Key Points
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In this highly anticipated FOMC preview, we dive into the shifting dynamics of the U.S. Federal Reserve, the upcoming PCE price index data, and the resulting trading opportunities across major markets.
The Shifting Fed Landscape
Just over a week ago, the market strongly priced in a hold from the Federal Reserve. However, that sentiment has shifted dramatically, with a 40% chance now priced in for a 25-basis-point rate hike. This shift has been reflected in a strengthening U.S. dollar and U.S. yields climbing back to multi-year highs.
Several factors are contributing to this changing outlook:
- Geopolitical Tensions: The ongoing situation in the Middle East, particularly the conflict involving Iran and Israel, has caused significant volatility in crude oil prices. While recent hopes for peace have brought oil prices down, the initial spike added to inflationary concerns.
- Leadership Dynamics: With Kevin Warsh now at the helm of the Fed, there is less forward guidance compared to Jerome Powell’s tenure. A surprise hike could be a strong show of leadership, signaling a proactive stance against inflation.
- PCE Data: The core PCE price index, expected to show a 0.2% month-on-month increase (down from the usual 0.3%), indicates some easing in inflation. However, this data may not fully account for the recent surge in energy prices, potentially leading to further market volatility.
Key Trading Opportunities
The current environment presents several compelling trading opportunities, particularly in Gold, USDJPY, and the EURUSD.
Gold (XAUUSD)
Gold has been moving strongly in line with the U.S. dollar, rather than acting purely as a geopolitical safe haven.
- Current State: Gold is currently sitting in a tight range, facing trendline resistance around $4,116 and support near $3,986.
- Outlook: If the Fed delivers a surprise hike, expect the dollar to strengthen and gold to break support levels, potentially targeting the longer-term support line just under $3,700.
U.S. Dollar/Japanese Yen (USDJPY)
The USD/JPY pair is a significant “pain trade” for the Bank of Japan, which has been unhappy with yen weakness.
- Current State: The pair recently hit an over 40-year high at 163.98.
- Outlook: A hawkish Fed or a surprise hike could send the dollar soaring, breaking through recent highs and potentially opening the way for a move towards 170. Conversely, a dovish Fed could provide good buying opportunities on the dip, with support around 162.75.
Euro/U.S. Dollar (EURUSD)
The EURUSD has recently broken down through trendline support.
- Current State: The immediate target is the recent low at 1.1324.
- Outlook: A surprise Fed hike would likely cause this level to break quickly, opening the door for a move down to the key psychological level of 1.10. If the Fed is more dovish than expected, initial resistance sits at 1.1419, with secondary levels around 1.1482.
Conclusion
The upcoming Fed meeting is poised to be a major market mover. Whether we see a surprise hike or a firm commitment to a September increase, the forward guidance will be crucial. Traders should expect significant volatility and manage their positions accordingly.
