Sales in the markets may stop before the Fed meeting

The current correction in the US stock market, caused by the expectation of an earlier increase in the Fed's interest rates, is probably coming to an end. In any case, the results of which will be known on January 26, that is, until the meeting of the regulator.

It is likely that American stock indices may stop their correction before the Central Bank meeting, which is clearly indicated by a sharp decline in Treasury yields on Thursday and continued decline on Friday. This morning, the benchmark yield of 10-year Treasuries declined by 2.49%, reporting to 1.788% after reaching a local high of 1.902% on Wednesday.

Why are government bonds behaving this way?

We believe that the lack of a clear understanding of what the result of the Fed's January meeting will be regarding the prospects for an earlier interest rate hike is forcing debt market investors to take a break, and bond sellers to take profits. There is a possibility that after the debt market, the sell-off in the US stock market will also stop, which may be observed today. As for Monday and Tuesday next week, low activity in the local market is expected before the start of the Central Bank meeting.

One should also pay attention to the US dollar's behavior in the currency markets. It fully reflects the lack of a clear understanding of what the Fed will do next week, but most importantly, what J. Powell will say. Will he talk about the possibility of slowing down inflation based on the December data published at the beginning of the month or not? If he mentions this topic, it means that the bank continues to hope that the situation with inflation will, if not improve, then at least stabilize. The reasons for this desire are the objective conditions of the situation in the US economy, which will simply be achieved by high interest rates, and the colossal national debt can cause default with all the ensuing problems.

If Powell once again expresses hope that inflation will continue to slow down, this will lead to a weakening of the US dollar and a recovery in demand for company shares, while Treasury government bond yields will gradually decline.

However, another scenario is also possible. Powell can brutal in his post-meeting press conference statement, which will clearly increase expectations for a rate hike in March and lead to a new wave of sell-offs, expressed in falling stock indices, rising Treasury yields, and strengthening US dollar.

Assessing all the pros and cons, we believe that everything is so far outweighed by the first positive scenario for the markets, but we will really find out what will happen on January 26.

Forecast for the day:

The EUR/USD pair is likely to remain in the range of 1.1275-1.1385 until the Fed meeting.

The USD/JPY pair may recover to the level of 114.35 in the wake of sales suspension in the stock markets and US Treasuries.