The Federal Reserve is scheduled to announce its interest rate decision early Thursday, bringing the super central bank week to its climax. Coinciding with this, the four US tech giants are unusually releasing their earnings reports on the same day. What sparks will this "Super Thursday" ignite?
The market widely anticipates that the Federal Reserve will keep interest rates unchanged at this meeting. While the US job market remains relatively stable, inflation has climbed to a two-year high of 3.3%, and the consumer confidence index has hit a record low. Considering that energy supply risks may persist long-term, more committee members might shift their focus towards inflation risks. Therefore, attention will be on whether the meeting statement and Chair Powell's remarks emphasize maintaining the status quo (neutral) or hint at future rate hikes (hawkish). A hawkish tilt could provide short-term support for the US dollar, whereas a focus on potential rate cuts (dovish) would likely pressure the currency. Beyond the rate decision, markets are also keenly interested in if and when the Fed will conclude its balance sheet reduction, as this directly impacts market liquidity.
However, the primary focus of this meeting is Powell himself, as it marks his final meeting as Chair. With the Department of Justice announcing the end of its criminal investigation into Powell, and the Senate expected to vote on Kevin Warsh's nomination as the new Chair this Wednesday, Warsh is poised to succeed Powell on May 15th and preside over the June policy meeting, barring any complications. During his hearing last week, Warsh advocated for a combination of "interest rate cuts plus balance sheet reduction."
A larger uncertainty is whether Powell will remain on the Federal Reserve Board as a Governor. Theoretically, his term as a Governor lasts until January 2028, but it is extremely rare in Fed history for a former Chair to remain as a Governor. Given that two Governors were appointed during the previous administration, and Warsh would occupy a third seat, Powell's departure would mean four of the seven Board seats align with the previous administration's appointees, forming a majority. To some extent, Powell's decision to stay or leave involves not just personal choice but also implications for the interest rate outlook and the Fed's independence.
Beyond the Fed, other major central banks featuring this week include the Bank of Japan, the Bank of Canada, the Bank of England, and the European Central Bank.
The Bank of Japan held rates steady on Tuesday. Notably, three of the nine policy board members voted for a rate hike, the highest number of dissents since 2016, signaling a hawkish tilt. However, the Governor noted in his press conference that inflationary pressures might be temporary, striking a more neutral tone. This caused the USD/JPY pair to experience a V-shaped reversal during the session, with the yen remaining weak near the 160 level. Interest rate markets currently imply a slightly less than 50% probability of a rate hike in June.
The Bank of Canada, the Bank of England, and the European Central Bank are also highly likely to keep their policy rates unchanged this week. Given differences in their domestic inflation environments and exposure to the energy crisis, the interest rate trajectories for these central banks diverge for the year. Currently, the Federal Reserve appears relatively dovish compared to some peers, which could exert medium to long-term pressure on the US dollar.
As geopolitical tensions ease, corporate earnings have become the primary driver behind the recent rally in US stocks to new highs. A Reuters survey indicates that first-quarter earnings for the S&P 500 are expected to increase by 16% year-over-year, up from the 14% forecast on April 1st. The technology sector is anticipated to see growth exceeding 40%, suggesting that corporate fundamentals remain robust. Strong earnings growth combined with reasonable valuation levels has led to a resurgence in AI-related trading.
This week marks the peak of the US earnings season, with 44% of S&P 500 constituents reporting results. Tech giants Alphabet (Google), Microsoft, Amazon, and Meta Platforms are all scheduled to report after the market closes on Wednesday. Apple will report its results after the close on Thursday. Energy majors Exxon Mobil and Chevron are set to report on Friday. For the tech giants, forward guidance and capital expenditure plans will be key factors influencing their stock prices and overall market sentiment.
After two consecutive days of declines, the gold price has decisively broken below the 100-day moving average, leaving the $4,600 level vulnerable. A break below this support could pave the way for a further decline towards $4,530, and potentially the previous low near $4,380. In the short term, a technical rebound due to oversold conditions is possible, but any recovery is likely to face resistance in the $4,670-$4,700 zone. A strategy of selling on rallies might be considered ahead of the Fed meeting. The combined impact of the Fed decision and major tech earnings has pushed gold's overnight implied volatility above 30%. Should the Fed deliver hawkish signals, gold prices could remain under sustained pressure.
The recent movement of the Euro has largely mirrored the US dollar's fluctuations. However, with the European Central Bank meeting on Thursday, the interest rate outlook for the Eurozone will start to exert its own influence on the pair. Hawkish commentary from the ECB could potentially boost the Euro. On the 4-hour chart, the area around 1.1670 is a key level to watch. A hold above this support could stimulate a move towards testing the previous high near 1.1837. Conversely, a decisive break below 1.1670 would open the path for a decline towards the 1.1400 level.
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