Financial market research and analysis

The Dow Jones and the S&P finished at record highs for the fourth straight session, as the Federal Reserve begins its two-day monetary policy meeting (FOMC). The Nasdaq bucked the trend, moving lower, as semiconductor stocks slid. US futures have since kicked off trading sideways.

25 basis point rate hike priced in

The focus is firmly on the FOMC. The market is expecting a 25-basis point rate rise from the Fed, and this is pretty much completely priced in. Investors will be paying more attention to how the Fed views the US economy in 2018 and therefore what the path of interest rate rises could look like. Given that it is Janet Yellen’s final session as Chair, forward guidance could come up disappointingly short.

US Factory gate inflation ticks higher in time for FOMC

One big theme across 2017 and a major headache for some Fed officials has been the lack of inflation in the US, despite a relatively, robust economy. Yet, Tuesday saw Producer Price Index (PPI), which measures inflation at the factory gate, unexpectedly jump to a six-year high. PPI was 3.1%, its highest level since Jan 2012, which points to potentially higher inflation down the road – good news for the Fed. This data will no doubt serve to reduce lacklustre inflation concerns, at least in some Fed officials.

The dollar also moved higher versus its major peers for the most part of the previous session. Although interestingly it fell towards the end, despite progress in the tax bill reform making its way through Congress. The dollar index is remaining steady at 94.00, whilst EUR/USD is seen consolidating at $1.1744, after falling for much of previous the day. Hawkish noises from the Fed could quickly send EUR/USD down towards $1.16.

Sterling is still being hit by Brexit jitters, wages in focus

The pound steadied versus the dollar in the Asian session, after falling for 3 straight sessions. News that inflation in the UK was at a six year high of 3.1%, failed to boost the pound. This is because Brexit jitters are expected to hold the Bank of England (BoE) back from raising rates in the near future.

Sterling will now look ahead to the UK jobs data report due later this morning. The important element here will be hourly wages, which could give an indication as the extent to which UK household purses are being squeezed. Average hourly wages are expected to be 2.5% in the three months to October, which is a respectable 0.3% increase from the three months to September. This would represent a rare closing in the gap since Brexit, between the cost of living and wage growth. The report is also expected to show resilience in other areas of the labour market, as well such as a further decline in the rate of unemployment. Yet while the UK jobs market may put on another showing of strength, the pound could struggle to react positively for the same Brexit jitter reasons that weighed on the pound following yesterday’s inflation report.

Technicals point lower

Technically, the outlook for the GBP/USD isn’t that encouraging either. The pair closed below the 20-day moving average of $1.3335, the first time, pointing to more weakness to come. Below $1.33, the pair could find support in the $1.3270 region (Aug 3 high) and $1.3230 (Oct 19,25 & Nov.10 high).

Sideways trading

Big players are unlikely to be looking to place trades in any significant size until the Fed policy meeting later today. This means trading could be fairly subdued in the morning session with potentially low volume.