Shares Drop Ahead of Fed Interest Rate Decision

27 July 2022, 02:31

Market Focus

US shares slid on Tuesday on a combination of steadily deteriorating economic conditions, fears of recession, and extremely high inflation. The world largest retailer, Walmart Inc.’s, weak outlook highlighted the impact of inflation pressures on consumer spending. However, investors are bracing for another 75-basis-point hike amid concerns about a faltering global economy ahead of a highly expected Federal Reserve interest rate increase, with a combined 150 bps interest rate spike over June and July representing the steepest level since the early 1980s. Google’s parent company Alphabet Inc., and Texas Instruments Inc. surged after earnings, but Microsoft declined amid its lowest sales growth since 2020. It is also worth noting that McDonald’s Corp. and Coca-Cola Co.’s sales exceed expectations, while Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets which should have been registered as securities, according to three people familiar with the matter.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined on Tuesday amid the threat of an interest rate hike Wednesday, fear of recession, and poor earnings reports. The S&P 500 decreased 1.19% on a daily basis and the Dow Jones Industrial Average fell 0.7%. Eight out of eleven sectors stayed in negative territory, with the Consumer Discretionary and Communication Services the worst performance among all groups, dropping 3.38% and 2.17% respectively. Meanwhile, the Nasdaq 100 declined with a 2% loss on Tuesday and the MSCI world index fell 0.9% for the day.

Main Pairs Movement

The US dollar advanced on Tuesday, being surrounded by bullish momentum and climbing toward the 107.3 level as risk aversion took over the financial markets yesterday. The DXY flirted with the 106.2-106.5 area during the first half of the day, then started to see heavy buying and touched a daily high above the 107.2 mark in the US trading session. Escalating fears of economic slowdown in the Eurozone and the Russia-linked energy crisis continued to help the safe-haven greenback to find demand, especially with Russian gas giant Gazprom delivering just 20% of its usual natural gas provision. Market focus has now shifted to the Fed’s monetary policy meeting announcements.

GBP/USD edged lower with a 0.12% loss on Tuesday amid a stronger US dollar across the board. Investors remain concerned about a possible global recession, which has overshadowed the prospects for a 50 bps rate hike move by the Bank of England in August. The GBP/USD pair dropped to a daily low below the 1.197 level in the late European session, then regained upside traction to recover most of its daily losses. Meanwhile, EUR/USD suffered from big losses yesterday and refreshed its daily low near 1.010 mark in the US session. EU countries also agreed to reduce gas use for next winter. The pair was down almost 1.0% for the day.

Gold was little changed with a 0.10% loss for the day after moving sideways in a narrow range below $1719 mark in late US trading session, as investors are waiting for Fed’s monetary policy meeting for further guidance. Meanwhile, WTI oil failed to preserve its upside traction and retreated to the $95 area on Tuesday as the White House announced it would sell 20 million barrels from the Strategic Petroleum Reserve.

Technical Analysis

XAUUSD(4-Hour Chart)

Gold made little technical progress, consolidating around 1722.66 on Tuesday. From the technical perspective, the four-hour outlook is neutral-to-bearish. Gold has fallen below the midline of the Bollinger Band and the 20 Simple Moving Average, suggesting that bears are in the driver’s seat. Failure to maintain above the resistance level of 1722.66 would bring the pair toward the next support of 1680.99. On the flip side, if gold can move upward above the midline, then the bullish momentum might be able to gain traction on the four-hour chart. The RSI indicator still trades around the midline, reflecting that absence of directional strength. Further price action has eyes on the FOMC meeting.

Resistance: 1722, 1748, 1769

Support: 1680.99

USDJPY (4-Hour Chart)

USDJPY surpassed 136.00 as the US dollar regained positive traction on Tuesday ahead of the FOMC meeting. On the technical side, USDJPY performed a meaningful rebound after hitting the lower band of the ascending channel. USDJPY has breached the psychological resistance of 136.00, suggesting that USDJPY has resumed its bid mood. USDJPY attracted some buyers near 136.00, thus the RSI indicator has skewed upside. The pair is expected to move further north as the RSI is far from being overbought, implying that there is room for the pair to ascend. On the flip side, if the pair falls below the bullish channel, then it will lose some positive momentum in the near-term.

Resistance: 136.62, 137.06, 137.61

Support: 136.84, 134.75

EURUSD (4-Hour Chart)

EURUSD tumbled towards 1.0100 amid the European gas crisis and fears of a global recession. From the technical perspective, EURUSD is trading at its lowest in a week near the support level of 1.0109. The outlook of the currency pair has turned to the downside as the bearish double-top trading pattern has been formed. In the meantime, the four-hour chart favours a downside extension as EURUSD has breached below the 20 Simple Moving Average. Failure to maintain above 1.0109 would confirm another downside momentum. Moreover, both the RSI and the MACD gained downward traction, and are trading within the negative regions.

Resistance: 1.0205, 1.0284, 1.0362

Support: 1.0109, 0.9952