CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Central Bank Week: Fed, BOE, and ECB meeting previews - USD, EUR, GBP, S&P 500

By Daniela Hathorn

14:40, 31 January 2023

By Daniela Hathorn

14:40, 31 January 2023

Share this article

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
Federal Reserve Building in Washington, DC
Federal Reserve Building in Washington, DC - Source: getty images

It’s that time of the month again when we get the latest employment data in the US, but this time we also have three major risk events in the previous days. The Federal Reserve meeting will be the key event this week, followed by the Bank of England (BOE) and European Central Bank (ECB) meetings on Thursday. 

 

Federal Reserve

Markets are convinced that the Fed will hike just 25bps at this meeting after the latest economic data has evidenced that growth in the US economy has started to slow. Retail sales, consumer prices, industrial production and factory gate prices were all below expectations in December, a good thing for those hoping for a more dovish Fed, but a bad sign for the economy. In fact, we’ve seen on the back of these a shift in the “bad data is good” mentality that traders had whilst the Fed was on its fierce rate hiking path.

If you look at equity markets now you can start to see the uncertainty that this change in mentality is causing. That said, both the S&P 500 and the Nasdaq have managed to break above their 200-day SMAs and their 2022 descending trend lines, which is a key turning point and a clear sign of a breakout. The key test now is going to be whether they can hold above these two levels after the meeting on Wednesday, at which point there is likely to be further upside if so. Watch out also for the RSI divergence. In the past, when a new high in RSI is failed to be matched by a new high in price (as we saw last week) we see a pullback below the previous low (3800 in this case) before moving back higher.

S&P 500 daily chart

S&P 500 daily chartS&P 500 daily chart. Photo: capital.com. Source: tradingview

A lot is going to depend on the messaging from the meeting. So far, as higher borrowing costs have slowed economic growth, some FOMC members have started to acknowledge the need to stop and assess the impact the 425bps of hiking in 2022 has had on the economy, which suggests a possible pause to rate hikes after the February meeting. Markets are currently positioned for another small rate hike in March but in the past, some officials have suggested that another one in May will likely be needed. This is likely going to be a key focus for traders as they want to know where the terminal rate will be, but more importantly how long will it remain at that level. This is where there is the most disagreement between the Fed and the markets, as the central bank expects rates to be above 5% in December whilst the latter see a few rate cuts before year-end.

If the messaging suggests a possible realignment in the terminal rate and its duration then equity markets will likely get another boost whilst the dollar resumes its downward trend. But I have the feeling Powell is going to stick to his hawkish stance reiterating that despite the welcome easing in inflationary pressures it is not the time to be complacent and risk under-tightening, meaning the recent run in risk sentiment may well be over for the time being. 

 

Bank of England

Market pricing is leaning towards a 50bps hike on Thursday with just 15% expecting a more modest 25bps. Two members, Tenreyro and Mann, voted to leave policy unchanged at the December meeting so the vote split is something that there is a struggle to find a consensus on. Those two members are likely going to remain as dissents at this coming meeting but the question is whether any other member will have made the move, something that seems unlikely but could happen.

AUD/USD

0.67 Price
+0.970% 1D Chg, %
Long position overnight fee -0.0076%
Short position overnight fee -0.0007%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.23 Price
+0.460% 1D Chg, %
Long position overnight fee -0.0061%
Short position overnight fee -0.0022%
Overnight fee time 21:00 (UTC)
Spread 0.00013

USD/JPY

130.77 Price
-0.560% 1D Chg, %
Long position overnight fee 0.0098%
Short position overnight fee -0.0180%
Overnight fee time 21:00 (UTC)
Spread 0.010

GBP/JPY

161.18 Price
-0.090% 1D Chg, %
Long position overnight fee 0.0077%
Short position overnight fee -0.0159%
Overnight fee time 21:00 (UTC)
Spread 0.028

Unlike with the Fed, the focus for traders will be on the actual rate hike given the BOE’s history of disappointing markets and remaining on the “safe side”. Governor Bailey has been pretty clear in the past that he fears the risk of over-tightening more than under-tightening, meaning 25bps isn’t completely off the table despite inflation remaining highly elevated, hence the lack of consensus in market positioning.

The base case scenario where we see rates increased by 50bps but the messaging suggesting slowing the pace of rate hikes in March would likely see little impact on UK assets. GBP/USD could continue to hover around 1.2350 as it attempts to build the momentum to push towards 1.25, whilst the FTSE 100 struggles to recover the appetite to push higher, with support around 7,707. 

A more dovish approach, which sees 25bps at this meeting and a commitment to see further gradual rate hikes in the coming months would likely see the Pound pullback as the immediate reaction, likely below 1.21 for GBPUSD but the momentum is unlikely to see much of a change in the longer run, as long as the commitment for further hikes seems convincing. A more hawkish approach, whether that is 75bps at this meeting or a shift towards the risks of persistently high inflation in the press conference would likely see the most upside in UK bond yields and could provide the push needed to send GBP/USD above 1.25.

GBP/USD daily chart

GBP/USD daily chartGBP/USD daily chart. Photo: capital.com. Source: tradingview

European Central Bank

Markets are pricing an 82% chance of a 50bps hike taking the deposit facility rate to 2.5%. The messaging from the December meeting was pretty hawkish, with President Lagarde suggesting that there could be up to 3 more 50bps hikes before the pace is slowed. Markets are currently pricing in a 70% chance of another 50bps at the March meeting, followed by 92% that the rate hike in May will be slowed to 25bps, which seems pretty feasible. 

Another key point to figure out is what is going to happen to the balance sheet, with the General Council announcing in December that the APP would be reduced at an average pace of 115bln euros per month starting from March up until the end of Q2, with the continuation to be determined at a later date. It’s unlikely that we see any change in this, but if we do see the unwind increase and the ECB remains firm on its hawkish path then EUR/USD would likely look at moving above its 50% Fibonacci (1.0895) heading towards the 1.10 level where we could likely see some consolidation. So far the pair has found good support around 1.08.

If, on the other hand, we see focus starting to shift towards a slower pace of rate hikes, which seems highly unlikely right now given the comments we’ve had from members recently, then the reversal in EUR/USD could gather pace as sellers look to target December’s high around 1.0735. 

EUR/USD daily chart

EUR/USD daily chartEUR/USD daily chart. Photo: capital.com. Source: tradingview

Rate this article

Share this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Forex news

Still looking for a broker you can trust?

Join the 500.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading