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Key events to watch in the week ahead: 30 Jan – 3 Feb 2023

It has been a risk-on week for markets, with the S&P 500 and Nasdaq reclaiming their respective 200-day moving averages (MA) for the first time since April 2022.

Source: Bloomberg

This week’s overview

It has been a risk-on week for markets, with the S&P 500 and Nasdaq reclaiming their respective 200-day moving averages (MA) for the first time since April 2022. Easing bearish bets are presented with further moderation in the CBOE put-call ratio after hitting extreme-bearish levels to start the year, while the VIX struggled to stay above its key 20 level for now. This comes despite further job cuts, pull-back in corporate spending and a weaker consumer spending outlook being the takeaways this week. It will be another busy week ahead, with a series of central bank interest rate decisions lined up on the calendar, along with more earnings releases from index heavyweights.

Here are some of the key events to watch next week:

1 February 2023 (Wednesday): US Fed interest rate decision

Current market expectations have largely priced for a 25 basis-point hike in the upcoming FOMC meeting, with another final 25 basis-point (bp) hike in March to bring the terminal rate to the 4.75%-5% range. This is less hawkish than what US policymakers have been guiding for, potentially bringing a scenario of some tug-of-war. Just last week, Fed officials were still throwing their support for a move above 5% and no rate cuts through 2023. Fresh economic projections and dot plot will only come in the March meeting, leaving market sentiments to be highly sensitive to the upcoming Fed statement and particularly to Fed Chair Jerome Powell’s tone at the press conference. With still above-target inflation readings, the Fed may refrain from feeding markets with any pivot hopes prematurely but any emphasis on a more data-dependent stance may potentially be looked upon positively. This is considering that recent economic data has been supportive of a less aggressive Fed, although policymakers have been unshaken thus far.

After declining close to 12% from its September 2022 peak, the US dollar has been largely in consolidation mode over the past week. Muted moves thus far suggest some wait-and-see for now, with the dollar resting on the 101.00 level of support. The overall downward bias could still be presented with the lower highs and lower lows in place. CFTC data suggests that speculators have effectively switched to net-short US dollar positioning against other G10 currencies since November 2022, having unwound previous build-up in net-long positions.

Chart 1_USDollarBasket Source: IG Charts

2 February 2023 (Thursday): Bank of England (BoE) interest rate decision

Expectations are for the BoE to deliver its last 50 bp increase (67% probability) at the upcoming meeting to 4%, before downshifting to 25 bp over the subsequent two meetings. With previous projections from the central bank pointing to a sharp decline in inflation from mid-2023, along with the UK economy in recession throughout 2023, the next phase of speculation has been revolving around a potential 25 bp rate cut in November or December this year. The GBP/USD seems to be completing an inverse head-and-shoulder pattern lately, with the pair hovering just below its neckline resistance at the 1.245 level. Any potential break above the 1.245 level may be on watch in the upcoming week.

Chart 2_GBPUSD Source: IG Charts

2 February 2023 (Thursday): European Central Bank (ECB) interest rate decision

Similar to the BoE, a 50 bp increase is the consensus (86% probability) for the upcoming ECB meeting, which will bring the key rate to 2.5%. With the central bank’s previous projection pointing to some inflation persistence until 2025, the path for higher rates seems likely to continue for the whole of 1H 2023. Current expectations are laying out 50 bp hikes over the next two meetings, before downshifting to 25 bp increases until deposit rate reaches 3.5%. The tone from policymakers has seen a firm hawkish build over the past few months, which is likely to be maintained at the upcoming meeting.

This will leave the EUR/USD in focus, which has been guided nicely by a rising channel pattern since mid-November last year. The 1.094 level may be the next line of resistance to overcome, in order to pave the way towards the 1.120 level next. Overall move remains upward bias for now, with a bullish crossover of its 100-day and 200-day MA playing out recently.

Chart 3_EURUSD Source: IG Charts

3 February 2023 (Friday): US non-farm payrolls for January

Further moderation in the US labour market is expected to be presented in the non-farm payroll report next week, with 175,000 job gains in January, down from 223,000 in December. This will mark the fourth consecutive quarter of decrease, with unemployment rate expected to see a pick-up to 3.6% (previous 3.5%) amid ongoing layoffs. Moderation in labour demand is consistent with what the Fed aims to achieve to drive a more sustainable wage growth. With the data release coming after the Fed meeting, much may also depend on the takeaway from US policymakers. If Fed officials stay firm on their hawkish tone, there is a possibility that an underperformance in job gains and a higher-than-expected unemployment rate could bring recession fears back into the spotlight once more.

1-3 February 2023: US big tech earnings release (Advanced Micro Devices, Meta Platforms, Alphabet, Apple, Amazon)

For the US earnings season so far, 25% of S&P 500 companies have released their results and 70% of them have outperformed earnings expectations. This is lower than past historical trend of around 80% but nevertheless, the still-elevated beat rate provides a less pessimistic take on current conditions, with beaten-down expectations providing a low watermark for outperformance. This week has seen mega cap tech counters taking leadership for markets’ bullish moves, and the onus will fall on several big tech names next week to keep up with the momentum. Notable earnings releases include Advanced Micro Devices, Meta Platforms, Alphabet, Apple and Amazon.

The Nasdaq 100 index has broken above a key downward trendline resistance this week, suggesting a shift in sentiments to the upside. The index may set its sight on the 12,200 level in the upcoming week and overcoming it may pave the way towards the 13,000 level next, where a Fibonacci confluence zone resides.

Chart 4_USTech100 Source: IG Charts

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