20 March 2023

Weekly Outlook - Consensus Elusive on What to Expect from FOMC Meeting

Technical Analysis

The banking sector was under intense scrutiny over the last week, with teetering investor confidence as the Fed and central banks tried to reassure markets. The focus turns on whether the FOMC will continue the fight against inflation.

3 Top Stories for the Week Ahead

  • FOMC expected to hike by 25bps

  • U.K. inflation ahead of BOE decision

  • Japan inflation to come down

FOMC Seen Hiking by 25bps, Not 50bps 

Traders' expectations for what the Fed will do on Wednesday have fluctuated considerably from 50bps to a quarter-point cut as certain regional banks came under threat of collapsing but, in the end, received support. After the ECB carried through with its 50bps hike, bets seem to be consolidating around the Fed, splitting its intervention to support the banking sector from its fight against inflation. If the Fed believes its new program to backstop banks facing withdrawals will be sufficient to restore order in the financial sector, it will push forward with trying to bring down inflation.

Gold has broken past the swing high of $1960 per ounce, clearing the path toward the 2k threshold. With momentum divergence forming already on the RSI and the commodity in the vicinity of the ceiling, prices could receive rejection at or above the handle. The net distance between the upward swings of the complete bullish leg suggests that the Fibonacci extension of 0.618% near $2016 per ounce could offer resistance. This could come before the FOMC event, with additional directional clues post-FOMC. Only losing $1935 per ounce could see a reversal towards the $1900 handle, but regardless of the decision, bulls could find it challenging to move beyond the ascending channel's trendline unless an attempt at $2073 per ounce succeeds.

Tradingview Chart: Gold Spot / U.S. Dollar 4h

UK CPI Figures, then BOE Decision

The U.K. will report its latest inflation figures on Wednesday, with CPI expected to come off double digits and drop to 9.6% compared to 10.1% prior. Although going in the right direction, it's not seen as enough to allow the BOE to pause, which is broadly expected to tighten by another 25bps when it meets on Thursday. Unlike Europe and the U.S., U.K. banks have not been seen having difficulties over the last couple of weeks, giving the BOE more leeway to attack inflation.

EUR/GBP has found support at the lower end of the descending channel, starting shy off 0.90. With a double-bottom formation in play, the bounce at 0.8720 could be the support offering respite towards 0.8955. This could result in a medium-term rally to complete the right shoulder of a potential H&S pattern. However, if the BOE surprises in any way, 0.86 would return back into the spotlight. In the interim, 0.8820 and 0.8677 could act as rejection levels.

Tradingview Chart: Euro / British Pound

Japan Inflation To Hurt Hawkish Bets

Japan is expected to report a precipitous drop in inflation on Friday, with the consensus forecasting 3.3% compared to 4.3% prior. While still above the BOJ's target, the move lower could significantly disappoint anyone hoping that the change in governor would lead to a quick and strong shift towards hawkishness. The yen has been a beneficiary of safe haven flows over the last couple of weeks, with the stronger currency seen mitigating the recent inflationary effects.

Aussie has dropped to receive rejection at the upper trendline of the descending channel, starting at 98.60 against the yen. However, the price could decelerate further without falling back into the bearish trend, where it could form a double bottom. The 87.00 handle remains a major support moving forward, regardless of what the CPI shows, as safe-haven flows might support the Japanese currency anyway. 86.23 could be reached if flows remain strong and the CPI surprises upward. Otherwise,  recapturing 89.50 could open the door to 91.25 wide open, so long 90.20 makes way to bulls.

Tradingview Chart: Australian Dollar / Japanese Yen

4 Top Stories in Review

  • Risk appetite fluctuated wildly over the First Republic Bank saga, seen as potentially vulnerable to a sudden withdrawal of assets. A rally in the stock market on Thursday was undermined by a return of cautiousness at the end of the week despite the bank receiving support from the Fed and rival banks.

  • ECB hiked rates by 50bps as expected, choosing the option to communicate confidence to the markets over the banking situation in Europe, which analysts had downgraded on Wednesday.

  • US CPI came in broadly in line with expectations, leaving ambiguity for what the Fed would do at the next meeting as neither inflation nor jobs numbers had provided any major shift in sentiment.

  • UK Chancellor presented the Spring Budget, which was received with relative calm by the markets compared to the mini-budget of last year, as the government forecasted there would be no recession this year.

Major Calendar Events 20- 24 Mar (GMT) 

Source: Investing.com

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