Deleveraging Event Continues Ahead of FOMC

Last week markets expected to major economic events in the US, however, this week is all about the Fed. On Wednesday, analysts expect the Fed to stay on ‘hold’ and reiterate Decembers’ guidance of 3 hikes this year. A signal for a March hike would support the dollar and send bleeding stocks to further declines. In addition, a more extensive and faster winding down of the Fed’s balance sheet, announced or hinted, would have a similar effect. The US reports its Q4 GDP too.

Tracking the prices of NASDAQ on the daily chart, the tech index has been under severe pressure since the swing failure on Dec 28. It has lost %14 of its value on policy and chip shortage narratives.

No further guidance or, in general, a dovish or neutral Fed would allow the index top pull off a decent relief rally towards the 15k hurdle, perhaps even higher. However, a hawkish surprise could prove detrimental for the US100 index as it flirts with major support at 14400. The RSI and MACD show a slight divergence, and this foretells short-sellers have been taking some profits off the table. Can it continue?

BoC Ready to Hike?

Also on the policy front this week, we expect the Bank of Canada to meet. Even though the Canadian dollar has probably priced in a hike as markets anticipate a 25bp rise, the performance of the USDCAD will depend on Fed’s decision too.

Should the bank indicate tightening of financial conditions, something embraced by BoC and could star this week, it could give loonie a further boost as their balance sheet would reduce. However, if they deliver only a hike and no shrinkage in reinvestments, this might offer an additional uptick on Frida’s reversal.

The USDCAD pair has formed a decent support at 1.2450, and the pricing-in of the hike has probably started to wane off. In that case, traders can expect 1.2664 to be the next target should 1.2545 gives in. On the flip side, if the Fed comes out shy on Wednesday, the loonie could see renewed momentum, and depending on where the Fed leaves the pair, the break of 1.2450 will be imminent. The following support would be around 1.2350.

Australian CPI Could Shift RBA Narrative

Australia will release its inflation numbers on Tuesday, and its well expected to remain above the 2-3% target range. The consensus amongst analysts lies at 3.2%.

The RBA has stayed somewhat behind in providing guidance and signals regarding bond purchases. However, this might end next month as Australia’s employment has gotten to levels to inform a strong case. Coupled with an uptick in inflation, the Q4 CPI release could prove pivotal for Aussie leading to the next meeting.

AUDUSD has not made a decent attempt to get past the 73 cents. Bulls were stopped, and markets reversed on Jan 13. If the 0.7125 support gives in, the pair can slide down to 0.71 next and even lower. But its driver will be a mix of their own Q4 CPI and expectation around Fed’s meeting on Wednesday.

A positive surprise might see upside pressure elevating. However, the move is not expected to lead to a break above 0.72 – at least not ahead of the FOMC.

RBNZ Waits for Quarterly Inflation

Neighboring New Zealand reports its quarterly inflation data too on Wednesday. Economists expect the CPI figures to fall to 1.3%, suggesting that RBNZ has been guiding policy just right so far as it cut rates twice last year. Far from the bank’s 2% average target, a spike in inflation diverging from expectations could be the catalyst for another hike as it would prove inflation is not transitory.

Such an event can be two-fold for the kiwi. Beating expectations would guide RBNZ to another hike, allowing the NZ dollar to gain against counterparts. However, it would take away confidence in the central bank’s ability to keep inflation in check, especially after hiking twice.

Similar to the rest, the performance of NZDUSD will depend primarily on Fed, then on what the inflation numbers can tell markets. If NZ’s CPI disappoints, already at major support at 0.67, a somewhat hawkish FOMC could send the pair searching for the next Fibonacci at 0.6473. If Fed disappoints and the CPI comes out as expected, kiwi might experience a relief rally up to 0.6732.

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