A so called “Fed put” has been one of the great market themes so far this year. Concerns regarding economic slowdown changed expectations regarding the Fed policy, buoying equity markets and halting advance of the US dollar. The FOMC chairman admitted that policy would need to be adjusted, no we await official changes. In this analysis we outline what to expect from the meeting and take a look at US500 and EURUSD charts.
Summary:
- The Fed to revise interest rate expectations
- Remarks from Chairman Powell will be important
- US500 cleared resistance, 2018 highs in sight
- EURUSD still in a downward trend
Fed will not hike – but will it admit interest rate cuts?
A communication from the Fed so far made it clear that we would not see any rate hikes in the near future. A dot-plot from December showed that a vast majority saw at least 1 hike this year, some even 3 hikes. This will now change but to what extent? Do notice that markets already expect a rate cut in 2020, but we do not think the Fed is ready to confirm these expectations. Ultimately the tone of comments may be decisive. Is the Fed softening its stance (by avoiding more rate hikes and signaling end to the balance sheet reduction process) because it sees lower inflation but still solid growth (positive scenario) or because it is concerned that lower inflation is part of a global slowdown that will affect the US economy as well (negative scenario)?
Just 3 months ago the Fed suggested interest rate hikes in 2019 and 2020. Now the markets expect interest rate cut next year. Source: Bloomberg
US500 – all-time highs in sight
A spectacular recovery from the late 2018 correction continues and the US500 has recently cleared the last hurdle – 2815 level that stopped bulls 3 times in late 2018 and ultimately caused a sharp sell-off in December. There’s also 78.6% Fibo of the full 2018 correction so this was a strong level. However, it is broken now and could serve as a support with the resistance being at all-time highs, just 100 points away.
EURUSD – still locked in a downward trend
Despite a clear shift in the expectations from the Fed, EURUSD remains in a downward trend that can be encompassed by a wedge formation. The reason behind this is weakness of the European economy that forced the ECB to abandon any hopes of interest rate increases and actually propose the new round of TLTRO. We can see that previous attempts to move higher have failed and the pair would really need a strong impulse to move. Other than the wedge, the pair faces a clear resistance line at 1.1515.
