As expected, the Fed downshifted to a 50bp rate hike at the December meeting but continued to signal that "ongoing" increases were needed. Despite nascent progress on inflation, the overall tone of discussion around the Fed board table apparently leaned hawkishly.
While Chair Powell maintained optionality about the size of the subsequent rate increase in February, with inflation on the downtrend, FX traders took his comments as supporting a further step down to 25bps at that time, CPI conditions permitting, which would be perceived as mere steps away from rate cuts in the second half of 2023.
Buy EURUSD on dips so long as we remain above 1.0600
After an extraordinary 2022, investors expect a more orthodox 2023 where risk-reward playing the Fed pivot is easier to digest through the lens of a lower USD dollar instead of higher stocks. FED rate cuts will damage the US dollar mercilessly but will be necessary to pull the US out of recession, where corporate profits could plummet and weigh on stocks through H1 2023.
Oil and China-sensitive assets are trading lower because Beijing has been walloped with a significant, and spreading, Covid outbreak, with local commentators reporting that folks are scared to come out of their apartments.
Indeed this is a bumpy road and the transient aspect of the oil market's recovery that everyone had expected. But given the 3 days of solid gains with mobility unquestionably taking a hit, freshly minted longs are booking profits.
The time of year has us more cautious about chasing oil prices higher on MAX open position due to the drop off in liquidity and China's headline risk.
Given the time of year, long positions are relatively less crowded, so there may not be a massive rush for the exits; hence dip buyers around technical support levels should kick in. But the Covid cosh is something to keep an eye on