All Eyes On The FOMC

Markets

Equities rallied in choppy trading ahead of today's FOMC meeting with expectations set for the Fed to hike 50bp after every speaker made sure to recommend that action just before their blackout period began.

The Which futures trading platform is the most reliablelack of policy surprise embedded in the May FOMC meeting expectations has provided investors with breathing room and allowed stocks to settle higher after this week's manic selloff. But a reduction in policy uncertainty going forward is a precondition for equities to recover.

Hence all eyes will be on the May FOMC, which is primed to benchmark future meetings. So, if there are any hints of future policy surprises hawkishly deviating from the steady 50-50-50 hawkish drumbeat, watch out below.

Oil 

Oil futures ended lower Tuesday, due to conflicting signals. Investors continue to weigh the prospects for a European Union embargo of Russian crude versus the hit to demand from China's COVID lockdowns. 

At the same time, the colossal SPR releases continue to smooth out the prompt energy crunch.

Anecdotally, energy traders remain constructive on oil prices and appear still willing to look for opportunities on dips. Still, the whipsaw and volatility have made it extremely challenging to take tremendous directional views these days.

Gold

A decline in US inflation breakevens implied lower demand for inflation protection. And this, in turn, caused gold to meltdown as bullion has been trading far north of where US real rates suggest. 

However, with nominal yields trading slightly lower again, gold caught a bid off the lows with the omnipresent recessionary storm clouds lingering in the distance offering up its usual support.

The meltdown was much more significant than I expected, suggesting a lot of weak longs ran for the exits, so there could be some value in buying dips to $1850, which could prove to be a highly psychological support level.

The only nail biter for longs today that could trigger another washout is whether Chair Powell even mildly endorses 75 bp for the following FOMC meeting. 

But at some point, down the road, when the Fed finally ratchets up interest rates high enough to stem the growth of inflationary pressures, gold will lose one of its central pillars. 

Forex

USD/JPY has been quiet since Monday's close with Japan out for the Golden Week holiday.

The 130.30 area capped the pair's rally, similar to Monday, and the move lower in US yields on Tuesday saw USD/JPY move back below 130.00 to touch a low near 129.80.

The market awaits Wednesday's FOMC decision, and, in the interim, it is tough to see market participants adding to long USD risk given current rates market pricing.

And a scenario for FX traders to gingerly reduce long USD positions into the FOMC makes sense to avoid a buy the rumor sell the fact type trade.

And this, coupled with USD/JPY traditionally trading less buoyantly over Golden Week, could mean limited upside action due to no local dollar demand. 

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