GBP towards 1.20.

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