Financial market research and analysis

The Federal Reserve (Fed) policy decision is the major macro event of the day. Higher volatility and hectic trading environment are on the menu of the day.

The G10 traded in a quite fashion. The EURUSD traded in the tight range of 1.0622/1.0642, the GBPUSD remained rangebound in 1.2641/2.2665.

The Aussie has been the worst performer against the US dollar in Asia, amid the Westpack consumer sentiment dropped by 3.9% month-on-month in December. The AUDUSD eased below the 0.7500. The carry appetite post-Fed should determine whether or not the pair could target a sustainable recovery above the 0.7500 handle. Failure to gather an upside momentum at these levels could encourage the AUD-bears. A break below 0.7464 (major 38.2% retracement on Dec 1st to Dec 13th rise) would suggest a short-term bearish reversal for a further slide to 0.7400/0.7370 (Dec 1st low).

The yen consolidated above the 115.00 against the US dollar as the Tankan hinted at a softer capital expenditure in fourth quarter, as well as a clear divergence between large and small manufacturers’ business outlooks mainly caused by the cheapening yen. Trend in the USDJPY remains positive in the mid-run, yet the activity in the US dollar should determine the tone for the day. Intra-day support are seen at 114.99/114.90 (minor 23.6% retracement on Nov 28th to Dec 12th rise) before 114.30 (major 38.2% retrace). A break below this level could signal a short-term bearish reversal.

Gold (+0.13%) was better bid into the Fed’s decision. The key short-term resistance is seen at $1167/$1170, if surpassed, could signal a new positive trend toward $1180/1200 area.

The Federal Reserve is expected to announce 25 basis points increase in the Fed funds rate later in the day. This interest rate move is being priced in since immediately after Donald Trump’s presidential victory. Therefore, no surprise is expected regarding the much likely rate action today. Yet, the accompanying statement could trigger some volatility, as it will set the primary tone for the future of the US monetary policy and will certainly not be as hawkish as priced in by the fixed income and the currency markets after Trump’s victory and on the run up to this week’s meeting. Instead, the FOMC's statement could be fairly balanced, therefore, the possibility of disappointment in Fed hawks’ camp is a major downside risk in the US dollar and the US yields. If, as expected, the Fed sounds too cautious, or less hawkish than expected regarding the future of the US’ monetary policy, the correction sell-off in the US dollar and the US sovereigns could be strident.