Headlines

* FOMC set to hike rates to 16-year high and debate a pause

* Dollar in defensive mood after job vacancy data

* Gold hovers above $2,000 ahead of Fed rate verdict

* Asian stocks drop on bank woes as Wall Street rattled by selloff

FX: USD eventually fell against most of its peers. The DXY pushed up to 102.40 before closing below 102. The index has been down in six weeks out of the last seven. The 2-year yield dropped as much as 21bps after moving above the 200-day SMA at 4.13%. It closed at 3.96%. The 10-year yield fell 14bps after also touching its 200-day SMA at 3.56%. Investors sought out safer assets amid ongoing fears about US regional banks. Economic data also pointed to a softening labour market.

EUR dipped to 1.0941 and long-term support before finishing just at 1.0996. The world’s most popular major has reclaimed 1.10 today. A close above the early February high at 1.1032 would be positive for bulls. GBP fell below 1.2447 support before closing above. Cable is trying to regain 1.25 this morning. USD/JPY snapped its three-day win streak. It made a fresh cycle high at 137.77 before pulling back below 136 today. The 200-day SMA sits at 136.97. AUD hit highs at 0.6717 on the unexpected RBA rate hike. But it eventually closed at 0.6663. The NZD has advanced for a fourth day in five today on strong jobs data. It is trying to find a base after falling towards 0.61 last week near year-to-date lows from March.

Stocks: US equities declined on the eve of the FOMC in a broad-based risk-off move. The blue-chip S&P 500 finished lower 1.16%. The tech-heavy Nasdaq 100 lost 0.89%. The Dow closed down 1.08%. The energy sector led the drop falling 4.3% after another steep fall in oil prices on worries about fuel demand. US regional banks were in the spotlight with the regional banking index losing 5.5%, its worst session since mid-March. The JOLTS vacancy data was cooler than expected which added to the subdued mood.

Asian stocks were mostly negative after Wall Street’s downbeat day. Sentiment was also hampered by market closes in Japan and mainland China. The Hang Seng was pressured by softness in tech and energy. Participants were braced for a rate hike Stateside.

US equity futures are marginally in the green as focus turns to the FOMC later today. European equity futures are indicating a higher open (+0.5%). The cash markets closed lower by 1.5%.

Gold punched higher to the top of the recent range at $2015. Risk-off sentiment helped with Treasury yields dropping sharply. All eyes are on the Fed. Bugs are looking for confirmation that rates will not rise any more with cuts soon.

Day Ahead –Focus on Fed decision and Powell’s tone

Consensus expects a 25bp rate hike and then for the Fed to pause at today’s FOMC meeting. Indeed, money markets go further and give just over a one in three chance of a rate cut at the Fed’s September meeting. This comes after yesterday’s fears over the banking sector ramped up. The collapse of a third US bank, First Republic, in a few weeks has seen investors speculate on which “domino” could fall next.

There’s no doubt Jerome Powell will be quizzed at his press conference about these worries. He has said previously these banking stresses may act like a 25bp hike by slowing the economy down due to tightening lending conditions.  Does the Fed Chair explicitly mention a pause in rate hikes? The dollar may suffer if so as bond yields would sink lower. Stocks would enjoy this environment. But Powell could then push back on any talk of rate cuts, for the time being at least.

Chart of the Day – USD/JPY hits 200-day SMA resistance

This major broke out of its recent range as the yen collapse took hold after the dovish stance taken by the Bank of Japan at its meeting last week. Not too much was expected at Governor Ueda’s inaugural convening. But policymakers surprised to the more cautious side on guidance with a long timeline for a policy review before potentially making any major policy shift. Whether this changes if inflation remains sticky and near multi-year highs is key for yen buyers

USD/JPY hit the 200-day simple moving average after breaking higher above the April high at 135.13. That widely watched indicator capped further upside in March just before the banking turmoil, with the pivot top at 137.91. The yen gained favour then, as it did yesterday as markets became more risk averse. The yen remains a prime safe haven currency as the health of the US banking system causes ongoing jitters. A more hawkish Fed would push Treasury yields back up and help USD/JPY.