Financial markets will be wild and eventful over the next few days thanks to key economic data, central bank decisions, and tech company earnings.
Immediately before meetings of the Federal Reserve, Bank of England, and European Central Bank, investors digested a barrage of corporate earnings and key reports that raised skepticism. European shares are lower this morning as a result of this unease and general caution. Given how investors are likely to remain cautious toward riskier assets, US stocks may also fall. Currency benchmarks also suffered due to an increased probability of rate hikes, with the dollar rising to its highest level in a week. Gold slipped to $1900 in response to the risk-off sentiment.
Since markets expect the FOMC, BoE, and ECB to act this week, the focus will likely be on what they say rather than what they do. This week’s events may set the tone for the new trading month of February. In addition to Apple, Alphabet, and Meta Platforms this week, all eyes will be on their earnings and growth outlook, particularly after the recent mass layoffs among US-based tech companies.
For Wednesday:
The ISM Manufacturing PMI is expected to fall from 48.4 to 48.0. You should also pay attention to employment and prices, with the former holding more weight now. For this reason, the US JOLTs Job Openings should move the market if the data drop significantly.
Fed members are expected to lean toward a smaller increase as the inflation rate moderates over the next few weeks and the FOMC hikes by 25 bps.
It is estimated that the Fed will raise rates by 25 basis points. The Fed usually follows market pricing, so it is unlikely they will unexpectedly raise rates by 50 basis points. Only if they wanted to break the current “animal spirits” that have slowed financial conditions quite a bit in recent months can they raise by 50 basis points. A move of that magnitude would certainly cause a big risk.
What to expect from the Fed?
In the wake of its meeting on Wednesday, the Federal Reserve is widely expected to raise interest rates by 25 basis points.
Due to the widespread expectation that the Fed will make such a move, the Fed Chair Powell’s press conference and statement will receive great attention. In contrast to market expectations about the Fed cutting rates by the end of 2023, Powell is expected to strike a hawkish tone. As investors seek fresh clues about what the central bank will do this year, the disconnect between the Fed and markets may add to the upcoming meeting. If Fed hawks dominate the scene, the dollar could receive further support. If markets fail to understand the hawkish rhetoric and signal continued rate hikes, the dollar could slip.
ECB Hawks, to reign supreme?
On Thursday, ECB hawks will take the lead since European inflation remains uncomfortable. The ECB is widely expected to raise interest rates by 50 basis points, with a hawkish Largarde reinforcing expectations for further rate hikes. January’s latest flash inflation figures will be presented before the policy meeting. With inflation at lofty levels, the ECB’s interest rate hikes may tame price pressures for longer if inflation remains elevated.
On the daily charts, EURUSD continues to trade under pressure around 1.0900, with resistance around the level of interest around 1.0770. The dollar’s strength appears to be fueling the downside, with the next level of interest around 1.0770. The Fed and the ECB meetings will significantly impact the near-term outlook, and a breakout opportunity could be on the horizon.
A look at GBP/USD from a currency perspective
This week, a hawkish Bank of England could inject sterling bulls with renewed confidence. Even though interest rates dropped to 10.5% in December, they are still more than five times the bank’s 2% target. To combat high inflation, the BoE will raise interest rates by 50 basis points. Given the widely expected rate rise, everyone’s attention will be focused on revised growth and inflation forecasts, which could provide new information about policy tightening. Regardless of the conclusion of the BoE meeting, there could be an increase in pound volatility.
The GBPUSD remains under pressure on the daily charts as prices approach the 1.2300 level. A breakdown below this level could encourage a decline toward 1.2170 or 1.2120.
