<ul><li>A 25 bps or 50 bps rate hike in May is possible</li><li>If core inflation remains persistent, 3.50% terminal rate is the minimum</li><li>Thursday decision is a hawkish one so market reaction has been surprising</li></ul><p style=““ class=“text-align-justify“>Well, they are really coming out to make it clear to markets that March isn’t going to be the last rate hike in this tightening cycle. I think the issue for me is why couldn’t we just hear something like this from Lagarde yesterday? Geez.</p>

This article was written by Justin Low at www.forexlive.com.

<p style=““ class=“text-align-justify“>In case you need a reminder on what happened in January:</p><ul><li><a target=“_blank“ href=“https://www.forexlive.com/news/us-dollar-sinks-on-hard-landing-fears-after-ism-services-survey-plunges-20230106/“ target=“_blank“ rel=“follow“>US dollar sinks on hard landing fears after ISM services survey plunges</a></li></ul><p style=““ class=“text-align-justify“>While the main focus is on the US non-farm payrolls first and foremost, it may not be the most important data release on the day. The ISM services report saw a stark miss in December (49.6 vs 55.0 estimated) and the reading is expected to come in at 50.4 today.</p><p style=““ class=“text-align-justify“>As much as broader markets may be paying attention to the US jobs report, another big miss could really set off fears of a hard landing and that could compound the pain in the equities space so far on the day.</p>

This article was written by Justin Low at www.forexlive.com.

<p style=““ class=“text-align-justify“>Easy come, easy go. After yesterday’s gains, stocks are giving a chunk of that back today ahead of the US non-farm payrolls later today. There are a couple of moving parts, so let’s try to sort things out.</p><ol><li style=““ class=“text-align-justify“>Apple and Alphabet reported misses on earnings after the close and that is weighing on tech sentiment; Nasdaq futures down 1.5%</li><li style=““ class=“text-align-justify“>European bond yields recover slightly from yesterday’s drop as ECB policymakers talk up more rate hikes after March; 10-year German bund yields up 8 bps to 2.14%</li><li style=““ class=“text-align-justify“>A further cooling of the US jobs data later could bolster the narrative of a less soft landing, especially as the Fed keeps its resolve to tighten rates further</li></ol><p style=““ class=“text-align-justify“>It’s pretty much a case of pick your poison but I wouldn’t rule out a turnaround in sentiment later in the day as Wall Street enters the fray. After all, the technicals are still supportive although we are seeing the S&P 500 near key resistance from its 100-week moving average:</p>

This article was written by Justin Low at www.forexlive.com.

<p style=““ class=“text-align-justify“>The report highlights that China’s policymakers are planning to increase support for domestic demand this year but they are likely to stop short of coming up with a big stimulus injection on direct consumer subsidies – instead keeping their main focus on investment. The sources said that China is expected to stick more closely to its familiar playbook of policies and provide support to key industries as well as splurge on infrastructure.</p><p style=““ class=“text-align-justify“>“There are limited options to stimulate consumption. The possibility of giving cash handouts is small.“</p><p style=““ class=“text-align-justify“>Now that we are trying to recalibrate to the post-pandemic era in China, common prosperity remains the number one goal for Xi and trying to bolster domestic consumption is arguably one of the biggest challenges.</p>

This article was written by Justin Low at www.forexlive.com.

<ul><li>Prior -0.9%; revised to -1.0%</li><li>PPI +24.6% vs +22.5% y/y expected</li><li>Prior +27.1%; revised to +27.0%</li></ul><p style=““ class=“text-align-justify“>Euro area producer prices surprised to the upside in December, with more expensive energy prices being the main driver again – rising 2.5% on the month. If you strip that out, producer prices were seen down 0.1% on the month instead.</p>

This article was written by Justin Low at www.forexlive.com.

<ul><li><a target=“_blank“ href=“https://www.forexlive.com/centralbank/boe-raises-bank-rate-by-50-bps-to-350-as-expected-20221215/“ target=“_blank“ rel=“follow“>Prior</a> 3.50%</li><li style=““ class=“text-align-justify“>Bank rate vote 7-2 vs 7-2 expected (Tenreyro and Dhingra voted to keep rates unchanged, similar to the December meeting)</li><li>Further increases in bank rate may be required</li><li style=““ class=“text-align-justify“>If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required</li><li style=““ class=“text-align-justify“>CPI likely to have peaked</li><li style=““ class=“text-align-justify“>Inflation to fall to 3.92% by Q4 2023 (previous forecast 5.2%)</li><li style=““ class=“text-align-justify“><a target=“_blank“ href=“https://www.forexlive.com/terms/i/inflation/“ class=“terms__main-term“ id=“ad51a5a2-1afc-4f42-9e62-ea6faf6f90fa“ target=“_blank“>Inflation</a> risks still skewed significantly to the upside</li><li style=““ class=“text-align-justify“><a target=“_blank“ href=“https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/february-2023″ target=“_blank“ rel=“nofollow“>Full statement</a></li></ul>

This article was written by Justin Low at www.forexlive.com.

<ul><li>50 bps rate hike</li><li>Reaffirming another 50 bps rate hike in the next meeting</li><li style=““ class=“text-align-justify“>Reiterate that inflation remains stubbornly high and that ECB is committed to fighting that</li><li style=““ class=“text-align-justify“>Repeat that policy path remains very much data-dependent</li></ul><p style=““ class=“text-align-justify“>If there is a checklist for the ECB policy decision and messaging today, the above four points will likely be it.</p><p style=““ class=“text-align-justify“>That points to quite a straightforward one in terms of what we are all expecting but there might be some subtle changes to look out for. Let’s get straight into it.</p><p style=““ class=“text-align-justify“>For one, another 50 bps rate hike today puts the ECB closer towards a peak in its tightening cycle. While they are likely to repeat another call for a 50 bps rate hike at the next meeting, it is unlikely to see Lagarde commit to anything beyond that – at least not in a firm manner.</p><p style=““ class=“text-align-justify“>As such, expect the ECB to only reaffirm a 50 bps rate hike for March. As for what comes after, that will depend on Lagarde and we are likely to just hear something more vague that offers up some flexibility.</p><p style=““ class=“text-align-justify“>In terms of the statement, we might get a change in wording on this passage potentially:</p><p style=““ class=“text-align-justify“>“In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.“</p><p style=““ class=“text-align-justify“>The relief for the ECB in the past few months has been that we saw a less harsh winter in Europe and energy prices have come down from extremely high levels. And even so, core inflation remains high across the region and continues to pose a problem for policymakers coming into today.</p><p style=““ class=“text-align-justify“>But in any case, the fact that we got such a development has granted the ECB more flexibility to be more hawkish as the economy continues to hold up – for now at least.</p><p style=““ class=“text-align-justify“>I think even in the event that we do see a more hawkish communique from Lagarde & co. today, broader markets are likely to be able to take that all in without as much difficulty as it would have been in the past.</p><p style=““ class=“text-align-justify“>We all know that no matter what the ECB says, we are getting closer to a peak in rates – which will see it move towards more restrictive territory. And as soon as that starts showing up on economic data releases, I reckon it would not be surprising to see a quick shift from the ECB to start acting like how the BOE is right now.</p>

This article was written by Justin Low at www.forexlive.com.

<p style=““ class=“text-align-justify“>The market is firmly expecting a 50 bps rate hike but as mentioned earlier in the day <a target=“_blank“ href=“https://www.forexlive.com/news/the-central-bank-bonanza-continues-later-today-20230202/“ target=“_blank“ rel=“follow“>here</a>, it might not be quite a straightforward one when it comes to the BOE as opposed to the ECB today.</p><p style=““ class=“text-align-justify“>We’ve already seen dissenters in the December meeting <a target=“_blank“ href=“https://www.forexlive.com/centralbank/boe-raises-bank-rate-by-50-bps-to-350-as-expected-20221215/“ target=“_blank“ rel=“follow“>here</a> and that might set up for a bit of a risk that today’s decision might surprise with a 25 bps rate hike instead. Since the last meeting, UK economic data has worsened with retail sales imploding and recession risks continue to be on the rise as the cost-of-living crisis intensifies.</p><p style=““ class=“text-align-justify“>I would expect policymakers to want to figure out a balance between maintaining some degree of hawkishness as they finish off the tightening cycle, and also needing to slow things down as they risk sending the economy off the rails.</p><p style=““ class=“text-align-justify“>Quite frankly, the most surprising thing that the BOE could do today is to put forward a hawkish 50 bps rate hike. However, I’d rate the odds of that as being pretty low among all the likely outcomes. As for a 25 bps move, I think that is certainly a possibility somewhere in the region around 35:65 when pitted against a 50 bps rate hike today.</p>

This article was written by Justin Low at www.forexlive.com.

<p>In the <a target=“_blank“ href=“https://greendax.com/“ target=“_blank“ rel=“follow“>financial
industry</a>, a haircut is a value reduction made to an asset to determine
the capital required, margin, and level of collateral. The difference between a
loan’s principal and the asset’s market value will serve as collateral. This amount
is given as a percentage. The lender must consider the shifting market price
over time, which results in the disparity.</p><p>The
distinction between the purchase and sale price of a stock, bond, derivative
contract, or any other financial instrument is sometimes referred to as a
haircut. The phrase „haircut“ refers to the market maker’s spread in
this context.</p><p>How to
Interpret a Haircut</p><p>When a <a target=“_blank“ href=“https://greendax.com/Registration“ target=“_blank“ rel=“follow“>financial
institution</a> or lender assigns a value to a collateral asset less than
the requested loan amount, this is known as a haircut. The lender chooses the
haircut amount, which varies depending on the institution and situation and is
typically expressed as a percentage difference. The amount of haircut is
determined by weighing the hazards. For example, if the borrower defaults, the
lender must take into account the level of risk they would run if they could
not sell the asset or collateral for a high enough price.</p><p>Compressed
haircuts result from high price predictability and lesser associated risks
because the lender is confident that the collateral can satisfy the loan amount
upon liquidation. As an illustration, government securities dealers frequently
employ treasury bills in overnight borrowing transactions, also known as
repurchase agreements (repos). Due to the high level of assurance regarding the
value, liquidity, and credit rating of the securities used as collateral in
such instances, the haircut is minimal.</p><p>Example</p><p>For
instance, if a borrower seeks out a loan for $15000 from a financial
institution and uses their stock portfolio worth $15000 as security, the
financial institution will very likely recognize the $15000 portfolio as only
worth $7500 as collateral. The haircut is the value of the stock portfolio
provided as collateral reduced by 50%, or $7500.</p><p>There is no
one-size-fits-all percentage for haircuts because each asset must be handled
uniquely. For example, an asset may have a value of $10000, but if it receives
a 10% haircut, it will only be valued at $9000. In a similar light, another
item might be worth $10000 but given a haircut of 30%, meaning it is regarded
as though its value were $7000.</p><p>Important
Takeaways and Final Overview</p><p>· A haircut is
a difference between the price at which a stock is bought and sold, or the
spread market makers may establish.</p><p>· The
discrepancy between the loan amount and the market value of collateralized
assets is known as a haircut in the finance industry.</p><p>· The safer the
asset, the lower the haircut, and the riskier the asset, the greater the
haircut.</p><p>To sum this
up, Lenders take a haircut, or a percentage reduction in the value of the asset
used as collateral for the loan, to shield themselves from price volatility and
associated risks. When a borrower defaults on their obligations, financial
institutions calculate the value of the collateral asset and assign that value
to the asset. </p><p>Lenders must
evaluate the collateral as an independent case to assess the associated risks,
including volatility, price predictability, and liquidity. Different assets are
addressed in different ways.</p>

This article was written by ForexLive at www.forexlive.com.

<p>In terms of technical analysis, the Dow Jones and the broader market had a lot to digest after the latest fed announcement. Fed has <a target=“_blank“ href=“https://www.forexlive.com/centralbank/federal-reserve-hike-rates-by-25-bps-vs-25-bps-expected-20230201/“ target=“_blank“ rel=“follow“>hiked
by 25 bps as expected</a> and signaled “ongoing increases” as they want to
reach their terminal rate in the 5% area before pausing. </p><p>Everything that came out of this
event was expected by the market, even a hawkish press conference. In fact, the market rallied
even if the <a target=“_blank“ href=“https://www.forexlive.com/centralbank/powell-qa-it-is-important-that-financial-conditions-reflect-policy-restraint-in-place-20230201/“ target=“_blank“ rel=“follow“>Fed
Chair Powell signalled “a couple more hikes”</a> coming at the next meetings. The
market is now more focused on economic data rather than the Fed because we are
at the end of their tightening cycle.</p><p>So, what’s next then? Looking
ahead there are two big risk events on Friday: the NFP report and the ISM
Services PMI. Since the resilience in the labour market is what is giving
the market confidence in a “soft landing”, we can expect that a beat or as
expected data should give the bulls confidence to reach higher highs. </p><p>A miss may be bad news though as
it will be the first one in a long time and given that the risks of a “hard
landing” are not yet out of the equation, the market may go into risk off. For
the ISM Services PMI the same playbook should apply. </p><p>DOW JONES Technical Analysis</p><p>In the daily chart above, we can
see that the market is basically ranging. Bulls and Bears have their reasons
and both sides may be right as we are navigating really unique times. </p><p>You can feel the uncertainty on
both sides. For now though, the bulls have the upper hand and the next target
should be the <a target=“_blank“ href=“https://www.forexlive.com/Education/technical-analysis-support-and-resistance-20220405/“ target=“_blank“ rel=“follow“>resistance</a> in the 35200 price area. </p><p>In the 4 hour chart above, we can
see that there’s a clear <a target=“_blank“ href=“https://www.forexlive.com/Education/technical-analysis-support-and-resistance-20220405/“ target=“_blank“ rel=“follow“>support</a> at 33500 and the price keeps
on trading around it like a magnet. The near term resistance is at 34477,
which is what the bulls need to break to maintain a bullish bias towards the
35200 resistance area. For now, the price action may just range.</p><p>Zooming in to the 1 hour chart, we
can see the levels that should define the next moves. Stay above the 34477
level and the bulls will have control. Stay below the 33538 level and the bears
will regain control.</p>

This article was written by ForexLive at www.forexlive.com.