Equities Rally on 0.75% Rate Hike

16 June 2022, 02:31

Market Focus

US shares rallied on Wednesday after the Fed raised the interest rates by 75 basis points, the largest increase since 1994. In the meantime, Fed chairman Jerome Powell signaled that the Fed could raise interest rates by a similar magnitude in July, promising to tackle inflation. Market confidence was boosted, and the three major US indices jumped at the end of on Wednesday. The Nasdaq Composite rallied 2.5%, the S&P 500 climbed 1.46% to 3789.99, and the Dow Jones Industrial Average rose 1%, ending a five- day losing streak. The Fed’s rapid hiking came as no surprise as the markets seemed to cheer for the confirmation of the Fed’s commitment to fight the inflation battle.

The ECB has announced that it plans to create a new tool to tackle the risk of eurozone fragmentation, attempting to calm fears of a fresh debt crisis. The new decision came after the ECB surprised markets with an emergency meeting to address higher borrowing costs for several European governments compared to the benchmark German bonds. In response to the fragmentations, the ECB mentioned that it will reinvest redemptions from its emergency bond- purchasing program, so called PEPP. In the meantime, the ECB promised that it will accelerate the completion of a new anti-bond fragmentation instrument.

Main Pairs Movement

NZD/USD traded 1.17% higher, finishing with 0.62853 on Wednesday. The greenback lost ground after the FOMC interest rate decision as Fed Chairman Powell said that the next hike could either be 50 or 75 basis points, causing the demand for the greenback to go down.

EUR/USD was up 0.24%, closing at 1.04403 at the end of the day. Markets seemed to lose interest in the greenback on Wednesday, the day that the US Fed was in the spotlight. Though the Fed raised rates by 75 basis points, the highest since 1994, the greenback lost momentum after the Fed dismissed the chances of a 100 basis point increase.

The US dollar Index was on the backfoot, dropping 0.6%. The demand for the greenback declined following Fed Chairman Powell denying the possibility of a 100 basis point hike in July. With this dovish move from a hawkish Fed, most of the G-10 currencies got boosted, as well as  gold, which edged 1.41% higher, to $1833.97 per ounce.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD rebounded over the course of Thursday’s trading. The dollar fell sharply after the FOMC raised interest rates by 75 basis points. The broad-based dollar weakness allowed the euro to rebound from earlier losses during the European and Asian trading hours. This short term rebound, however, might not be sustainable as the interest rate difference between the Fed and the ECB has now increased even further.

On the technical side, EURUSD has found fresh support around the 1.038 price region. Near term resistance has formed near the 1.049 price region. RSI for the pair has recovered from oversold territory and is currently indicating 43.6. On the four hour chart, EURUSD is trading below its 50, 100, and 200-day SMAs.

Resistance:  1.049

Support: 1.03783

GBPUSD (4-Hour Chart)

GBPUSD gained 1.5% over the course of Thursday’s trading. The FOMC has increased interest rates by the largest margin in 40 years, in an attempt to control soaring inflation. Fed chair Jerome Powell has also indicated that either a 50 or 75 basis point interest rate hike is likely at the FOMC’s July meeting. The BoE is set to announce its interst rate policy and economic guidance during the European trading session.

On the technical side, GBPUSD has rebounded strongly from our previously estimated support level of 1.20824, but the pair met fresh resistance around the 1.218 price region. RSI for Cable is currently sitting at 66.16. On the four hour chart, GBPUSD is trading above its 50-day SMA, but below its 100 and 200-day SMAs.

Resistance: 1.25944

Support: 1.20824

USDJPY (4-Hour Chart)

USDJPY fell 1.23% over the course of Thursday’s trading. The 75 basis point increase in interest rates have weakened the Dollar as the U.S. 10-year Treasury yield retreated below the 3.3% level. The interest rate difference between the U.S. and Japan will further encourage carry trades as interest rate differential increases. The BoJ’s insistence on easy money policy also shows a stark contrast between the two central banks.

On the technical side, USDJPY has met its fresh resistance at 135.6, while support levels at 133.5 and 132.5 remain firmly intact. RSI for USDJPY indicates 66.18, as of writing. On the four hour chart, USDJPY is currently trading above its 50, 100, and 200-day SMAs.

Resistance: 134.56

Support: 133.5, 132.5