- Fed and BoC inflation-fighting credentials will be tested
- Dollar stable, yen retreats as Fed and Ukraine concerns ease slightly
- Wall Street survives another rollercoaster session, Microsoft (NASDAQ:) earnings futures rise
Will Powell scare the markets or quell the panic?
All eyes are on the Fed today as investors seek much-needed policy guidance amid spiraling inflation, growing doubts about the economic outlook and geopolitical tensions in Eastern Europe. The FOMC decision itself, expected at 19:00 GMT, is unlikely to set off any fireworks, although there is a small risk that the Fed decides to end its asset purchases even sooner. President Powell’s press conference 30 minutes later will be the main highlight as markets try to get a sense of how fast policymakers want to move in terms of policy normalization.
Powell will likely give his blessing to higher interest rates in March, but exactly what will follow is up for debate. There is no dot chart at the January meeting, so Powell’s tone will be very important in dictating sentiment. If he signaled that more than one rate hike per quarter might be needed to fight inflation, that could send stocks falling.
Another burning question for markets right now is the timing and pace of the Fed’s balance sheet reduction plan. Powell is unlikely to reveal much at this point, so it will all depend on how worried he is about inflation and whether he tries at all to assuage investors’ fears that the Fed will eventually tighten its monetary policy. too aggressively.
BoC: A “surprise” rate hike?
The Bank of Canada will announce its decision a few hours before the Fed and could opt for a head start on rate hikes even if its latest forecasts did not foresee such a decision before April at the earliest. With a strong labor market and inflation at a 30-year high in Canada, a surprise rate hike is more than possible from a central bank with a history of shocking markets. Although it’s not exactly considered a big surprise when the odds of a rate hike hit 80%.
Therefore, it is questionable whether the Canadian dollar will be able to make another push to the recent high of C$1.2450 per dollar in the near term.
Dollar society and pound ignore ‘partygate’ debacle
The greenback’s latest resurgence negated the slight rebound enjoyed by riskier currencies in December and early January when sterling and the pound rallied the strongest.
The is currently trading near two-week highs, rallying above the 96.0 level and awaiting further direction from the Fed. The yen, however, gave up some of its recent gains as safe-haven flows eased somewhat amid no further escalation in the standoff between Washington and Moscow over Ukraine.
The pound was steady around $1.35, showing little nerve even as things keep getting worse for British Prime Minister Boris Johnson, who is under investigation for hosting a birthday party during lockdown. The next 24 hours could be critical for Johnson when the report on the “partygate” debacle is expected to be released.
Microsoft Helps Stocks Recover, Tesla (NASDAQ:) and Fed Tests Still Ahead
In equity markets, most stocks were in the green, although some Asian markets remained under pressure. European stocks opened sharply higher, extending their gains into a second day, despite another wild session on Wall Street on Tuesday.
US stocks fell at the open, started to rebound late in the session, before falling just before the close. The S&P 500 ended the day down 1.2%, while the slid 2.3%. However, volatility quickly died down after Microsoft cheered markets by predicting that its cloud unit will see faster growth in the current quarter, following slightly disappointing growth in the reporting period.
Microsoft shares rose more than 3% in premarket trading and U.S. e-mini futures rose sharply on Wednesday, led by Nasdaq futures, which last traded in 2% increase.
However, many tests are ahead for the markets, as outside of the Fed meeting, Tesla will announce its results after the closing bell.