Market Drivers – US Session 25/01/2023

Mohamed Abdelhamid 26 January, 2023 4:58 am Market Update

Hopes for a dovish stance by the Fed are widespread across financial markets as they are heading towards the end of the month and the FOMC policy decision on February 1. ECB policy decision is also awaited for direction.

Investors and traders are closely watching Thursday’s GDP data in the United States that will go towards the Federal Reserve’s upcoming interest rate decision. The US Commerce Department will release its initial advance fourth-quarter Gross Domestic Product estimates at the same time that the nation’s Core PCE prices will be announced.

The US 10-year yield was 1bp lower at 3.45% and WTI was down 0.1% to USD80/bbl. Gold popped 0.8% to $1940.4/oz.

Economic Data

PCE is expected to accelerate to a 0.3% MoM pace in December, though a 0.4% gain cannot be ruled out. The YoY rate likely slowed to 4.5%, suggesting prices continue to moderate but remain sticky at high levels.

Ahead of this data, WIRP suggests a 25 bp hike on February 1 is fully priced in, with less than 5% odds of a larger 50 bp move. Another 25 bp hike on March 22 is about 80% priced in, while one last 25 bp hike in Q2 is only 35% priced in.

Key Developments

The dovish outlook saw the US Dollar once again fall against the euro on Wednesday, although traders are not seeing this through and EUR/USD stuck to a 1.0875 / 1.0923 range on the day.

There was some better movement in USD/JPY. The pair closed down the prior day which gave the bears the fuel to continue selling against pullbacks, denying the bulls space into the peak formation set earlier in the week USD/JPY fell from a high of 130.58 to a fresh low of 129.26 when the New York traders came on line, extending London’s supply. this made for great opportunities for trades targeting prior support structures on the way down to 129.50 and then the 129.20s.

USD/CAD was another pair that offered traders opportunities with two-way action on the day over the course of the Bank of Canada’s interest rate decision. The Bank of Canada, as expected, raised the key interest rate by 25 basis points to 4.5%. In the statement, the central banks mentioned that will likely hold rates at this level while assessing the impact of recent policy moves.

BoC’s governor Tiff Macklem delivered his remarks on the policy outlook and responded to questions, warning that they are not ruling out further hikes and are data dependent. The USD/CAD rose from 1.3365 to 1.3426. It then pulled back into a prior support structure in the 1.3375s in a 50% mean reversion of the BoC rally.

The Australian Dollar and Kiwi were higher on Wednesday after a surprisingly red-hot inflation report for Australia and as for Yesterday’s Q4 CPI inflation from NZ, (while still far too strong at 7.2% YoY in Q4) analysts at ANZ Bank argue that it ”was much better under the hood than the RBNZ feared at the time of the hawkish November MPS.” The Kiwi traded between 0.6450 and 0.6504 while the Aussie between 0.7032 and 0.7122 (a key level for the day ahead that guards 0.7150.

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