FOMC Meeting Trading Preview

Market Insights

FOMC Meeting Trading Preview

Stock markets have bounced back overnight amid a flurry of earnings and manufacturing PMI reports. In the US this morning NASDAQ futures are up 0.5% propelled higher by positive earnings reports out of Apple and Electronic Arts while Dow and S&P futures are up 0.2%. In Europe the Dax is up 1.0% and the FTSE is up 0.5% while in Asia, the Nikkei gained 0.5% and the hang Seng fell 0.2% on its return to trading from Lunar New Year holidays.

Currency markets are mixed today. Sterling is rallying on indications that opposition to PM May’s Brexit bill is in disarray and that it is expected to pass the House of Commons perhaps as soon as today. Sentiment toward Brexit has been changing with each step closer and additional clarity being seen as a positive particularly since UK economic data has been so strong since the vote. On the other hand, JPY has come under renewed pressure with Governor Kuroda being forced to defend his policies from accusations by President Trump that the Bank of Japan has been manipulating its currency lower. Gold and most of the other major currencies are consolidating yesterday’s gains against USD at a higher level.

There is a lot of news due in the US today that could potentially move the markets. The main event is this afternoon’s FOMC decision and statement. The central bank is not expected to change interest rates having announced a 0.25% increase at its last meeting in December. This time around there are three new regional Fed Presidents who have never voted before (Harker, Kaplan and Kashkari), but dissent is unlikely this time out.

The statement is likely to attract the most attention with traders looking for signs of whether  the Fed is thinking about raising interest rates in March or not. With the new administration accusing China, Japan, Germany and others of currency manipulation and complaining about the high dollar, political pressure on the Fed from the campaign to raise rates aggressively appears to be fading heading into Chair Janet Yellen’s last full year of her term.

For traders, the number of increases is important because at 100 and over the US Dollar is pricing in 4 or more increases this year. To get to four, and keep to gradual increases, the Fed would need to raise rates in March. If the Fed passes on March, the party line of 3 increases would still be possible, but my forecast of 2 would become more likely. A move away from March for the next hike would be seen as dovish (or at least less hawkish) and could decrease dollar support.

Also keep an eye on the statement for any discussion of the Fed’s balance sheet. There has been chatter the Fed is starting to think about starting to slowly unwind the massive QE stimulus of the last several years. Any hints toward shrinking the balance sheet could be seen as hawkish and could offset one or more rate hikes and support the dollar.  

Ahead of the FOMC decision, there are a number of significant US economic reports including ADP payrolls and Manufacturing PMI. ADP is expected to come in just below 170K. The ISM PMI report could attract interest following yesterday’s big miss in Chicago PMI. Both of these reports may be viewed through the lens of whether they increase or decrease pressure on the Fed to raise interest rates soon

Chart Signals

Chart Signals: Markets consolidate big moves ahead of the Fed

As is normal following a day of big moves and big breakouts the tone of trading overnight has been one of consolidation shown by a number of inside days of trading within yesterday’s ranges. We are also seeing that some correction attempts quickly fail and breakout points be confirmed so the new moves appear to be holding overall.

North American and European Indices

US 30 has stabilized at a lower level trading near 19,900 between 19,880 and 19,920. It remains stuck below the 20,000 round number and in a downswing with next potential support in the 19,660 to 19,700 near a channel bottom and its 50-day average. RSI testing 50 which could confirm the underlying uptrend or signal a downturn. 

US SPX 500 is sending mixed signals. The index has regained 2,282 trading near 2,285 but remain well short of recent resistance in the 2,300 to 2,305 area. A head and shoulders in the RSI indicates upward momentum peaking. Next downside support on place near 2,252 where channel support and the 50-day average converge. 

US NDAQ 100 successfully tested 5,100 support and has bounced back up toward 5,145, but appears to be levelling off at a lower high and still faces resistance near 5,175. RSI still under 70 indicates upward momentum has likely peaked.

UK 100 continues to bounce around between 7,100 and 7,200 recently sliding from 7,155 toward 7,135. RSI sitting just below 50 suggests momentum stabilizing following a correction. Next upside resistance near 7,265 with next downside support possible at the 50-day average near 7,050.

Germany 30 is having an inside day, consolidating Tuesday’s losses. A rebound attempt didn’t get very far with the index levelling off near 11.650 short of 11,700 a previous channel top. RSI testing 50 which could confirm or break previous uptrend momentum. Next downside support possible in the 11,445 to 11,500 zone. 

Commodities

Gold is consolidating Tuesday’s breakout over $1,200 trading near $1,211 a Fibonacci level with next potential resistance near $1,218 then $1,230. RSI bouncing off 50 confirms momentum turning upward again following a trading correction.

Crude Oil WTI continues to bounce around between $51.50 and $53.00, recently trading near $52.70 with initial support rising toward $52.30 and next resistance near $53.35. RSI holding 50 indicates momentum neutral to slightly upward.

FX

US Dollar Index remains under distribution stuck below its 100.00 breakdown point and trading near the low end of Tuesday’s 99.30 to 100.50 range. RSI still under 50 indicates downward momentum intact.

USDJPY is having an inside day, consolidating recent swings between 112.35 and 114.05 Fibonacci support and resistance, recently trading near 113.35.  RSI signals are mixed with higher lows suggesting downward pressure easing but it needs to retake 50 to signal an upturn.

EURUSD remain under accumulation, climbing up toward $1.0800 with next potential resistance near $1.0830 a Fibonacci cluster then $1.0875. Support rises toward $1.0775 this week’s breakout point RSI steady near 60 indicates continued underlying upward momentum.

EURGBP has turned back downward after running into resistance at a lower high near 0.8660 a Fibonacci level and 50 on the RSI, both of which confirm its recent downswing continues. The pair has dropped back into the 0.8540 to 0.8580 area with next potential support near 0.8500 then 0.8460. 

GBPUSD is back under accumulation and appears poised for a breakout. The pair has advanced from a higher low near $1.2550 toward $1.2650 and is approaching test of $1.2690 its recent high and a 23% Fibonacci retracement of the post-Brexit downtrend. Next potential resistance on a breakout appears near $1.2775 then $1.2855.

USDCAD  bounced up off $1.2975 toward $1.3100 in a normal trading correction but has started to resume its downtrend falling from a lower high hack toward the $1.3040 to $1.3060 area with next potential support near the $1.3000 round number.

CADUSD has retrenched back into the $0.7640 to $0.7660 area consolidating Tuesday’s gains about its 200-day average near $0.7620 but below a Fibonacci cluster near $0.7625. 

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