Morning Market Update 04.05.2022

Asset markets reflect jittery positioning ahead of the FOMC tonight. Should the Fed deliver on the widely anticipated outcome of a rate hike and hawkish guidance this will no doubt create further drag on equities near-term.  Recent comments from Fed chairman Powell have acted as a bedrock for USD bulls and traders will be keen to see how the central bank’s view has developed in the last month. 

Key Factors for Today

• Markets braced for May FOMC
• Oil prices lower on China demand concerns 
• Fed tonight, BOE tomorrow

Coming Up

• US ADP employment change
• May FOMC

Traders Prepare for Powell 

European markets are trading with a better tone on Wednesday with equities indices retracing yesterday’s losses. The market is bracing itself for the FOMC this evening. The Fed is well signalled to hike rates by .5% and is indicating that further such hikes are likely needed across the remainder of the year as the central bank continues to battle soaring inflation. 

Recent Fed commentary has been fairly uniform in pointing towards such a move. With that in mind, the market reaction to today’s decision will primarily fall on the guidance given by the Fed. The current move higher in equities might suggest that traders are anticipating the Fed to moderate its outlook slightly on the back of recent data disappointments. 

Oil Price Fall on China Demand Fears

In the commodities space, oil prices have seen firm selling today with the market moving back towards weekly lows. A firmer US Dollar has certainly created a headwind to higher prices in oil. However, the bigger driver here appears to be growth concerns on the back of disappointing PMI data releases this week in China, the US and the eurozone. 

Recent lockdowns in China, in particular, have created a great deal of uncertainty. The Q1 GDP miss has underscored concerns over economic activity in the world’s second largest economy. With lockdowns continuing now, oil demand (particularly from the shipping sector) has fallen significantly. 

Gold Price Steady Ahead of the Fed

In the metals complex, gold prices are starting with a softer bid on Wednesday. Near-term, the prospect of a stronger US Dollar is weighing on demand for the yellow metal. Looking ahead to tonight’s FOMC meeting, should the Fed follow through with a .5% rate hike and hawkish signals in its outlook, gold prices are likely to stay pressured as the Dollar moves higher. However, worth noting that given the hawkish expectations linked to the Fed, and change in this narrative could easily fuel profit-taking after the USD rally, creating support for gold. 

GBP Traders Waiting for BOE 

Elsewhere, in G10 FX, the Aussie remains well bid following the recent rate hike from the RBA this week. Looking ahead at the rest of the week, the BOE will follow the Fed tomorrow, with traders anticipating a rate increase from the UK central bank also. Given the hawkish expectations for the Fed, any sense of disappointment for USD bulls will likely be well expressed against USD given the hawkish BOE expectations for tomorrow.