Fed-BoJ Monetary Policy Diverges Further

23 September 2022, 02:30

Market Focus

On Wednesday, U.S. central bank officials raised interest rates to a new range of 3.0% to 3.25%. Policymakers also expect to lift rates higher than before and maintain that level, projecting the fed funds rate rising to 4.4% by the end of this year and 4.6% by the end of 2023. Numerous central banks from all over the world Thursday followed the Fed’s lead. The Bank of England increased its key rate by 50 basis points, and Switzerland’s National Bank hiked by 75 basis points. Market observers also anticipate the European Central Bank to raise rates when it meets next month.

The Federal Reserve’s most recent policy announcement and following comments from Chair Jerome Powell drove markets into chaos. US stocks ended Thursday’s volatile day lower. The benchmark S&P 500 dropped by 0.9%, while the Dow Jones Industrial Average shed 100 points. The technology-heavy Nasdaq Composite fell 1.4%, marking a third straight day of declines for U.S. equity markets.

Boeing Co. agreed to pay $200 million to settle Securities and Exchange Commission allegations that the company and its former Chief Executive Officer Dennis Muilenburg failed to disclose safety issues with its 737 Max jetliner, resolving one of the final US investigations related to two crashes that killed 346 people.

The settlement, announced by the SEC on Thursday, concludes a probe into whether Boeing withheld key information from shareholders about a flawed software system linked to the 2018 and 2019 crashes. The SEC said the company and its former CEO violated securities laws by making “materially misleading” public statements. Without admitting or denying the findings, Boeing and Muilenburg agreed to pay $200 million and $1 million, respectively, to settle the allegations.

Daily Return vs US Dollar(%)

Main Pairs Movement

Following the US Federal Reserve meeting, a number of central banks made monetary policy announcements. The Bank of Japan made the decision to maintain its current monetary policy. After reaching an intraday high of 145.89 during the meeting, the USD/JPY pair fell sharply to 140.34. It is currently trading at around 142.40. The benchmark rate at Switzerland National Bank was increased by 75 basis points. However, USD/CHF advanced, ending the day in the 0.9780 price zone. The Bank of England, meanwhile, hiked rates by 50 bps.

EUR/USD lacked conviction on Thursday, moving between small gains and losses, likely constrained by rising U.S. The EUR/USD pair is trading around 0.9830, meeting intraday sellers at around 0.9900. The AUD/USD pair posted a modest intraday advance and hovers around 0.6640/50, while USD/CAD is trading at 1.3480.

Spot gold posted a modest intraday gain and settled at $1,672 a troy ounce. Crude oil prices ended the day essentially steady, with WTI now changing hands at $83.50 a barrel.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

After a 1.3% loss over the previous trading day, EURUSD has found footing around the 0.98 price level. The Dollar index has continued to trend higher during the Asia and European trading session on the 22nd, but demand for the greenback slowed as the American trading session began. The key U.S. 10-year Treasury yield has soared past 3.7% as the short term yield curve continues to get even more loaded after the Fed’s remark on the 21st. On the economic docket, Germany is set to release its manufacturing PMI for September during the European trading session today.

On the technical side, EURUSD has found support near our previously estimated level of 0.98; however, the previously estimated support level of 0.99 has changed polarity to become a short term resistance for the pair. RSI for the pair sits at 43.66, as of writing. On the four hour chart, EURUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance:  1.0011, 1.0055

Support: 0.9902, 0.98

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

Cable made some upward movement ahead of the BoE’s interest rate decision; however, the pair soon faced selling pressure after the BoE announced an increase of 50 basis points on its benchmark interest rate. The hawkish stance of the BoE failed to attract sustained demand for the British Pound as markets have already priced in a 50 basis point rate hike by the BoE. Furthermore, economic fundamentals of Britain have not improved by much since the BoE’s last interest rate decision. Without a press conference by the BoE following its interest rate announcement, market participants are left to interpret the central bank’s move on their own. On the economic docket, the U.K. will announce PMI data during today’s European trading session.

On the technical side, GBPUSD has found support at slightly above our previously estimated support level of 1.12. Our previously estimated support level of 1.1463 has changed polarity and now becomes a short term resistance level for GBPUSD. RSI for the pair sits at 47.55, as of writing. On the four hour chart, GBPUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1.1561, 1.1854

Support: 1.1463, 1.12

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

Gold has shrugged off the impacts of interest rate hikes by global central banks and managed to find upward traction amid escalating tensions in global geopolitical events. Russian president Vladimir Putin’s decision to mobilize half of Russia’s military forces have caused concern among market participants. At the onset of the Russia-Ukraine war, Gold staged a historical rally to beyond $2050 per ounce as market participants fled for safety. A rare and irregular rally of the non-yielding metal, however, should not be ruled out under current geopolitical conditions—tensions rising in the South China sea, possible further escalation of the Russian-Ukrainian war, and the competition for global domination between China and the U.S.—are all possible catalysts for a historical run by Gold.

On the technical side, XAUUSD has found support near our previously estimated support level of $1660 per ounce. The secondary support for the precious metal remains at $1600 per ounce. Near term resistance for the pair stands at $1695 per ounce. RSI for the pair sits at 37.62, as of writing. On the four hour chart, XAUUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1695, 1724

Support: 1660, 1600