Fed To Hike Again But What Will Follow?

The main focus for traders today, and indeed for the week, will be the FOMC rate decision this evening. Expectations have been shifting wildly since the last meeting and recent market developments have added to uncertainty. Rate hike projections have bounced back from the “no hike” expected last month to the almost fully priced in .25% hike expected now. However, the greater focus is on the outlook beyond today’s decision and whether the Fed chooses to pause after this meeting or signals further hikes to come.


Inflation Still Key 

Inflation has been cooling steadily in recent months, allowing the Fed room to pivot lower on rates. With CPI still well above target, however, recent strength in Q1 corporate earnings suggested that the Fed likely still has room to press ahead with further hikes in a bid to bring inflation down quicker. In recent weeks, however, the backdrop has shifted again. The return of concerns for the US banking sector, as well as a greater emphasis on recession forecasts over the second half of the year, has muddied the water suggesting that the Fed might take a less hawkish view.


Recession Risks & Rate Cut Pricing

Additionally, traders will be looking to see how the Fed addresses the growing rate cuts being prices Iater in the year. Recession risks and banking sector stability will be key focus points for the market at this meeting and it will be down to Powell to strike the right tone to help keep markets stable. If Powell is seen pushing back against rate cut forecasts for later in the year, this should help firm USD up while pulling stocks lower near-term. Similarly, if Powell is seen leaving the door open for further tightening in coming months. However, if Powell signals that the Fed will likely pause after this hike or is seen not striking a firm enough tone against rate cut chatter, this should see USD sold and risk assets rebounding firmly higher.


Technical Views

Dow Jones

Despite a firm rally off the March lows, the index remains capped by the 34523.58 level for now. With momentum studies turning bearish, risks of a correction lower are growing. With this in mind, 33576.05 is the key level to watch. Below here, the 32072.32 level is the next big support to note. While 33576.05 holds as support, however, the focus is on an eventual break of resistance and a move up to the 33503.24 level next. 


Pfizer Shares Rally on Q1 Earnings Beat 

Despite a tough day for stock markets on Tuesday, shares in US pharma company Pfizer (PFE) were seen rising over the session following the release of better-than-forecast Q1 figures. Pfizer posted Q1 EPS of $1.23, well above the $0.98 the market was looking for. Additionally, revenues were seen much higher than forecast too at $18.282 billion vs $16.607 billion expected. This marks the ninth consecutive quarter of earnings growth for the company which last saw a negative quarter in Q4 2020.

Interestingly, Pfizer recorded a sharp drop in demand for its covid products, including its vaccine and antiviral pill. Of the $18.2 billion recorded in sales over Q1, covid products brought in $7.1 billion. Looking ahead, Pfizer CEO Albert Bourla said he expects this year to be a “transition year” for the company as demand shifts away from the covid products which have dominated sales over recent years.

Looking ahead, Pfizer was optimistic on its prospects noting that Q1 revenues excluding covid products were up 5% on the year. Over the year as a whole, Pfizer forecasts sales revenues of between $67 billion and $71 billion with earnings of between $3.25 - $3.45 per share. Additionally, with the majority of new product launches scheduled for the second half of the year, Pfizer expects non-covid revenues to grow at a faster pace from summer onward.


Technical Views


Shares have been moving lower over recent months, guided by the bearish trend line which continues to hold as resistance. For now, 38.70 is holding as support. However, with momentum studies still bearish and with the trend line overhead, the focus remains on a further push lower and an eventual breakdown towards the 36.80 level next. 


EURUSD Pushing Higher 

EURUSD is rallying firmly ahead of the FOMC later today. The pair has been on a strong run since the March lows, gaining around 5.5% as narrowing yield spreads between EU and US bonds help lift sentiment. Much of the driver behind the move has been the narrowing of monetary policy divergence between the Fed and the ECB. With the Fed having slowed the pace of its rate hikes this year while the ECB pushed ahead with a further full point of tightening, EUR has strengthened considerably against USD. With both central banks due to make rate decisions over the next two days, there is plenty of room for fresh volatility.


Fed in Focus 

Looking ahead to the Fed later today, the market is widely expecting a further .25% rate hike. However, beyond today’s meeting there is a great deal of uncertainty over how the Fed is likely to act. With recession fears building and banking sector woes simmering away, many players expect the Fed to take a less hawkish view on the coming months. If this proves to be the case, EURUSD looks likely to rally further into the ECB meeting tomorrow. Focus will then be on Lagarde and co. The ECB too is expected to hike by .25%, however there looks to be more room for the ECB to retain a more hawkish outlook than the Fed which, again, if seen, should keep EURUSD well supported near-term.


Technical Views


Following a steady run off the March lows, the rally has stalled for now into a test of the 1.1126 level. This area remains key resistance though, while within the bull channel which has framed the move off last year’s lows. Should price break current highs, there is room for a bigger move higher towards the 1.1503 level next. To the downside, 1.0785 and the channel lows remains the key support area to monitor. 

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