⏬US30 drops almost 1% ahead of Fed

❗ Fed will make the first rate decision of 2023 today at 7:00 pm GMT

FOMC is set to announce rate decision today at 7:00 pm GMT. It looks almost certain that the bank will go with a 25 basis point rate hike, what would be a second slowdown in tightening pace in a row. However, such decision was seen as hawkish last time. Will it be the same this time? Here are key things you need to know ahead of today's FOMC decision:

• Market is pricing in a 25 basis point rate hike with almost no probability of 50 bp rate move. However, some institutions forecast a 50 bp rate hike although they are in minority

• Market expects rates to peak at 5% but a lot of Fed members suggested that rates needs to rise beyond that

• Majority of Fed members signaled in recent weeks that 25 bp rate hike is in play

• Q4 US GDP growth turned out to be very strong at 2.9% annualized

• US retail sales dropped in November and December

• Jobs market remains strong - claims drop to multi-month lows, significantly below 200 thousand, and JOLTS climb above 11 million. However, ADP report disappointed signaling jobs gain of just slightly above 100k in January

• According to some Fed members, there is a chance to push inflation down to the goal even with strong labor market

• This would signal a possibility of a 'soft landing' and allow Fed to focus on other monetary policy settings rather than rates (i.e. trimming of balance sheet)

• Investors will look for hints in a statement whether further rate hikes would be appropriate or whether Fed is readying a pause in cycle

• Powell will likely retain hawkish bias and will repeat that there is a lot more to do. However, he may also signals that chance of achieving 'soft landing' has increased

According to market pricing, Fed is expected to be less active in the near future when it comes to rate hike and cuts cannot be ruled out in the later part of the year. Unless market changes its view, indices may resume climb after a knee-jerk negative reaction. Source: Bloomberg

Given the above, today's meeting can be seen as hawkish even if the Fed delivers a 25 basis point rate hike, in-line with expectations. On the other hand, any changes in the statement as well as shifts in Powell's attitude may signal that pause in the rate hike cycle could arrive as soon as end-Q1. We see a chance for drops on indices and strengthening of USD after today's decision. However, those are likely to be short-term moves after which markets will resume moves in-line with January's trends - strong gains on Wall Street and sell-off on USD market.

US30 is trading 0.8% lower today. Index is trading within a triangle pattern and today's FOMC meeting may lead to a test of either limit of the pattern. Source: xStation5