FOMC Talking Points:

• Tomorrow is the big day with the Fed expected to announce another 75 basis point rate hike.
• There’s still some remaining potential for a 100 bp hike at tomorrow’s meeting, with markets showing a current probability of 18% for such a move. But, the Fed will also be issuing updated guidance and forecast so there’s ample opportunity for the Fed to inject additional hawkishness without needing to go 100. But, going 100 would certainly make a statement from a bank that seems to be wanting to get their hawkish message across.
• The analysis contained in article relies on price action and chart formations. 

September FOMC is almost here and tomorrow we’ll hear whether the bank decides to go for a 100 bp hike or whether we’ll get the 75 bps that markets have been pricing-in for some time now.

We had a similar scenario in June. Markets began to price in a 75 bp hike during the Fed’s blackout window, and while there was some skepticism as to whether the bank would go that aggressive, it was highlighted in a report published on the Monday before the meeting. The report was written by the Wall Street Journal’s Chief Economics Correspondent, Nick Timiraos, and it had the feeling of being well-sourced within the Fed, highlighting the fact that the bank may, in fact, hike by 75 basis points.

So, when they did announce the hike a couple days later, there wasn’t much shock. And a couple of days after that, stocks bottomed and then embarked on a two-month-long rally that tacked on about 20%. So – technically – stocks moved into a ‘bull market’ even with the Fed’s aggressive hiking plans well in focus.

But, it was perhaps the telegraphing of the move that remained so interesting because for a Federal Reserve that’s continually talked up the prospect of ‘soft landings,’ giving a warning before a move sure did seem as though it was an effort to soften the blow. And this is likely playing into that expectation for a policy pivot at the Fed despite the fact that inflation remains far too high.

Nonetheless, after last week’s CPI release expectations began to grow for a 100 bp hike at tomorrow’s meeting. This ran as high as 34% but has since whittled down to 18%, as of this writing. Interestingly, I highlighted this dynamic last week after the CPI print along with Christopher Vecchio, noting that markets could be looking for another report from Mr. Timiraos ahead of this week’s FOMC rate decision.

That dropped yesterday – and there was no mention of 100. Instead, Timiraos presented Powell as an inflation hawk, trying to take on a role and a tone similar to that of Paul Volcker. Little in that report seemed dovish to me, and if anything, it seemed there was a message to markets that a pivot isn’t coming until the Fed is sure that inflation is back under control.

So – perhaps the Fed wants to deliver some shock to markets tomorrow, and if they hike by 100 without a warning this time, that would be the takeaway. Or, alternatively, they might not see the need to go 100 this meeting given the fact that it’s a quarterly meeting and they’ll also be issuing updated guidance and forecasts.

The one thing that is and should be clear is that the Fed is hawkish and will remain as such as former Vice Chair, Richard Clarida, has said, ‘The Fed’s really a single mandate central bank’ and that they’ll hike to 4% ‘come hell or high water.’
 

USD

How does this impact the Dollar? Well, it already has but there could be more in store. Perhaps disconcertingly recent hawkish shifts in Europe have done little to dent the Dollar’s bullish trend and this is likely related to some of the drivers on the horizon for the EU. The economic outlook over Europe remains cloudy given inflationary pressure and when combined with the energy situation, it’s really difficult to muster anything other than bearishness there.

So even though the ECB has started hiking rates and has been warning of more to come, there’s been little life in EUR/USD as yet, with the currency pair continuing to grind at the parity level.

Why am I talking about EUR/USD when this is a section about the USD? Well, the Euro is 57.6% of the DXY quote so the if USD is going to put in a bullish breakout, we’re likely going to need some breakdown to show in EUR/USD and the big question here is one of timing. I’ll look deeper into EUR/USD in a moment but first, the USD chart.

The US Dollar bullish trend is mature and has been ongoing for more than fifteen months now, running from below the 90 handle on DXY all the way up to the 110 handle, which has become a recent item of resistance in the DXY that the USD has not been able to leave behind just yet.
 

US Dollar Daily Price Chart

(Click on image to enlarge)

Chart prepared by James Stanley; USD, DXY on Tradingview
 

USD Resistance

With a bullish trend as mature as what’s showing in the US Dollar, there should be some technical pull towards weakness as longer-term bulls look to pare positions or manage off risk. And when there has been an excuse for USD bears to take their shot, they have, but they’ve been quickly offset by bullish action as the trend has continued higher.

Last week saw one of these dynamics in play around CPI, with prices pulling back to support ahead of the release but putting in a straight shot up to the 110 psychological level in the wake of that report.

And after that, 110 hasn’t been able to hold the line – as there’s another item of resistance a little higher at 110.25 that’s now seen three inflections over the past two weeks. This has the look of continued breakout potential, as outlined in USD Price Action Setups yesterday, and there’s support potential at prior resistance of 109.14-109.27.
 

US Dollar Two-Hour Price Chart

(Click on image to enlarge)

Chart prepared by James Stanley; USD, DXY on Tradingview
 

EUR/USD

So now on to the Euro…

I’ve been talking about this for some time but the parity level is a major spot on the EUR/USD chart and logically speaking, it should take bears some time to break through, especially considering for how long the bearish trend has already been working.

The fundamental backdrop around Europe remains really bad and this has kept bears hitting the offer as prices have posed mild rallies. The ECB has ratcheted up the verbiage but, as yet, there hasn’t been much by way of sustainable bullish trends in the Euro.

Owing to the support pulling in off or around the parity handle, a falling wedge remains in play. And notably – last week printed both a higher high and a higher low, which could keep the door open for bullish technical themes. And there could be some rather quick invalidation, as well, with the .9950 level helping to set the low last week after the CPI-fueled reversal.
 

EUR/USD Daily Chart

(Click on image to enlarge)

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Wedge Invalidation/fill

Given the bullish technical formation on the chart, it’s not a stretch to see how one could quickly become bearish again – and that would need a negation of the bullish formation. I’m tracking this with a break of support in the .9862-.9876 area which would also bring on fresh 19-year-lows in EUR/USD.

If that doesn’t happen, however, a break of 1.0095 highlights a fresh higher-high and that opens the door for a run-up to the 1.0200 area. If that can be tested through, then there’ll be a series of higher highs and lows and that can open the door for a move up to the 1.0350 level.
 

EUR/USD Four-Hour Chart

(Click on image to enlarge)

Chart prepared by James Stanley; EURUSD on Tradingview
 

USD/JPY

There’s a Bank of Japan rate decision after tomorrow’s FOMC and this is a loaded situation, as the bank’s yield curve control strategy has been pretty stretched with the Yen weakening through much of this bullish run in the USD.

Amazingly – USD/JPY has been as much as 41.3% above 2021 low – in a non-levered currency pair. Inflation is starting to tick-higher in Japan and came-in at 2.8% for core inflation in August. The BoJ continues to cap yields on 10-year JGBs at 25 basis points, even as the rest of the world is hiking rates, and this further exposes rate divergence amongst developed economies and as long as the BoJ continues to defend that yield cap.

The big question with inflation flaring higher is whether the BoJ is nearing an adjustment of that policy. We’ll hear from the BoJ on Wednesday evening (Thursday morning in Asia).

In USD/JPY, the pair remains very close to the 145 psychological level that it hasn’t been able to break through yet. Notably, there is a double top formation that remains as a potentially bearish scenario until new highs are formed, which would nullify the setup.
 

USD/JPY Four-Hour Price Chart

(Click on image to enlarge)

Chart prepared by James Stanley; USDJPY on Tradingview
 

S&P 500

I wrote the technical forecast for equities this week and little has changed since then. I remain bearish and it really feels as though the long side of stocks is fighting the Fed, at the moment. Yesterday’s report from Nick Timiraos reiterated that to me.

It really seems as though there’s still a large ‘buy the dip’ crowd hanging around stocks waiting for the Fed to signal some type of policy pivot. And given the bank’s proclivities of the past 13 years, that’s understandable as each market dip has been matched with dovish comments or even in some cases, dovish policy moves.

What’s different this time is inflation. This is the first time in 40 years that inflation has become a problem and this is something that’s more relevant than just the stock market as it seeps into every crevice and nook and cranny of an economy, and it threatens to carry some large long-term impacts, particularly if it's not headed off. That’s where we’re at right now and this is what the Fed has to address.

In the S&P 500, last week brought a bearish engulfing candlestick which negated a prior bullish engulf. The big driver there, of course, was inflation. Yesterday saw prices bounce up for a resistance test at prior support, taken from a price action swing in a confluent area, around a couple of Fibonacci levels that align with a prior bullish trendline.

The next major area of support on my chart is the 3802 area which I’m considering as a zone down to 3786. If sellers can take this out in short order, the focus then quickly shifts to the June lows at 3639.
 

S&P 500 Daily Chart

(Click on image to enlarge)

Chart prepared by James Stanley; S&P 500 on Tradingview
 

Nasdaq

While the S&P 500 has tested some fresh lows already this week, the Nasdaq has not. Instead, the price put in a higher-low yesterday and quickly ran up for a test of resistance at prior support, around the 12,074 level. I’m tracking two more short-term support levels at 11,859 and 11,782; but the key will be whether we see another higher low in today’s session, which could keep the door open for further bounce plays into FOMC tomorrow and perhaps even thereafter.
 

Nasdaq Four-Hour Chart

(Click on image to enlarge)

Chart prepared by James Stanley; Nasdaq 100 on Tradingview
 

Nasdaq Big Picture

The more important area for directional themes in the Nasdaq is longer-term in focus, as it was the 50% mark of the 2019-2021 major move that helped to cauterize support back in June, plotted at 11,294. There’s a big area along the way, running from 11,613 up to a Fibonacci level at 11,698. This is a more short-term area of support potential that I’m tracking for tomorrow.
 

Nasdaq Daily Chart

(Click on image to enlarge)

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

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