Asian markets opened broadly lower this morning, following a pull-back of US equities last night. The S&P 500 index has consolidated for a second week. It seems that the unstoppable ‘Trump rally’ is finally cooling off in the headwind from the Fed.
A higher interest rate will increase the government’s and corporations’ borrowing cost, raise the debt-servicing burden and make companies less valuable, when their future cash flows are discounted by a higher required rate of return.
Equity traders chose to stay on the sidelines ahead of the Fed’s interest-rate decision at 2am Singapore time tomorrow. The FX market was a different story.
Yesterday, GBP/USD tumbled over 100 pips to 1.211 in early European open hours, as FX traders dumped sterling anticipating a formal trigger of Article 50 by the end of March. GBP rebounded mildly to around the 1.216 area this morning.
Amid mounting concerns of Brexit negotiations and a near-100% chance that the Federal Reserve will start tightening in March, we have reason to believe that sterling will remain soft against the greenback in the near term.
Technically, the next major support level for GBP/USD is the 1.200 area, which is also a key psychological level. The momentum indicator MACD is trending downwards, suggesting the pair is still facing selling pressure. The 10-Day simple moving average line is now at the 1.220 area, which will become the immediate resistance level.
Gold and silver prices have found some support at US$1,200 and US$17.0 respectively, reaching short-term equilibrium as the market balances the negative impact of a stronger USD against the demand for safety.
US SPX 500 - Cash
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