Headlines

* Fed set to hike rates by 25bps despite turmoil

* Dollar subdued ahead of Fed rate decision

* Gold tanks nearly 2% as bond yields rebound

* Asia stocks rise as financial shares rally

FX: USD moved lower for a fourth day. But the trading range was very small. The DXY remains just under the 50-day SMA at 103.44.  The US Treasury 2-year yield rebounded again. It advanced above the 200-day SMA and the key psychological level of 4%. The 10-year yield also moved above its 200-day SMA at 3.5% as market sentiment improved.

EUR closed higher +0.5% for a fourth straight session. It is now above its 50-day SMA at 1.0727. GBP closed lower for the first time in three days, losing 0.5%. Focus is now on Thursday’s BoE meeting which is a near coin-flip between a pause and a 25bp hike. USD/JPY strengthened by 0.9% and back to its 50-day SMA at 132.51.  AUD finished 0.7% lower to 0.6671 though buyers have pushed it up closer to 0.67 this morning.

Stocks: US equities rose for a second consecutive session. The benchmark S&P 500 gained 1.3% and closed at 4002 and above the 200-day SMA. The tech-heavy Nasdaq 100 gained 1.42%. The Dow added 316 points or nearly 1%. The KBW bank index gained 5%. The beaten-down shares of First Republic climbed close to 30%, having fallen nearly a half on Monday. US Treasury Secretary Yellen signalled the government would back all deposits at smaller US banks if needed.

Asian stocks again tracked Wall Street’s positive close. The Nikkei 225 rose over 2%. The Hang Seng gained 1.92%.

US equity futures are flat to very modestly in the green. European equity futures are pointing to a higher open +0.3%. The Euro Stoxx 50 cash market finished higher 1.51%.

Gold fell over 2% as Treasury yields made a strong comeback. We noted yesterday that bugs have struggled to remain above the key $2000 psychological level for an extended period of time.

Day Ahead – Fed to hike by 25bps, focus on guidance

The FOMC faces its moment of truth later today when it needs to decide if it follows the ECB and raises rates in the eye of a banking crisis. Volatility has subsided since early Monday after the Credit Suisse rescue. The Fed has already set up new liquidity measures and dollar funding lines.

Markets think it can focus on the monetary policy side of its remit. Traders see over an 85% chance of a 25bp rate rise with just a 15% possibility of no move. Inflation and the job market remain relatively hot. Guidance by Powell will be key. He could take a neutral stance so as to leave its options open and retain some flexibility. Financial conditions have tightened and tighter regulation going forward could mean inflation and activity slows. Focus will also be on the new “dot plots” from officials with consensus seeing a higher terminal rate than December’s 5.1%. The dollar will find support if this is much higher, though rate cuts loom if the economy does slow.  

Chart of the Day – USD/CAD holds above support

Weaker-than-expected inflation data out of Canada (5.2% vs 5.4%) yesterday saw USD/CAD bounce again from support just below 1.37. Inflation is still way too high above target even though CPI y/y hit its lowest level since April 2020. That said, the BoC is unlikely to shift its thinking too much in the short run with pressures on the banking sectors meaning tighter financial conditions and easing inflation.

Buyers have stepped in on several occasions over the past week or so keeping prices above 1.3643/51. Bulls need to advance beyond 1.3750 to take a look at the March high at 1.3862.