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Fed: Interest rates need to keep higher

February 9, 2023

US stocks declined sharply on Wednesday, suffering heavy daily losses, and were dragged lower by a selloff in tech stocks as Federal Reserve speakers reinforced the idea that interest rates will need to keep climbing to quash inflation.

Fed Governor Christopher Waller teased a long fight with a 2.0% inflation target by citing expectations of tighter monetary policy for longer than expected. Meanwhile, Governor Lisa Cook also said that the central bank remains focused on restoring price stability, as inflation is still running too high. Therefore, hawkish comments from the US policymakers provided support to the US Dollar and exerted bearish pressure on the equity markets.

On top of that, the mixed concerns surrounding the latest geopolitical tension between the US also acted as a tailwind for the greenback. On the Eurozone front, European Central Bank policymaker Klaas Knot said that headline inflation appears to have peaked but added that keeping the current pace of hikes into May could well be needed if underlying inflation does not materially abate.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined lower on Wednesday as the S&P 500 almost wiped out its previous session’s rally amid hawkish comments from the US policymakers. The S&P 500 was down 1.1% daily and the Dow Jones Industrial Average also dropped slightly with a 0.6% loss for the day.

All eleven sectors in S&P 500 stayed in negative territory as the Communication Services sector and the utility sector are the worst performing among all groups, losing 4.13% and 1.71%, respectively. The Nasdaq 100 meanwhile retreated the most with a 1.8% loss on Monday and the MSCI World index was down 0.5% for the day.

Main Pairs Movement

The US dollar advanced higher on Wednesday, rebounding from a daily low, and held onto its recovery moves towards the 103.50 level amid hawkish Federal Reserve comments. The Fed officials including Chairman Jerome Powell renewed inflation fears and allowed the US Dollar Index (DXY) to regain upside momentum. However, receding woes of the US-China ties and a light calendar might limit the upside for the US Dollar.

GBP/USD advanced higher on Wednesday with a 0.20% gain after the cable struggled to maintain its feet and gradually dropped to the 1.2060 area amid the souring market mood. On the UK front, the UK GDP is expected to display a flat performance every quarter on Friday. Meanwhile, EUR/USD also remained under pressure around the 1.0710 area amid a modest US Dollar comeback. The pair was down almost 0.13% for the day.

Gold advanced slightly with a 0.13% gain for the day after touching a daily high at $1886 during the European trading session, as the statements highlighting inflation fears from the US diplomats weighed on the yellow metal. Meanwhile, WTI Oil rebounded higher with a 1.74% gain for the day. The solid China recovery is expected to keep the oil price in bullish territory.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD erased daily gains and was trading below 1.0730 as of writing. The EUR/USD pair hover around 1.0740 on Wednesday, consolidating after Tuesday’s Federal Reserve (Fed) chief Jerome Powell turmoil in markets. The head of the American central bank participated in a moderated discussion at the Economic Club of Washington, DC, providing some interesting headlines. The macroeconomic calendar has no relevant data scheduled for today. A couple of Federal Reserve officials are scheduled to speak during the American afternoon.

From the technical perspective, the four-hour scale RSI indicator climbed to 42 as of writing, suggesting that the pair’s negative traction has weakened. As for the Bollinger Bands, the pair continued to wander below the 20-period moving average, showing that the EURUSD remained defensive at the moment of writing.

Resistance: 1.0930, 1.1025

Support: 1.0664, 1.0508

GBPUSD (4-Hour Chart)

The GBPUSD has failed to stabilize above 1.2100 and erased a portion of its daily gains. The US Dollar preserves its strength amid the souring market sentiment and makes it difficult for the pair to gather recovery momentum. Late Tuesday, FOMC Chairman Jerome Powell also acknowledged the strong labor market data and reiterated that they will probably need to do further rate hikes. In an optimistic tone, Powell said that he was expecting 2023 to be “a year of the significant decline in inflation.” This comment made it difficult for the US Dollar Index to preserve its bullish momentum and helped GBP/USD erase some of this week’s losses. Currently, the CME Group FedWatch Tool shows that markets are pricing in a 68% probability of the Fed opting for two more 25 basis points rate increases in March and May. The market positioning is unlikely to change significantly ahead of next week’s inflation report.

From the technical perspective, the four-hour scale RSI indicator recovered to 46 at the moment of writing, suggesting that the pair now have no decisive direction. As for the Bollinger Bands, the pair was breaking through the 20-period moving average to the upper area and the size between the upper and lower bands got smaller, signaling that the pair was within the consolidation phase.

Resistance: 1.2264, 1.2391, 1.2492

Support: 1.1924, 1.1859

XAUUSD (4-Hour Chart)

Gold price stays around $1,870, unable to gain traction on Wednesday amid the absence of a fresh catalyst. Market participants lack of consensus so far from US Federal Reserve (Fed) Chair Jerome Powell’s speech on Tuesday. Powell repeated that they were determined to control inflation and would continue tightening the monetary policy by hiking rates. On the other hand, he also stated that the disinflationary process has begun. At the time of writing, the Gold price is trading at $1,877.26, posting a 0.3% gain daily. The US dollar index rose 0.03% to 103.370 and the benchmark US 10 Year Treasury Yield declined 0.65% to 3.653, having no clear traction on Gold price.

For the technical aspect, RSI indicator 43 figures as of writing, signaling no clear traction as the RSI indicator has no significant movement in the near term. As for the Bollinger Bands, the price is holding around the downward moving average. The bearish trend could persist. In conclusion, we think the market is in modest bearish mode though both indicators show no strong bearish potential. The downtrend from last week should persist until further breakthrough. For the downtrend scenario, the price is currently holding above support at  $1,860. If the price drops below the current support, it may trigger some technical selling and drag the price deeper. For the uptrend scenario, the price must hold above $1,860 and break through the resistance at the round-figure mark of $1,900 to confirm the uptrend.

Resistance: 1900, 1920, 1957

Support: 1860, 1830, 1800

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EUR                German CPI (YoY) (Jan)15:008.9%
GBP                BoE MPC Treasury Committee Hearings17:45 
EUR                EU Leaders Summit 18:00 
USD                Initial Jobless Claims21:30190K