Overnight Headlines

*BoJ debated chance of inflation pick-up towards 2%

*Fed expected to back first pandemic-era rate rise in March

*Bank of Canada set to raise rates in fight against high inflation

*Asian shares gain as investors brace for Fed policy outcome

US equities fell with tech once again leading the way down. It was another volatile session with markets dropping, then recovering, and then falling again. The Nasdaq closed lower -2.48%, the S&P500 -1.24% and the Dow -0.19%. Growth lagged as bond yields steadied. The S&P500, down nearly 9% so far this month, is on course for its worst January on record. The VIX popped up near to 36 before settling above 30. Asian stocks are modestly in the green with European and US futures looking strong.

USD continued to rise against most of its peers, making a high at 96.27 before closing around 96. Despite the action in equities, it was a relatively quiet session. EUR dipped below the 1.1270 support area before bouncing back to 1.13. GBP erased a drop below 1.3455 before pulling back to 1.35. USD/CAD fell back to 1.26 as oil steadied and equities closed off their lows.

Market Thoughts –Fed action in yo-yo markets

Intraday volatility remains extreme this week, and alarming, as we head into the FOMC meeting where no material policy changes are expected. It is an interim meeting so there will no updated dot plot and projections. Consensus sees close to four 25bp rate hikes this year with a signal tonight of the first one in March.

While risks were skewed towards more hikes and earlier quantitative tightening, the recent sharp falls in equity markets have potentially done some of the Fed’s job already. Of course, policymakers do not have a mandate to prop up the stock market, but the Fed does have a track record of stepping back from the brink when under pressure from falls in risk assets – the famous “Fed put”. That said, it is now up for debate whether that moniker applies today.

It does seem as though the entire market is now hawkish. This means the bar is very high for Chair Powell to go beyond this with a faster unwind or 50bps hike hints needed, otherwise there could be short-term disappointment for the dollar.

Chart of the Day – USD/CAD steadies around 1.26   

The Bank of Canada led the way among G10 central banks in turning more hawkish last year. Its latest guidance for a first rate hike has been the “middle quarters” of 2022, but the market has currently priced a 25bp move today above 60%. Analysts are evenly divided but recent data has been strong, and policymakers may look through short-term equity market volatility.

USD/CAD has steadied after spiking higher on Monday up to the 50-day SMA at 1.27. Dollar gains through the 1.26 area have clouded the near-term outlook for USD. This zone has the 100-day SMA and is also the neckline of the bearish head and shoulders pattern. Of course, much depends on the central bank meetings today with strong support below at 1.25 and the 200-day SMA. Initial intraday resistance is 1.2669.