The Federal Reserves raise rates by 25 basis points as expected to 5.5%. The changes to the statement were modest. Federal Reserve Chairman Jerome Powell indicated that two upcoming Consumer Price Index (CPI) reports and two non-farm payrolls reports will be crucial data points for the Federal Open Market Committee (FOMC) meeting slated for September 20. Currently, the market is pricing in just a 20% chance of a rate hike in September, assuming that the Fed could defer any changes until November, even if data signals inflationary pressure. Additionally, market sentiment towards a November rate hike remains fairly optimistic, with only a 40% likelihood priced in, in anticipation of an economic cool-off. Despite this, Powell has emphasized a data-dependent approach and is not ruling out the possibility of a rate hike in September.

On specific topics, a summary from the Fed Chairs comments showed:

Employment and Labor Market: The labor market shows strong growth with labor supply and demand reaching balance. Unemployment remains steady, with anticipated softening in labor conditions shown by fewer job openings and resignations.

Inflation: Inflation, although moderated, is still well above the 2% target. Positive but singular data from June's CPI report prompts a need for further monitoring. Energy and food price drops have decreased headline inflation, and a decline in core inflation is expected. However, he also said that getting to 2% would take until 2025.

Economic Growth: Growth in consumer spending has slowed, and the housing sector, though still below 2022 levels, shows recovery. Moderate growth is preferred as stronger growth could contribute to inflation, requiring policy intervention.

Monetary Policy: Monetary policy decisions are being made meeting-by-meeting, with the current policy viewed as restrictive. Rates remain the primary tool for monetary policy, with September's decisions relying on incoming data.

Future Outlook: Restrictive policy levels are expected to continue to manage inflation. The committee is prepared to act if more rate hikes are suggested by data. Current policy appears to be functioning as expected, boosting the economy's resilience.

Financial Stability: Uncertainty remains regarding the financial outlook. However, the banking system shows stability and resilience amidst turmoil, with banks preparing to use the discount window as needed.

Wages: The Fed is not targeting wage inflation and prefers wage growth aligning with 2% inflation. Wages, previously not seen as a key inflation factor, are now considered important in reducing inflation.

The forex reaction to the decision and press conference was tilted to the downside, but the move was limited.

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The strongest to the weakest of the major currencies

Looking at the strongest to the weakest currencies, the JPY is ending as the strongest of the majors. The AUD is the weakest. The USD is modestly lower, but is still mixed on the day, with modest gains vs the AUD and CAD. The dollar is unchanged vs the NZD and lower vs the JPY, GBP, EUR and CHF.

The AUD was influenced earlier in the day on the back of weaker-than-expected CPI data in Australia for the quarter. Although the AUDUSD is still lower on the day, it is trading near the midpoint of the range after stalling the falls (there were three dips) ahead of the 200-day MA at 0.67223. Having said, that the rally to the upside after the Fed decision stalled near the 200-hour moving average at 0.6783. So there is a battle between the 200-day MA below and the 200-hour MA above (in between sits the 100-hour MA at 0.67556 - blue line on the chart below).

AUDUSD

In other major currency pairs vs the USD:

  • EURUSD: The EURUSD is closing the day near its 100-hour moving average at 1.1089. The price high extended to 1.1106. That was near the broken 38.2% retracement target at the same level. The low price in the New York session found support against the 50% midpoint at 1.10539. In the new trading day, the support will remain at 1.10539, while the resistance it will be at 1.1106. In between is the 100-hour moving average at 1.1087. PS. Tomorrow the ECB is expected to raise rates by 25 basis points when they announce their rate decision at 8:15 AM ET.
  • USDJPY: The USDJPY is closing the day at 140.23. That is above its 200-hour moving average at 140.032. On the top side the 100-hour moving average at 141.038. Although the low price today dipped below the 200-hour moving average, the inability to extend much below that level, and closing above the moving average keeps the technical bias more neutral. Traders will be waiting for a break of either moving average level with momentum.
  • GBPUSD: The GBPUSD moved above its 200-hour moving average at 1.2942 to a high of 1.2960. However, the price rotated back to the downside and is closing the day near the 200-hour moving average level. That moving average will be a barometer into the new trading day.

A look at other markets:

  • Crude oil is trading down $-0.64 or -0.80% at $78.99
  • Gold is trading up $7.27 or 0.37% at $1972
  • Silver is up $0.23 or 0.96% at $24.92
  • Bitcoin is trading higher at $29,600 heading into the close

US stock markets closed mixed on Wednesday, July 26, 2023. Despite the mix, the Dow Jones Industrial Average (DJIA) managed to extend its winning streak to 13 sessions, capping a 4.9% rally. The DJIA closed up 0.23%, marking the longest winning streak since 1987.

Meanwhile, the S&P 500 and Nasdaq showed minor losses, down by 0.01% and 0.16% respectively. The Russell 2000, which tracks small-cap stocks, outperformed with a gain of 0.8%. The recent performance suggests a broadening rally with value stocks beginning to catch up to tech, a positive sign for bullish investors. However, the Russell 2000 is expected to face some challenging resistance levels in the near future.

In the US debt market, yields are lower:

  • 2-year yield 4.851%, -4.1 basis points
  • 5-year yield 4.114%, -6.1 basis points
  • 10-year yield 3.870%, -4.1 basis points
  • 30-year yield 3.941%, -1.1 basis points