Fundamental Overview
The Federal Reserve delivered a 25-basis-point rate hike, beginning what could develop into a broader rate-hiking cycle. Market pricing now points towards the possibility of further increases, potentially taking the federal funds rate towards 4.75% over the coming months.
The key message is that financial conditions are not considered restrictive enough. Combined with elevated inflation, this supports the prospect of tighter monetary policy for longer, with significant implications for borrowing costs and the refinancing of US government debt.
Attention now shifts to the Bank of England, where a pause at 3.75% is the most likely outcome despite persistent inflation pressures and weak growth. The Bank of Japan follows early Friday, with a 25-basis-point rate increase expected.
Risk Sentiment
Conditions remain risk-off. A more hawkish Federal Reserve, elevated bond yields, continued conflict in the Middle East and concerns surrounding the AI trade all support a cautious market backdrop.
However, there remains a clear difference between the fundamental expectations and current price action. US equity markets continue to demonstrate considerable resilience despite conditions that would normally support a corrective move.
Oil is also behaving unexpectedly. Despite continuing concerns around Middle East energy supplies, US oil has pulled back sharply from around $106 towards $100. The underlying expectation remains for renewed strength, but the market has yet to confirm it.
Technical Overview
The S&P 500 and Nasdaq initially moved lower following the Fed decision before recovering strongly. The broader bias remains towards further downside, but the reluctance of US indices to sell off means patience is essential.
EUR/USD produced a breakout yesterday and the expectation remains for further downside following the recent bounce.
EUR/JPY and GBP/JPY remain within relatively tight ranges. The expectation continues to favour yen strength, although these trades have required considerable patience as price action remains largely sideways.
US oil has experienced a significant pullback, but the broader bias continues to favour the next structural move higher rather than a sustained sell-off.
Focus for Today
The central theme is the difference between expectation and confirmation.
The fundamental backdrop continues to favour a risk-off environment: potential US-index weakness, US dollar strength, yen strength and eventually renewed strength in US oil. However, several markets are currently moving against those expectations.
The priority is therefore not to force the fundamental bias onto price action. Existing structural levels remain important, and new opportunities require confirmation before execution.
Patience, consistency and disciplined risk management remain particularly important while markets digest the Fed decision and attention moves towards the Bank of England and Bank of Japan.
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