S&P 500, FOMC, Dollar and EURUSD Talking Points:

  • The view of the market: USDJPY Bearish below 137; GBPUSD Bullish above 1.2300; S&P 500 Bearish below 4,030
  • The Fed raised its benchmark rate by 50 bps as expected, but the SEP’s 2023 forecast of 5.1 percent defied market expectations — but the market continued to discount that forecast.
  • ECB, BOE and SNB rate decisions, China data run and global PMI ahead; EURUSD looks like a very interesting setup

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The Federal Reserve’s rate decision was as provocative as expected with its policy decisions – at least in terms of market expectations. There was a higher-than-expected FOMC-day volatility peak in 2022, with higher-than-expected volatility from risk assets and dollar preferences. In part, the results from the proportional decision were generally consistent with expectations from the broader phenomenon. But the market’s skepticism about the central bank’s ability going forward is playing a critical role in disarming big moves. After the last known events of the year have passed, the markets may abandon market activity from here to current norms. If that’s the case, the December liquidation estimates around the holidays will be strong. Also, the S&P 500 (as a measure of ‘risk’) fits the picture with its narrowest 20-day range in 13 months. It’s a wide enough range that it can easily accommodate generous levels of flexibility. What could be going against current norms and driving the volatility levels of December 2018? Perhaps the ‘official’ US recession designation or Great Financial Crisis (Grey Swan).

S&P 500 chart with volume, 20, 100 and 200-day SMAs, ‘Wicks’ and 20-day range (daily)

A chart has been created. Tradingview Platform

Why haven’t US indices and the dollar turned special event risks like the FOMC rate decision into more meaningful price action? Let’s outline the possible scenarios and possible outcomes for a central bank. The most easily resolved part of the policy meeting is the price decision itself. A 50 basis point rate of growth of around 4.25 – 4.50% was in line with expectations (79% market probability via Fed funds futures) so it was well priced. That immediately turned his attention to the Summary of Economic Forecasts (SEP) released at the same time. While there were various elements to this survey – including a reduction in the GDP forecast from 1.7 to 0.5 percent and an upward revision in inflation – the most important was the interest rate forecast. Although the market’s terminal forecast of 4.83 percent to the event at the June 2023 meeting is roughly unchanged, the group’s average high water mark of 5.1 percent will not change significantly. In fact, the market appears to remain as concerned about next year’s central bank rate guidance as it was before the update.

FOMC scenario table with events, probabilities and USD/S&P 500 impact


A table created by John Kicklighter

Here is an unsolved and unsolved concern from this incident. Chairman Powell goes so far as to put it, in response to a question, that 17 of the 19 officials involved in the forecast expect a terminal rate of more than 5 percent. A related component of hawkish reluctance in the future is the belief that the Fed will cut rates in 2023, which market participants believe is not in the cards. Ironically, if the Fed is forced to withdraw from its policy, it could be due to the economic downturn, which is seriously affecting trends. As for the direction of the US dollar, the expected divergence between the policy authority and the market is eating into the carried trade advantage that the greenback was accused of last year. Short-term Treasury rates are closely tied to the valuation of commodity exchanges, as are Fed funds futures expectations. While 2-year Treasury yields have generally been flat around 4.2 percent, the threat of a break in the strong bull trend could change that outlook. Meanwhile, other major regional benchmark rates are working to close the gap with the US.

US 2-Year Treasury Yield Chart Overlaid on DXY Dollar Index (Daily).


A chart has been created. Tradingview Platform

As for closing the US dollar gains, the economic documents in the last 48 hours of this week will be unusually active on the other side of the majors. There are five major central bank rate decisions on tap (ECB, BOE, SNB, Hong Kong and Mexico central banks), Chinese data for November, Australian employment data and of course the developed world’s December PMI boost on Friday. There’s a lot to chew on from the world’s major economies and markets, but I’m interested in the smaller but more extreme assets. After the better-than-expected New Zealand 3Q GDP reading, there wasn’t much extended movement from the stretched New Zealand dollar. Despite this information, a more effective speculative wave could begin if the market begins to pull back. As there are many events from the counterparty dockets, the most interesting for me is the Kiwi pair NZDCAD.

The risk of a major macroeconomic event for the next 48 hours


Calendar created by John Kicklighter

While small and unique exchange rates are interesting, there is a reasonable amount of attention to be paid to pairs like GBPUSD and USDJPY. The former broke above 1.2300 (the midpoint of the post-pandemic) before the FOMC decision, while the latter is still lower after retrieving previous support around 1.3750 as new resistance. The most technically profitable pairing is the EURUSD. We are nearing the end of a rising wedge formation at the October low, which is pushing towards 1.0700 long-term trend line resistance. A technical break is very likely before the end of the weeks as we run out of room between these interwoven patterns. But that doesn’t mean we should get a follow-up on a breach – which would be what I call a ‘necessity break’ rather than a ‘conviction’. With the European Central Bank (ECB) expected to announce a 50bp rate hike on Thursday morning and the market highly skeptical of a move to 2.50% after this hike, there is plenty of room for speculation, whether hawkish or dovish.

They are customers. Net long.

They are customers. Net short.





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every week -18% 7% -4%

EURUSD chart with 20 and 200-day SMAs (daily)

Figure 5.png

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