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Fed’s wake-up call, loud and hawkish

Overnight Headlines

*USD surged higher, past 91 to the highest since 6 May

*US equities retreat, pulled down by the Fed’s hawkish surprise

*Gold through 200-day SMA at $1840, suffers 2.5% loss on the day

*Bond yields shoot higher with Fed’s dots pointing to two hikes in 2023

USD went bid in a big way on the Fed’s surprise hawkish meeting and dot plot projections, rising 0.65% on the day and through 91 on the DXY for the first time since early May. EUR/USD fell more than 1% to 1.1992 and below 1.20 for the first time since mid-April. USD/JPY powered higher to 110.71 with the year-to-date high at 110.96 in sight. That said, it’s the morning after the night before and the last time an initial post-FOMC move extended was in June 2019.

US equities finished lower with defensives leading the losses and so the Dow fell 0.8%, the S&P500 was down 0.5% and the Nasdaq closed lower by 0.2%. Sentiment in Asia is mixed this morning with China rebounding but elsewhere lower while European futures point to a softer open.

Market Thoughts – Treacherous retreat from crisis measures begins…

Quite a shock from the FOMC at the end of the day, even if markets had set itself up for one, with investors and traders having been guided by a past year of nonstop easing, a persistently dovish Fed who remained purposefully behind the curve and soothing words like “transitory”. This was barely mentioned last night with the Fed simply projecting two rate hikes for 2023, from zero at the previous meeting. This was relatively aggressive and makes for a tapering plan towards the end of the year. Language on inflation shifted to more explicitly acknowledging upside risks and the talk on the jobs market, an excuse to sound dovish, sounded optimistic.

The Fed is now more likely to respond to data and is more prepared to tighten than previously thought. This will help the dollar and hurt gold and there is plenty of room for US real rates to continue rising from their low base. This should also mean higher volatility (good news for traders!) which may also be good for the dollar as it is generally regarded as a haven in times of uncertainty.

Chart of the Day – AUD/USD in the crosshairs

We had the highly anticipated aussie jobs report out overnight and it smashed expectations, sending AUD higher in its correction versus the Fed-hardened dollar.  The headline number showed a huge 115k rise in employment (+30k expected) which sent the unemployment rate down to its pre-pandemic lows of 5.1% (+5.5% expected). This rate is now within sight of the estimate range for full employment and sets the scene for the July 9 RBA meeting where the bank will decide on the future pace and size of its emergency policy measures.

The bumper jobs data halted last night’s selloff in AUD/USD and the pair is now supported by a zone of medium-term support around the 0.7570/30 area. The 200-day SMA also sits in here at 0.7550 before longer-term support comes in around 0.75. Initial post-FOMC reaction in FX has reversed in recent times, though last night’s meeting does seem as though it is finally the start of the (long) normalisation process.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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