Bond traders expect Fed to turn dovish

BY Janne Muta

|March 23, 2023

The Fed hiked by 25 bp as we expected. The move was more dovish than the previous indications but still risky. Higher rates could push create more havoc in banks’ bond portfolios and scare depositors. Powell tried to sugarcoat the situation and said the banking system is sound and resilient but it didn’t stop traders from selling the bank shares.

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KBW Nasdaq index of commercial banks dived by 5%. First Republic’s shares dropped over 15% but even JPM declined 2.58% and BAC dropped 3.32%. Janet Yellen’s comments that the administration officials weren’t considering taking immediate action to insure all bank deposits were probably contributing to the weakness in equities.

Outside the equities markets bond traders pushed the yields lower and the USD with it. This suggests the markets don’t believe the Fed will keep on fighting inflation but has to turn more dovish in order to steady the banking sector. Today’s next risk event is the BOE rate decision (25 bp hike expected).

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DJ slipped back inside the range

DJ rallied to 32 650 level and then some. Now the market looks bearish after the Fed hiked by 25 bp. DJ falling back below the 32 280 - 32 420 range isn’t bullish unless there’s a quick reversal and then some follow-through buying that rallies the market. However, before something this bullish can happen I think it’s likely we’ll see more fluctuation below the 32 280 - 32 420 range. A more bearish alternative is that there’s going to be more bad news from banks and we’ll see the market trading back to the recent lows (31 430).

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Shooting star in NAS

NAS created a bearish shooting star in both daily and 8h charts yesterday. This suggests lower prices are more likely than a rally above yesterday’s high. Therefore, if the intraday charts agree we should look for shorting opportunities. However, there’s no point in shorting the market if it keeps on rallying. Just trade what you see and stick to your best trade setups. If you are a new trader keep trading with low leverage.

When in doubt, leave it out! Remember, that flat/cash is also a position. The nearest support at 12 400 is likely to be tested (if yesterday’s high can’t be taken out) and if it doesn’t hold 12 300 looks likely and then 12 200 on extension. The nearest key resistance level (below yesterday’s high) is at 12 740.

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GBPUSD trades higher ahead of the BOE rate decision

GBPUSD is bullish above 1.2178 in the 4h chart but it’s also getting close to the daily range highs before the BOE rate decision (25 bp expected). This is a risk factor for the bulls. If 1.2178 gets violated it’s probably we’ll see a move to 1.2100 or so. The nearest key resistance level is at 1.2400.

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Is USDJPY creating a double bottom?

USDJPY traded lower since my last analysis but now the market looks like it tries to create a double bottom. If we now get a rally without the market trading below the 130.40 level (decisively, quick spikes don’t matter) then there’s a good chance the pair could rally to 131.70 and then to 132.50 on extension. Below 130.40 the market probably trades down to 129.80 or so.

The Next Main Risk Events

  • GBP MPC Official Bank Rate Votes
  • GBP Monetary Policy Summary
  • GBP Official Bank Rate
  • USD Unemployment Claims
  • USD New Home Sales
  • JPY National Core CPI y/y
  • GBP Retail Sales m/m
  • EUR French Flash Services PMI
  • EUR French Flash Manufacturing PMI
  • EUR German Flash Manufacturing PMI
  • EUR German Flash Services PMI
  • EUR Flash Manufacturing PMI
  • EUR Flash Services PMI
  • GBP Flash Manufacturing PMI
  • GBP Flash Services PMI
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m
  • USD Core Durable Goods Orders m/m
  • USD Durable Goods Orders m/m
  • USD Flash Manufacturing PMI
  • USD Flash Services PMI

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.

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