EUR/USD struggled to capitalize on the overnight positive move to the 1.0575-1.0580 area. Aggressive Fed rate hike bets continued acting as a tailwind for the USD and capped gains. Investors eye the US ADP report, ISM PMI for some impetus ahead of the FOMC decision. The EUR/USD pair gained some positive traction on Tuesday amid modest US dollar weakness, though the intraday uptick lacked bullish conviction and ran out of steam near the 1.0575-1.0580 area. Given that the Fed's anticipated move to hike interest rates this week is already priced in, a positive risk tone undermined the safe-haven buck and extended support to the major. Traders, however, seemed reluctant to place aggressive bets and wait to see if the US central bank is ready to hike rates further to curb soaring inflation, even if the economy weakens. Hence, the market focus will remain glued to the outcome of a two-day FOMC monetary policy meeting. The Fed is scheduled to announce its decision later during the US session this Wednesday and is widely expected to raise interest rates by 50 bps. This would mark the first supersized rate increase since 2000 and the first back-to-back hike in 16 years. The US central bank could also announce plans to start shrining its near $9 trillion bond portfolio at a likely pace of $95 billion a month. Apart from this, comments by Fed Chair Jerome Powell will be scrutinized for fresh clues about the future pace of policy tightening. This will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the EUR/USD pair. Heading into the key event risk, traders might take cues from the final Eurozone PMI prints. Meanwhile, the US economic docket features the release of the ADP report on private-sector employment and ISM Services PMI. That said, any immediate market reaction to the data is more likely to be short-lived and might do little to provide any meaningful impetus to the major. Technical outlook From a technical perspective, the recent range-bound price action witnessed over the past one week or so constitutes the formation of a rectangle on short-term charts. Against the backdrop of a sharp decline since late March, this could be categorized as a bearish consolidation phase. That said, it would still be prudent to wait for a convincing break and acceptance below the 1.0500 psychological mark before positioning for any further losses. The subsequent downfall has the potential to drag spot prices towards intermediate support near the 1.0450 area en-route the 1.0400 mark and the 2017 low, around the 1.0340 region. On the flip side, immediate resistance is pegged just ahead of the 1.0600 round figure, marking the top end of a near one-week-old trading band. Sustained strength beyond would suggest that the pair has formed a near-term bottom and trigger an aggressive short-covering move. The pair might then surpass the 1.0640-1.0650 resistance zone and aim to reclaim the 1.0700 round-figure mark. The recovery momentum could further get extended, though runs the risk of fizzling out near the previous YTD low, around the 1.0760-1.0755 area.

The US central bank is set to hike its policy rate by 50 basis points in May. The Fed is also expected to start shrinking its balance sheet by $95 billion per month from June. A 'buy the rumor sell the fact' market reaction could weigh on the dollar. The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of six major currencies, rose nearly 5% in April fueled by the Fed’s apparent willingness to tighten its policy in an aggressive way. The FOMC is widely expected to hike its policy rate by 50 basis points (bps) following the May policy meeting and unveil its plan to start shrinking the balance sheet by $95 billion per month from June. Markets have been buying the rumor and the question on traders’ minds will be whether it will be the right time to sell the fact when the Fed announces its policy decisions on Thursday, May 4? Hawkish scenario According to the CME Group FedWatch Tool, markets are pricing a 94.5% probability of a total of 125 bps in the next two meetings. Additionally, the benchmark 10-year US Treasury bond yield is already up more than 50% since early March. Both of these market developments suggest that there isn’t much room for a hawkish surprise. Nevertheless, in case FOMC Chairman Jerome Powell draws attention to ‘front loading’ rate increases and doesn’t outright dismiss a 75 bps hike in the near future, the dollar could continue to gather strength. Additionally, it would also be dollar-positive if Powell downplays growth concerns and reiterates that they will stay focused on taming inflation, especially with the coronavirus-related lockdowns in China playing into supply chain issues. Dovish scenario The data published by the US Bureau of Economic Analysis showed that the Gross Domestic Product (GDP) decreased at an annual rate of 1.4% in the first quarter of 2022. Moreover, the annual Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, edged lower to 5.2% in March from 5.3% in February (revised from 5.4%).  The Fed could voice its concerns over the heightened uncertainty surrounding the economic outlook and reassure markets that they will turn patient and watch the developments before deciding on the pace of future rate hikes. Moreover, an optimistic tone on the inflation outlook is likely to be seen as a dovish shift in language and weigh on the dollar. Finally, the Fed’s quantitative tightening plan is expected to consist of a reduction of its holdings of US Treasury bonds and mortgage-backed securities by $60 billion and $35 billion, respectively, per month from June. If the Fed decides to shrink its balance sheet at a softer pace, the dollar is likely to come under heavy selling pressure. Neutral scenario The Fed might acknowledge the worsening economic outlook but argue that the economy and the labor market could handle aggressive rate hikes in the near term, which are necessary to battle inflation. A 50 bps hike in May, a total reduction of $95 billion per month in the Fed’s holdings from June and an open door to more 50 bps rate increases in the upcoming meetings should be more or less in line with what the markets have been pricing. Thus, the initial ‘buy the rumor sell the fact’ market reaction in the neutral scenario is likely to hurt the dollar and trigger a long-overdue correction.  Nonetheless, the policy divergence between the Fed and other major central banks should continue to support the greenback over the medium term.

China is the world's second-largest consumer and the world’s top importer of crude oil. In the face of adversity, is its economy likely to slow down? Crude oil prices ended slightly higher yesterday after a volatile session, caught between weakening demand in China and the prospect, closer than ever, of a European embargo on Russian oil imports. In the economic capital of Shanghai, where more than 25 million inhabitants have been locked up for a month, anyone who tests positive for coronavirus is sent to a quarantine center, even if they are asymptomatic. Apparently, China is sticking to this “zero-covid” policy that, ironically, has even become a new standard of freedom as similar restrictive models that run counter to individual freedoms were followed by some countries, including Australia, Canada, and New Zealand not so long ago. On the other hand, several countries, including Hungary, Denmark, France, the United States, and Britain, have recently announced they are moving their embassies back to Kyiv as the security situation in the Ukrainian capital improves. As Hungary will not support sanctions on Russian oil and gas shipments, Slovakia says it will seek exemption from any EU embargo on Russian oil. Therefore, the EU executive committee could spare both Slovakia and Hungary an embargo on buying Russian oil, taking into account the dependence of both countries on Russian crude. Speaking of Russian imports, it can also be noted that in 2021, Russia supplied Europeans with 30% of crude oil and 15% of petroleum products. Meanwhile, the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC), led by Riyadh, and their ten partners, led by Moscow (OPEC+), are going to meet on Thursday (May 5) by videoconference to make any adjustments to their production. The market does not expect much from this meeting, as the current target of 400k barrels per day should be sustained. It’s despite the cartel’s struggling to pump such volumes, notably given the current political crisis in Libya – the producing country endowed with the most abundant reserves in Africa – which has seen its oil infrastructure blocked, where oil operations have been stopped since mid-April. Regarding the US dollar, the safe-heaven currency – still the king of international trade – remains strong, with a dixie hovering around its highs in a range marked between 102.750 and 103.930. The latter remains a strong resistance to break out before we see further moves towards the upside. Charts Figure 1 – US Dollar Currency Index (DXY) CFD (daily chart) Figure 2 – WTI Crude Oil (CLM22) Futures (June 2022 contract, daily chart) Figure 3 – RBOB Gasoline (RBM22) Futures (June 2022 contract, daily chart) Figure 4 – Henry Hub Natural Gas (NGM22) Futures (June 2022 contract, daily chart)

The Federal Reserve is very likely to raise rates today to 0.50%. There is a case to be made for the idea of raising rates immediately to 0.75%. Let’s get this ball rolling. The Federal Reserve is so incredibly behind the curve it is embarrassing to the entire nation. The days of easy money are over. Get over it everyone. Most market participants will be trying to cross the valley without a bridge believing that as the market is expecting a hike it is already priced in. So take advantage and buy into this. It is a psychological subset of always looking across the valley and buying the dip which has pervaded equity markets for the past two years with a high degree of intensity. Human beings decision make/function on the pillars of recency, frequency and intensity. So we have a perfect set up as the fundamental underpinnings fade away under the hoofs of all the bulls, read the entire herd, and they stand their ground only to find themselves in the midst of a nothing but a sea of potential sellers. As an economists of some years, can I tell you it has never looked as ugly as this. We are about to begin an historically intense and tectonic plate ripping interest rate hiking cycle by the Fed, and around the world. There will be no escape, and this first move should only be viewed as a baby step to what is coming. A flurry of rate hikes back toward near normal, probably way up at 3.25%. Coming late and attempting to fight inflation, but the nature of this inflation will see the Fed’s efforts being akin to pouring water on an oil fire. In case you did not know, this is not a good idea. The rate hikes designed belatedly will not work on this latest kind of inflation. The US consumer will be further squeezed and totally collapse. Hence the risk of a US recession joining that of China and Europe by year end. Who would in their right mind cross this valley without a bridge. It will only end in flames.

The Federal Reserve is very likely to raise rates today to 0.50%. There is a case to be made for the idea of raising rates immediately to 0.75%. Let’s get this ball rolling. The Federal Reserve is so incredibly behind the curve it is embarrassing to the entire nation. The days of easy money are over. Get over it everyone. Most market participants will be trying to cross the valley without a bridge believing that as the market is expecting a hike it is already priced in. So take advantage and buy into this. It is a psychological subset of always looking across the valley and buying the dip which has pervaded equity markets for the past two years with a high degree of intensity. Human beings decision make/function on the pillars of recency, frequency and intensity. So we have a perfect set up as the fundamental underpinnings fade away under the hoofs of all the bulls, read the entire herd, and they stand their ground only to find themselves in the midst of a nothing but a sea of potential sellers. As an economists of some years, can I tell you it has never looked as ugly as this. We are about to begin an historically intense and tectonic plate ripping interest rate hiking cycle by the Fed, and around the world. There will be no escape, and this first move should only be viewed as a baby step to what is coming. A flurry of rate hikes back toward near normal, probably way up at 3.25%. Coming late and attempting to fight inflation, but the nature of this inflation will see the Fed’s efforts being akin to pouring water on an oil fire. In case you did not know, this is not a good idea. The rate hikes designed belatedly will not work on this latest kind of inflation. The US consumer will be further squeezed and totally collapse. Hence the risk of a US recession joining that of China and Europe by year end. Who would in their right mind cross this valley without a bridge. It will only end in flames.

EUR/USD - 1.0520 Euro's decline to 1.0491 (New Yoyk) on Mon due to renewed usd's strength on gain in U.S. yields suggests correction from Thursday's 5-year bottom at 1.0472 has ended and re-test of this key sup is envisaged after consolidation, loss of downward momentum would limit weakness to 1.0435/40. Only above 1.0568 prolongs choppy swings above 1.0472 and may risk gain towards 1.0592 but reckon 1.0630/35 should cap upside. Data to be released on Tuesday New Zealand building permits, GDT price index, Australia RBA interest rate decision Japan Market Holiday, China Market Holiday. France budget balance, Germany unemployment rate, unemployment change, U.K. Markit manufacturing PMI, EU producer prices, unemployment rate. U.S. redbook, durable goods, durables ex-defense, factory orders, durables ex-transport, JOLTS job openings.