• Gold up $16 to $1944
  • US 10-year yields down 13 bps to 3.39%
  • WTI crude oil down $1.99 to $76.88
  • EUR leads, USD lags
  • S&P 500 up 42 points, or 1.0%, to 4132

The market sniffed out that the FOMC decision wasn't going to change the narrative and it was right. The first clue came when the FOMC statement was more hawkish that hoped for and risk assets dipped. But the tell was that the dip was momentary and the bid for risk assets returned, along with USD selling.

Powell stayed hawkish in his opening statement and then the cracks started to show. He was first given an opportunity to push back on loosening financial conditions and passed. Then he started to salt in hints about coming deflation and then spelled it out with "the disinflationary process has started".

The usual caveats were there but the market had heard enough. Stocks and bonds surged while the US dollar sank. All markets moved together and the message was unmistakable: inflation is done. Or at least the market sees a few months of goldilocks data.

I laid out the scenario before the meeting:

1) The economy holds up at 5% rates, the data stays strong, hooray for a good economy
2) The economy stumbles, the data turns lower, the Fed cuts.
Either way markets can rally.

So markets are breaking out and the Fed isn't going to stand in the way. Yes, there might be economic pain coming but the Fed has 500 bps of ammo if it goes badly. Powell even opened the door to cutting at year end if inflation falls faster than the FOMC is forecasting.

Now it becomes a matter of levels and establishing which ones matter. A number of assets, including AUD and gold are threatening to break out while the euro is testing 1.10 for the first time since last April.

FX news wrap Feb 1 2023