Asia Day Ahead: Market calm ensued following FOMC meeting

Asia Open

The Asian session is set for a positive open, with Nikkei +0.23%, ASX +0.53% and KOSPI +1.65%, as broader sentiments were relieved to get past the recent US inflation data and the Federal Open Market Committee (FOMC) meeting without much of a hiccup. The VIX plunged more than 6%, once again with its struggle to see any significant pick-up pointing to a risk-on environment.

Overnight sector performance revealed a continued lean into AI-exposed names, as traction continued to follow through from Apple’s latest artificial intelligence (AI) push. The ‘Magnificent Seven’ stocks continues to lead the pack, creating a further disparity between growth and value. For now, falling US Treasury yields and a weaker US dollar in reaction to the lower-than-expected US consumer price index (CPI) has offered less of a hurdle, as sentiments will continue to digest the latest FOMC outcome over the coming days.

FOMC digest

Overnight, the Federal Reserve (Fed) kept interest rates unchanged at 5.25-5.50% as widely expected, while focus had all along been on the dot plot projections to gauge the timing and scale of any easing ahead. From the median dot, a paring back to only one rate cut this year from previous three cuts has been the key takeaway in what is deemed as a “hawkish hold”, while the median dot for the next two years revealed an additional cut from the March projections.

Fed Chair Jerome Powell did acknowledge recent inflation progress but stuck to the view of wanting to see more, which is expected given that inflation is still some distance away from its 2% target. He also downplayed the recent strength in US labour data, once again repeating his script that it is coming into “better balance”. Overall, there has not been too much of a surprise from before and the absence of any hawkish tilt will be very much welcomed.

Of course, one may argue that delayed policy easing just shows that economic conditions are holding up well, and past periods of rate hold has generally been supportive of risk sentiments. As long as additional rate hikes are off the table, which was reiterated in Fed Chair’s comment that rates are “sufficiently restrictive”, markets may continue to seek comfort with the current environment once rate expectations recalibrate.

What to watch: USD/JPY

With the FOMC meeting behind us, the next significant event lies up ahead – Bank of Japan (BoJ) meeting on Friday. Thus far, the upward channel trendline remains intact despite a weaker US dollar overnight, as market participants took the opportunity for some dip-buying. Given the recent ‘hawkish hold’ outcome from the Fed, if the BoJ were to stick to its usual accommodative tone in terms of policy settings, that may pave the way for the upward trend in USD/JPY to continue.

For now, the 155.00 level may be on watch for any immediate defending from the bulls, where the lower channel trendline stands in confluence with its daily Ichimoku Cloud support. Any success in doing so may see buyers potentially eyeing for a retest of resistance at the key 160.00 level.