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Analysis

Fed raises rates and hints at a possible halt

BY Janne Muta

|May 4, 2023

The Federal Reserve raises rates and suggests a possible halt: By unanimous decision, the Fed increased rates by a quarter point, resulting in an overnight policy rate range of 5% to 5.25%. Notably, the statement did not include a line indicating the possibility of "additional policy firming," suggesting that the May hike might be the last. Given the delayed effect of monetary policy on the economy and ongoing disinflation, policymakers may adopt a wait-and-see strategy for policy. As a result, the yields moved lower and bids in the USD softened.

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Equities slipped lower when Chair Powell indicated that there would be no rate cuts if inflation remained high. It’s now likely that the market focus will be on the next two rounds of employment and inflation reports before the next Fed meeting in June, as the Fed continues to rely on data to make decisions.

Chair Powell said he hoped the possible recession would be mild. In fact, no other recession comment would have been possible. The Fed Chair cannot predict a severe recession without causing panic in the markets and the economy. Therefore the fact that Powell even mentions recession as a possibility made the markets a bit jittery.

Gold rallied strongly and the old safe haven currency JPY gained against the dollar while oil dropped to new lows for the year. All eleven S&P 500 sectors closed in red signalling investors are somewhat uneasy with the near-term view. Today’s main risk event is the ECB rate decision. The central bank is expected to hike by 25 bp but some are making rate hike calls as high as 50 bp.

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EURUSD

EURUSD trades near the three-week range high (1.1095) as traders expect to see the ECB hike rates by at least 25 bp (some analysts have talked about a 50 bp hike). The lower end of the trading range is at 1.0909. The nearest key support level is at 1.0942. The obvious question is: how much the market has already priced in? It would seem likely that the widely expected 25 basis points hike is already in the EURUSD rate but with the Fed signalling it’s not likely to hike rates for a while everything depends on the ECB rate statement and press conference. Is the ECB looking to keep on fighting inflation or is it more likely to follow the Fed? Let’s wait and see what Lagarde has to say.

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Gold

Gold was overbought in the daily timeframe chart yesterday and earlier today. The market is now reacting lower after trading near the 2022 high. Yesterday gold retraced to the 2006 support level before taking off and providing a great return for those that went long on this retracement. The market rallied over 70 dollars which attracted profit-taking when the price got close to the 2022 high. Now gold remains bullish above 2020. Below the level, the market could trade down to 2000.

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DAX

DAX remains in a range above 15 670 in the daily chart but the lower daily high yesterday indicates indecisiveness from the bulls. If the 15 670 support doesn’t hold look for a move to 15 620 and then possibly to 15 380 on extension.

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Nasdaq

NDX is bullish above 12 720 in the daily timeframe chart and likely to trade to 13 370 and then to 13 650 on extension if the upside momentum is maintained. Below 12 720 the market could trade down to 12 660. The market is rising in a bullish channel but with some weakness (the latest swing high didn’t reach the channel top). As long as the 12 720 isn’t decisively violated it makes sense to look for buy signals for swing trades. Intraday traders obviously are likely to get trading opportunities on both sides of the market. For intraday traders, the currently bearish two-hour trend could provide reasons to short the market.

The Next Main Risk Events

  • EUR Main Refinancing Rate
  • EUR Monetary Policy Statement
  • USD Unemployment Claims
  • EUR ECB Press Conference
  • CAD Ivey PMI
  • CAD BOC Gov Macklem Speaks
  • AUD RBA Monetary Policy Statement
  • CHF CPI m/m
  • CHF SNB Chairman Jordan Speaks
  • CAD Employment Change
  • CAD Unemployment Rate
  • USD Average Hourly Earnings m/m
  • USD Non-Farm Employment Change
  • USD Unemployment Rate

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets

DISCLAIMER: TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances, or needs. The content has not been prepared in accordance with any legal requirements for financial analysis and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval.

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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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