Proceed with caution

The Federal Reserve delivered some of what the markets were looking for. It decided to raise the Fed Fund Rate by 25bps as widely expected, confirming a slowdown of the tightening process. However, it kept the door open for several hikes ahead according to the Federal Reserve’s Chair Jerome Powell.

Initially, markets dipped as there were no signs of a pause. However, the moment Jerome Powell mentioned the word disinflation, the markets turned around. Powell said “more disinflationary pressure could boost economic activity”, and that was enough for the market to understand that the Fed is starting to worry about disinflation instead of inflation. Although it’s still hard to say that inflation has peaked.

In addition, even though Powell was hawkish, he was acting dovish at the same time. By the end of the session, the Fed Fund Futures were pricing in a 50bps rate cut by the end of the year from the June peak.

In the coming days, traders are advised to be very careful after the notable move that followed the Fed’s decision. Especially since we might get more clarifications from the Fed’s members over the next few days, and the move that we saw yesterday could be reversed. However, earnings are becoming another positive factor, including META, which beats estimates, and the stock added over 15% after hours.

In the meantime, we maintain our call that the bear market could be over, but a weekly close over 4030 is still needed to confirm that. If so, S&P500’s next possible stop stands at 4220 with some retracements to the downside. Bear in mind that any downside retracement should remain above 4,000 for the bullish outlook to remain intact.

DXY breaks lower

The US Dollar Index declined sharply right after the decision, breaking the sideway range which lasted for over 15 trading days, declining to as low as 100.86 during the Asian session today. However, the RSI indicator is now at 29.6 which is considered heavily oversold. Therefore, we will be looking for new long positions at the next support area which stands between 100.50 and 100.0.

ECB & BOE decisions ahead

Today, all eyes are headed towards the European Central Bank and the Bank of England, as they will both announce their decision during the European session.

The Bank of England is expected to raise the official bank rate by 50bps to 4%, while the main focus is on the votes, as the previous meeting showed that two members voted to hold the rates steady. In today’s votes, any shift is likely to have a notable impact on the markets. The UK is still suffering from double-digit inflation. In addition, the Bank of England is aware that a weak pound will make headline inflation much stickier.

As for the ECB, the bank is also expected to raise the main refinancing rate by 50bps to 3%. No surprises are expected today. However, ECB President Christine Lagarde mentioned in Davos that multiple large hikes are needed, and this is exactly why they keep pushing higher.

Technical outlook

After the Federal Reserve’s decision, the technical outlook hasn’t changed a lot. Most pairs against the US Dollar are overextended including the Euro and the British Pound. Therefore, we will look for another short position in the coming days, especially since both pairs are heavily overbought, while the Dollar Index is heavily oversold, and today’s decisions could be the catalyst for a new retracement to the downside.

EURUSD broke above 1.10 psychological resistance in Asia. However, we can risk the first short position at around 1.1050m with a tight stop at 1.1080, with a possibility to retest 1.09 over the next few days.

As for the British Pound, the pair remains under 1.24 even after the Federal Reserve’s decision, while there is a cup and handle pattern on the daily chart, which may lead to another leg higher, we prefer to give it more time before initiating any trade.



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