Financial market research and analysis

The Federal Reserve (Fed) increased the borrowing costs by 25 basis points as expected and revealed a steeper tightening outlook. The Fed’s rate normalization is now expected to involve three additional rate hikes in 2017, compared to two rate hikes projected in September. The US stocks bounced off historical high levels.

The SPX sold-off to $2248, the Dow retreated to $19748. There is room for a further deeper correction to $2240 and $19630, the 38.2% retracement on Dec 5th to Dec 14th rally.

The US dollar took off across the board, sending the EURUSD down to 1.0468 in Asia, a touch above the critical 1.0460 (March 2015 dip). Although the pair rebounded on decent dip-buying orders approaching 1.0460, the EURUSD bias remains comfortably negative on the back of growing divergence between the US and EU yields.

Firmer US yields and the broad-based US dollar rally have equally taken their toll on gold prices. The yellow metal shortly slipped below $1135. Although the lack of appetite in gold could encourage a further extension in gold’s race to the bottom, higher inflation expectations will at some point resuscitate interest in gold for hedging purposes.

Cable tanked to a two-week low, heading into the Bank of England (BoE) MPC meeting. The BoE is expected to maintain the bank rate at the historical low of 0.25%, to make sure that the monetary conditions in the UK remain supportive of the economy through the Brexit. Traders are seeking top selling opportunities in Cable for a further slide to 1.2405 (major 38.2% retracement on Oct 7th flash crash to Dec 6th high), before 1.2295 (Fibonacci’s 50% level).

The USDJPY soared to 117.85 in Tokyo. The divergence between the Fed and the Bank of Japan (BoJ) moves the next target to the 120.00 handle, last seen on February 2016.

Solid deterioration in the carry appetite, amid Fed’s more aggressive rate tightening outlook, sent the AUDUSD 140 pips lower to 0.7384. Solid resistance is seen at 0.7465 (major 38.2% retracement on Dec 1st to Dec 14th rise) then 0.7500. Failure to clear offers should pave the way for a pullback to 0.7370 (Dec 1st low), before 0.7310 (Nov 21st low).