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Daily market analysis

Fed raises interest rate by 75bps, US stock market falls

November 3, 2022

US stocks tumbled heavily on Wednesday, witnessing fresh downside momentum and surrendered all of their daily gains after the Fed chief Powell said the Fed still has some ways to go in its policy cycle as rates could peak at higher levels than previously thought. The US Federal Reserve announced that it raised the policy rate by 75 bps to the range of 3.75-4% as expected and suggested policymakers would soon slow the pace of QT.

However, Fed Chair Jerome Powell’s speech spurred turmoil in the market as he said that a restrictive policy stance should stay for some time and the ultimate level of rates would be higher than previously expected. The comments revived the odds of a fifth 75 bps in December and weighed heavily on global equity markets. In the Eurozone, the Euro might be under pressure due to interest-rate differentials between the Fed and the European Central Bank (ECB), as the United States will enjoy rates at 4.50% by the end of 2022, while the Eurozone will likely be at 2%.

The S&P 500 and Dow Jones Industrial Average both slumped dramatically on Wednesday as the S&P 500 suffered its worst rout on a Fed decision day since January 2021. The S&P 500 was down 2.5% daily and the Dow Jones Industrial Average also dropped lower with a 1.6% loss for the day. All of the eleven sectors in the S&P 500 stayed in negative territory as the Consumer Discretionary sector and the Information Technology sector is the worst performing among all groups, losing 3.79% and 3.47%, respectively. The Nasdaq 100 meanwhile dropped the most with a 3.4% loss on Wednesday and the MSCI World index was down 1.7% for the day.

Main Pairs Movement

The US dollar advanced higher on Wednesday, regained upside strength and pared all of its earlier losses around the 112.00 area during the US trading session after Fed Chair Jerome Powell surprised with a hawkish speech. He mentioned that slowing the pace of rate hikes will become necessary at some point but interest rates in the United States would go higher than September’s projections. Therefore, the hawkish statement increased volatility despite a slightly dovish FOMC monetary policy statement.

GBP/USD declined lower on Tuesday with a 0.80% loss after the cable retreated from daily highs and holds lower ground near a one-week low amid renewed US dollar strength. On the UK front, the Bank of England is less likely to impress the GBP/USD buyers even by announcing the 75 bps rate hike amid the fears of the UK’s recession. Meanwhile, EUR/USD surrendered its daily gains and plunged 150 pips from weekly highs amid a stronger US dollar and a hawkish Federal Reserve. The pair was down almost 0.60% for the day.

Gold dropped with a 0.77% loss for the day after extending its intra-day side to the $1,632 area during the late US trading session, as Powell’s hawkish commentary undermined the precious metal. Meanwhile, WTI Oil advanced higher with a 1.84% gain for the day as oil price pares recent losses around the $89.00 area.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD keeps hovering eventually in a range from 0.9850 to 0.9950 level as investors stay on the sidelines while preparing for the Fed’s policy announcements. The central bank is expected to raise interest rates by 75bps for the fourth consecutive meeting and prepare market players for a slower pace of quantitative tightening sometime shortly. With the mounting speculations that this would be the last 75 bps hike, and the December meeting will bring a 50 bps move, the US data showed a different opinion. The US inflation is still stubbornly high, while growth has probed resilient. Furthermore, employment-related data released these days has shown the sector is strong enough to bear with QT. The US ADP survey just released showed that the private sector added 239K new job positions in October, beating expectations of 195K, which shows the central bank could easily maintain its aggressive path for a couple more meetings. Investors need to keep eye on what Chair Jerome Powell’s stance is, which would highly change the direction of the equity market and the US Dollar.

From the technical perspective, the four-hour scale RSI indicator fell sharply to 41 as of writing, suggesting that the EURUSD was surrounded by heavy selling pressure during the first half of the US trading session. As for the Bollinger Bands, the pair was capped by a 20-period moving average and U-turned to below 0.9870 level. Therefore, we think the pair was more favoured to the downside path in the near term to challenge the lower band support around the 0.9844 level.

Resistance:  1.0000, 1.0092

Support: 0.9751, 0.9664, 0.9548

GBPUSD (4-Hour Chart)

The GBPUSD has continued to extend losses after having dropped below 1.1500 in the second half of the day on Wednesday, as US Dollar managed to regather upside momentum ahead of Federal Reserve’s policy announcement, forcing the pair to stay under modest bearish pressure. The Fed is on track to raise 75 basis points once again in November. However, the decision itself is unlikely to trigger a significant reaction as investors stay focused on the US central bank’s communique on the December policy step. Heightened expectations about a smaller 50 bps Fed rate hike in December made it difficult for the greenback to extend its rally in the past couple of weeks. In case FOMC chairman Jerome Powell notes that a 50 bps rate hike will be on the table at the last policy meeting of the year, Wall Street’s main indices could rise dramatically and trigger a US Dollar selloff in the late US trading session. Earlier, the pound was struggling to make a decisive move in either direction as FTSE 100 index and US stock index futures traded virtually unchanged on the day, reflecting a cautious market stance.

From the technical perspective, the four-hour scale RSI indicator dropped to 43 as of writing, suggesting that GBPUSD is amid strong downside traction. As for the Bollinger Bands, the pair was falling from a 20-period moving average to the 1.1460 level at the time of writing. As a result, we think the downside trend of the pound would persist unless breaking through the 1.1634 resistance.

Resistance: 1.1633, 1.1738

Support: 1.1281, 1.1114, 1.0955

XAUUSD (4-Hour Chart)

Gold has lost its bullish traction and retreated below the $1650 mark after having climbed toward $1660 earlier in the day, as investors may have decided to book their profits while gearing up for the Fed’s rate decision. Although the main event will be the release of the monetary policy statement, the market has already priced in a 75 basis points hike. ll eyes now remain on the expected 75 bps Fed rate hike decision, with Chair Jerome Powell’s press conference to grab the limelight, as investors eagerly await any hints of a smaller rate increase from December. The speculation about a signal to softer hikes from December has been increasing over the last weeks, and the market is split about the size of the next move. With extremely sensitive about the Fed’s forward guidance, any hint might trigger a significant deal of volatility. Meanwhile, the benchmark US 10-year T-bond yields hold a steady high level above 4%, which weighs on the non-yielding yellow metal.

From the technical perspective, the four-hour scale RSI indicator remained at 50 as of writing, suggesting that gold has no clear direction with investors staying cautious. As for the Bollinger Bands,  the yellow metal rebounded from the 20-period moving average, $1645 level, and was moving with little volatility ahead of Fed’s decision, which is a signal that gold has no clear path in the near term. Hence, we think investors need to focus on the following Fed’s conference to look for clues about the future direction.

Resistance: 1675, 1700, 1725

Support: 1632, 1615, 1600

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EURECB President Lagarde Speaks16:05 
GBPComposite PMI (Oct)17:3047.2
GBPService PMI (Oct)17:3047.5
GBPBoE Interest Rate Decision (Nov)20:003.00%
GBPBoE Gov Bailey Speaks20:30 
USDInitial Jobless Claims20:30220K
USDISM Non-Manufacturing PMI (Oct)22:0055.5
GBPBoE Gov Bailey Speaks22:15