Daily Market Outlook, January 26, 2022

Overnight Headlines

Some previous market tantrums over a looming tightening in policy made central bankers think twice about taking away hefty monetary support. Yet, for the Federal Reserve, concluding a two-day meeting later on Wednesday, things are now different. With inflation raging at 40-year highs, the Fed is unlikely to backtrack on its intent to raise interest rates and will almost certainly flag a March rate hike later on Wednesday. Yet, the almost 9% slide in the S&P 500 this month and the flattening of the U.S. yield curve are not good indicators of sentiment towards the economic outlook, and may temper the case for a more hawkish stance from the Fed.

The fine line between taking action to contain inflation but not tightening policy too fast that brings the recovery to a quick end, is exactly the line Fed chief Jerome Powell has to walk. Markets will be watching his every step. One possible policy move today is that the Fed further accelerates the tapering of its asset purchase programme. That is currently scheduled to end in mid-March and one key official recently said that the timetable is unlikely to change. Nevertheless, policymakers may still choose to terminate it a month earlier to emphasise their more hawkish stance. There will also be interest in whether anything more is said about the running down of asset holdings. The minutes of the December meeting indicated that this could start relatively soon after the first rate hike. Fed Chair Powell seems likely to be asked to give more precise information, but the Committee may not yet have made their minds up.

Meanwhile, odds are split on whether or not the Bank of Canada will hike rates for the first time since 2018 when it meets later in the day. The bank may need to take Omicron's wrath into account while deciding whether to start a tightening campaign geared at taming red-hot inflation.

With central banks in the spotlight, Asian stock markets steadied after three sessions of losses. U.S. and European stock futures were higher. Geopolitical tensions are likely to remain in focus after U.S. President Joe Biden said he would consider personal sanctions on President Vladimir Putin if Russia invades Ukraine as Western leaders stepped up military preparations and made plans to shield Europe from a potential energy supply shock.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

USDJPY - 112.20 450m.

EURUSD - 1.1500 1.06bn (C). 1.1440/50 631m. 1.1350/60 752m. 1.1300 534m. 1.1280/90 493m. 1.1220/30 1.46bn (P). 1.1150 537m.

AUDUSD - 0.7570 660m. 0.7350 680m. 0.6870 704m.

USDCAD - 1.2370/80 406m. 1.2270 500m.

EURNOK - 10.00 430m.

USDCNH - 6.42 680m. 6.40 642m. 6.35 1.30bn (1.09bn P). 6.32 440m. 6.28 1.09bn (P).

EURUSD Bias: Bearish below 1.15 Bullish above

GBPUSD Bias: Bearish below 1.36 Bullish above.

USDJPY Bias: Bullish above 114.50 Bearish below

AUDUSD Bias: Bearish below 0.7250 Bullish above