Daily market analysis

May 5, 2022

The Federal Reserve stated that quantitative tightening or the removal of assets from the central bank’s $9 trillion balance sheet will begin on June 1. The Fed will first allow up to $47.5 billion of US Treasuries and mortgage-backed securities to flow off the balance sheet in this situation. That rate would rise to $95 billion three months later.

Investors pondered the Federal Reserve’s monetary policy statement, in which the central bank announced a 50-basis-point rate hike for the first time since 2000. The increase is double what the Fed did in mid-March when it raised rates 25 basis points for the first time since 2018. The federal funds rate now has a target range of 0.75 % to 1.00 %, up from the current range of 0.25% to 0.50%.

The S&P 500, Dow Jones, and Nasdaq all raised and extended their gains Wednesday afternoon as Federal Reserve Chairman Jerome Powell signaled that a future 75 basis point rate hike is not currently being discussed. The yield on the benchmark 10-year Treasury note climbed to 2.25%.

China’s markets will resume trading Thursday after a three-day break to test whether Beijing has convinced investors that the strict Covid lockdown hasn’t hampered efforts to boost economic growth and pledges to go gentle on big technology companies.

Stocks may have come under pressure after falling earlier this week in Hong Kong, with Friday’s rally reversing after China’s leaders vowed to stimulate a faltering economy and hinted at a softer stance on the private sector. Economic pessimism means the yuan is likely to continue to struggle and bonds are likely to be supported, although the outcome of the Fed’s key meeting on Wednesday will also help determine their direction.

In addition to the widely expected rate hike at Wednesday’s meeting, investors are also awaiting a new outlook from the Fed, a key driver of Chinese assets given the widening policy divergence between Beijing and Washington.

Main Pairs Movement

The central bank raised interest rates by 50 basis points and states that it would begin shrinking its balance sheet on June 1. Following the Fed’s monetary policy announcement, the dollar plummeted. On the other hand, U.S. government bond yields eased, with the 10-year Treasury yield closing at 2.93% after peaking at 3.01%.

Meanwhile, European Commission President Ursula von der Leyen proposed the sixth wave of sanctions against Russia, which would phase out Russian crude oil and refined products by the end of the year. The news has the potential to send the European indexes down again.

The AUD/USD rate is currently around 0.7260, while USD/CAD is down to 1.2730. The EUR/USD pair trades at 1.0620, while GBP/USD advanced beyond the 1.2600 figure. Even safe-haven currencies like CHF and JPY posted gains against the greenback. Gold currently trades at $1,883 a troy ounce while crude oil price resumed their advances, with WTI now at around $107.60 a barrel.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair advanced on Wednesday, flirting around the 1.050~1.055 level ahead of the US Federal Reserve monetary policy announcement. The pair regained some upside traction and touched a daily high near 1.055 in the late European session, but then failed to preserve the bullish momentum heading into the US session. The pair is now trading at 1.0551, posting a 0.31% gain on a daily basis. EUR/USD stays in the positive territory amid a quiet market mood, as investors stopped taking any potential decisions and wait for the rate hike decision by the Fed. Fed chair Jerome Powell is expected to announce a rate hike by 50 basis points today due to overheating inflation. For the Euro, European Commission President Ursula von der Leyen said earlier today that they will phase out the Russian supply of crude oil and refined products, which is also the sixth round of sanctions against Russia.

For the technical aspect, the RSI indicator is 50 figures as of writing, suggesting that there is no obvious trend for the pair now and the market stays quite ahead of the key rate decision. As for the Bollinger Bands, the price crossed above the moving average and keep heading north, therefore the upside momentum should persist. In conclusion, we think the market will be slightly bullish as the pair is heading to re-test the 1.0570 support, a break above that level might open the road for near-term profits.

Resistance:  1.0570, 1.0728, 1.0810

Support: 1.0485

GBPUSD (4-Hour Chart)

The pair GBP/USD edged higher on Wednesday, rebounding from a weekly low that touched earlier today amid positive risk sentiment and a dismal ADP report. The pair staged a goodish rebound and refreshed its daily tops above the 1.253 level during the European session, then retreated back to surrender most of its daily gains. At the time of writing, the cable witnesses some fresh selling and stays in negative territory with a 0.04% loss for the day. The private sector employment in the US rose by 247,000 in April, which is well below the market’s expectations and dragged the US dollar lower. However, the prospects for a more aggressive policy tightening and a 50 bps rate hike by the Fed today should limit the losses for the greenback. For the British pound, traders are waiting for the Bank of England’s policy announcements on Thursday, but a hawkish Fed today might let the cable face renewed bearish pressure in the second half of the day.

For the technical aspect, the RSI indicator is 41 figures as of writing, suggesting that the downside is more favored as the RSI stays below the mid-line. For the Bollinger Bands, the price failed to cross the moving average and dropped towards the lower band, indicating that a downside trend could be expected. In conclusion, we think the market will be bearish as the pair is heading to re-test the 1.2430 support, which is the 2022 low for the cable. The falling RSI also reflects bear signals.

Resistance: 1.2585, 1.2761, 1.3070

Support: 1.2430

USDCAD (4-Hour Chart)

As the US dollar remain under bearish pressure ahead of the Federal Reserve monetary policy decision later in the session, the pair USD/CAD extended its slide that started yesterday in a choppy trading session. The pair touched a daily high above 1.285 level in the early US session, then lost its positive traction and suffered daily losses. USD/CAD is trading at 1.2817 at the time of writing, losing 0.18% on a daily basis. The pair is trading in a narrow range as investors get ready for the Fed monetary policy decision, which is expected to raise rates by 50 bps and begin its balance sheet reduction. On top of that, surging crude oil prices also provided strong support to the commodity-linked loonie and weighed on USD/CAD, as the latest news showed that European Commission is ready to phase out all imports of Russian oil within six months.

For the technical aspect, the RSI indicator is 46 figures as of writing, suggesting that the market is relatively quiet as the RSI stays flat without any directions. As for the Bollinger Bands, the price fell from the upper band and then crosses below the moving average, therefore the lower band becomes the loss target. In conclusion, we think the market will be slightly bearish as long as the 1.2868 resistance line holds. On the upside, the Fed’s policy announcement later in the session might push the pair higher above that resistance.

Resistance: 1.2868, 1.2902

Support: 1.2721, 1.2544, 1.2473

Economic Data

CurrencyDataTime (GMT + 8)Forecast
NZDEmployment Change (QoQ) (Q1)06:45 
GBPComposite PMI (Apr)16:3057.6
GBPServices PMI (Apr)16:3058.3
GBPBoE Inflation Report19:00 
GBPBoE Interest Rate Decision (May)19:001.00%
GBPBoE MPC Meeting Minutes19:00 
USDInitial Jobless Claims20:30182K
GBPBoE Gov Bailey Speaks21:15