Cautious trading ahead of FOMC

After a terrible start to the week, the financial and energy sector stocks are getting some reprieve from bargain hunters.

Federal reserve building
Source: Bloomberg

Despite oil prices extending their slide and pushing five-year lows, WTI has been trading under $55, while Brent has been drifting under $60.

The swing in sentiment reflects the growing volatility in the markets, as investors are on edge ahead of the Federal Open Market Committee (FOMC) meeting tonight. 

The volatility index or VIX, widely used as a gauge of fear and uncertainty in the market, jumped 15% last night to hit a two-month high of 23.57 points.

This follows the 78% jump we saw just last week alone.

Tax hike expectations building up

Expectations are high that the Federal Reserve will take a more hawkish posture and perhaps drop its pledge to keep interest rates near zero for ‘a considerable time’. Any change in language or cues that might raise expectations of a rate hike would likely spark a rally for the greenback.

This puts the focus on USD/JPY, which saw a pullback overnight as nervous investors flocked to the safe haven Japanese currency. We should see some strengthening of the pair though as expectations build up ahead of the FOMC event.

On a one-hour chart, USD/JPY appears to be on an uptrend line and is likely to test a resistance level of 117.29. A clear break above this will signal bullish momentum that could see it climb towards the next resistance level of 119.00.

Click to enlarge

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.