Headlines

* FOMC hikes by 25bps to 22-year high, staff no longer forecast recession

* ECB to hike rates but keep options open for September

* USD on back foot, gold hovers near one-week high after Powell’s statement

* Asia markets rise after Fed hikes as expected, Japan eyed

FX: USD is down for a third day in a row and below the 101 level. The FOMC statement was little changed. But the press conference was perceived as mildly dovish. Chair Powell refused to commit to any future rate hikes with policymakers adopting a data dependent stance.  There is around a 50% chance of another rate rise before the tightening cycle finally ends. The 2-year yield moved lower. It is trading just below the 50-day SMA at 4.85%. The 10-year yield also settled lower and is down this morning at 3.85%.  

EUR rebounded off support at the February high and 50-day SMA at 1.1032 and 1.1050 respectively. Upside is capped ahead of 1.11 and today’s ECB rate decision.

GBP has come off one-week highs but is up for a third straight day. Decent support is seen at the June top at 1.2848. The 50-day SMA at 1.2876 is also acting as support.

USD/JPY is lower this morning for a fourth day ahead of the BoJ meeting. Overnight implied volatility is at multi-month highs. The 50-day SMA at 141.31 should act as initial resistance.  The 50% mark of the October 2022 drop is below at 139.58.

AUD is stronger today and again reversing yesterday’s losses. Positive risk sentiment and a strengthening yuan are helping. A couple of SMAs have acted as support around 0.6726/35. USD/CAD is trading sideways between 1.3150 and 1.32.

Stocks: US equities ended flat after a choppy session. Markets initially perceived the Fed press conference as dovish and rallied. But Powell said the central bank was prepared to hike rates if necessary. He also repeated that the June dot plot does not see inflation returning to the 2% target until 2025. The benchmark S&P 500 lost 0.02% to 4566. The communication sector topped performance helped by Alphabet gains of 5.8% after its strong results. But Microsoft slid 3.8% on slower cloud-computing growth. That saw the tech-heavy Nasdaq lose 0.40%. But the Dow continued its win streak, adding 0.23%.  This was its 13^th straight positive session and longest rally since 1987. Coca-Cola results beat and volume momentum is seen picking up in Q3.

 Asian stocks were trading higher post the Fed meeting and its new data-dependent bias.  Chinese stocks were positive as sentiment benefitted from recent policy support efforts. The Nikkei 225 eventually rallied ahead of the BoJ meeting. Most expect no change in policy after Governor Ueda’s recent clear communication.

US equity futures are solidly in the green. After the bell yesterday, tech giant Meta reported consensus-beating earnings. Crucially, advertising beat estimates and also sales guidance for Q3 was raised.

European equity futures are pointing to a higher open (+0.5%). The Euro Stoxx 50 closed down 1.0% yesterday.

Gold is climbing for a third day this week. Powell left out any clear signs of another rate hike. But real yields could remain elevated due to disinflation, even if there are no more rate rises. $1980 is the midpoint of the May decline while $2000 will entice bugs above.

Day Ahead – ECB and data next in the spotlight

Probably the key takeaway from last night was that risk sentiment didn’t hate Powell’s message last night. But they didn’t love it either. That means he did a decent job on communication.  All eyes are now on President Lagarde. Can she “do a Powell” by not committing and leaving the policy door open? A 25bp rate hike has been well-telegraphed. Consensus expects the bank to veer towards a more data-dependent strategy. This could be viewed as a slightly dovish tilt and lead to a weaker EUR. But much depend on Lagarde’s tone and language.

We get a bunch of important US data this afternoon. Q2 GDP is forecast to confirm that the US economy continued to grow at a pace of almost 2%, while the GDP price index is set to fall to about 3%. The latter is a good look, and a reminder of the recent CPI number at the same rate. The core PCE index should be more influential. It too should fall, but to a still elevated 4%. Durable orders should remain solid. We’ll also get the weekly jobless claims. These are predicted to remain in the 230k area. That is still well below average. But this data will need to rise to see tight conditions ease in the labour market.

Chart of the Day – EUR/USD holding above support

The challenge for the ECB and Lagarde is to deliver a strong message on inflation with the promise of more tightening to come if needed. But there needs to be a balance with the risks that growth is subdued, and the bank’s own forecasts are too high. If she is too soft, EUR/USD will challenge strong support at 1.1032 and 1.1050. If the ECB is more hawkish, buyers will push up towards the 200-week SMA at 1.1183. The recent multi-month high is at 1.1275.