Takeaways from the latest FOMC meeting: US Dollar Index, USD/JPY, EUR/USD

Market Recap

As expected, the latest Federal Open Market Committee (FOMC) meeting concluded with a 25 basis-point hike to the 4.5%-4.75% range, which was fully priced by markets and seen as a no-surprise. Greater focus was placed on other wordings in the FOMC statement and the press conference. From the statement, the Federal Reserve (Fed) has left the door open for further rate hikes by maintaining that the Committee anticipates ‘ongoing increases’ in rate hikes. This was echoed by Fed Chair Jerome Powell in the press conference, who suggested ‘couple more hikes’, while acknowledging that the economy is slowing but labour market remains tight and inflation is still too high. However, those hawkish reaffirmations from the Fed were met with rising doubts from the markets, which saw a dovish takeaway from Jerome Powell’s acknowledgement of progress in the ‘disinflationary process’ and that he is not worried about loosening financial conditions. Following that, terminal rate hike bets leaned further into the 4.75-5% range, with markets starting to price for 50 basis-point rate cuts in 2023 as opposed to previous 25 basis-point.

The US dollar index reacted accordingly to the softer rate hike bets, with a break below the 101.30 level after a brief period of consolidation. The formation of a new lower low reiterates its ongoing downward trend and seemingly setting its sight on the 99.00 level next, where a key 61.8% Fibonacci retracement level resides. US Treasury yields fell across the board, driving the outperformance for the rate-sensitive Nasdaq (+2.0%) overnight. After-market moves in the Nasdaq found further validation from Meta Platforms’ fourth quarter (4Q) results release, which pushed back against concerns of stalling growth with a 5% growth in family daily active people (DAP). Guidance of lower-than-before expenses in 2023 and a US$40 billion increase in share repurchase authorisation also lifted sentiments, sending its share price surging 19% after-market.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.20%, ASX +0.40% and KOSPI +1.00% at the time of writing. Following a wild ride in Wall Street overnight, the strong positive close in major US indices reflected equity bulls retaining control, which could set the stage for some relief in the Asia session as well. That said, much of the overnight traction seems to revolve around growth sectors, while value stocks saw more measured upside (DJIA +0.02%). That may prompt a more lukewarm reaction in the Asia session, with heavier exposure to value-driven sectors. The energy sector could also come under some pressure in today’s session, following the negative sector performance in US overnight (-1.9%) as oil prices failed to find traction despite the turnaround in risk sentiments.

After a falling channel pattern in the USD/JPY (大口） was threatened with a period of indecision over the past week, the conclusion of the FOMC meeting provided the much-needed clarity to guide the pair back on its downward trend. The 130.80 level of resistance has succeeded in keeping the pair down thus far, with the bearish-bias from a new lower high paving the way for a retest of the 126.84 level next. Stronger near term support may come from the 123.50 level, where a key 76.4% Fibonacci retracement level stands in coincidence with the lower channel trendline.

On the watchlist: EUR/USD formed a new higher high following latest FOMC meeting

Following the latest FOMC meeting, the EUR/USD has pushed to a new higher high on US dollar weakness, as market participants found tints of dovishness in Fed Chair Jerome Powell’s comments. The further downshift in rate hikes from the Fed also run in contrast to the European Central Bank (ECB), which markets have priced for 150 basis-point of hikes by June this year. The ECB meeting will be up later today, with recent persistence in core inflation rate (5.2% versus 5.1% consensus) likely to deliver another round of hawkish affirmation, although headline reading has showed signs of easing. For now, the EUR/USD is attempting a break above a rising channel pattern and may set its sight on the 1.120 level next.

Wednesday: DJIA +0.02%; S&P 500 +1.05%; Nasdaq +2.00%, DAX +0.35%, FTSE -0.14%