The next few days promise to be wild and incredibly eventful for financial markets thanks to a string of central bank decisions, earnings from tech titans, and key economic data releases.
There was already a strong sense of tension in the air as investors digested a barrage of corporate earnings and key reports ahead of the Federal Reserve, Bank of England, and European Central Bank meetings. This uneasiness and overall caution have sapped the appetite for risk, sending European shares lower this morning. Given how investors are likely to remain guarded towards riskier assets, US stocks may trade lower later today. In the currency space, the dollar hit its highest level in a week amid the risk-off sentiment while gold slipped bear to $1900 thanks to a stabilizing dollar. Oil benchmarks were also under pressure due to the prospect of more rate hikes.
It is safe to say that the events of this week could set the tone for the new trading month of February. Given how markets are expecting the FOMC, BoE, and ECB to make a move, the focus is likely to be on what they say rather than the actions they take. On the earnings front, Apple, Alphabet, and Meta Platforms will be under the spotlight this week with all eyes on their results and growth outlook, especially after the mass layoffs recently announced in US-based tech companies.
What to expect from the Fed?
The Fed is widely expected to raise interest rates by 25 basis points when its meeting ends on Wednesday.
Given how the Fed is widely expected to make such a move, much focus will be directed towards the statement and Fed Chair Powell’s press conference. Powell is expected to strike a hawkish tone which is in contrast to market expectations over the Fed cutting rates near the end of 2023. This means the disconnect between the Fed and markets may add more spice to the pending meeting, as investors seek fresh clues on what to expect from the central bank this year. Dollar bulls could receive further support if Fed hawks dominate the scene. However, if markets fail to buy the hawkish rhetoric and signal for continued rate hikes, this could drag the dollar lower.
ECB Hawks to reign supreme?
Given how inflation remains at uncomfortable levels in Europe, ECB hawks are set to take the lead on Thursday. Markets widely expect the ECB to hike interest rates by 50 basis points with a firmly hawkish Largarde reinforcing expectations for further rate hikes down the road. Before the policy meeting, investors will be presented with the latest January flash inflation figures. If inflation remains at lofty levels, this may strengthen expectations around the ECB hiking rates for longer to tame price pressures.
Looking at the technical picture, EURUSD remains under pressure on the daily charts with resistance found around 1.0900. A stronger dollar seems to be fueling the downside with the next level of interest around 1.0770. A potential breakout opportunity could be on the horizon for the currency pair with the outcome of both the Fed and the ECB meetings influencing the near-term outlook.
Currency spotlight: GBP/USD
A hawkish Bank of England could inject sterling bulls with renewed confidence this week. The BoE is expected to raise interest rates by 50 basis points in the face of high inflation. Although the annual rate fell to 10.5% in December, it is still more than five times the bank’s 2% target. Given how a rate rise is widely expected, all eyes will be on the updated growth and inflation forecasts which could offer fresh clues on the pace of policy tightening. Whatever the outcome of the BoE meeting, it could translate to increased pound volatility.
Talking technicals, GBPUSD remains under pressure on the daily charts with prices approaching the 1.2300 level. A breakdown below this point could encourage a decline towards 1.2170 and 1.2120, respectively.