It promises to be a chaotic day in financial markets and they’re currently positioned cautiously in anticipation of what’s to come.

There’s no doubt that investors have one eye on the Fed decision later in the day, as they have all week. It’s not just about the rate hike itself, which will almost certainly be 25 basis points according to markets, but the signal the central bank sends about what lies ahead given the progress made in the economic data in recent months.

There is growing evidence that rate hikes have worked in cooling the economy, inflation, and the labour market, but the question is whether the Fed believes it has done so enough, particularly on the core measure where inflation could prove more stubborn.

We’ll get plenty more data ahead of the decision including ADP employment change – which attempts to be a precursor to the NFP number on Friday – the ISM and final manufacturing PMIs, JOLTS job openings, and more. No doubt it’s shaping up to be a lively session throughout.

Inflation data creates argument for doves and hawks

The ECB decision tomorrow looks highly likely to be a 50 basis point hike but what comes after is up for some debate. Inflation in the euro area slowed again last month and once more by a greater amount than expected which will offer some comfort to investors and policymakers, alike. And probably stimulate further debate on how much further rates will have to rise.

Unfortunately, core inflation is not following a similar trend, rather it remained at a high of 5.2% despite expectations of a modest decline. Energy remains a big driver of movements in the headline reading while the lack of progress in the core suggests there remains a large degree of potentially stubborn inflation that some policymakers will be very wary of. The decision making isn’t going to get any easier for the ECB just yet.

Will the Fed propel cryptos higher?

Bitcoin has benefited more than most from the increased optimism in the markets since the turn of the year. What’s more, it’s held onto those gains in choppier trade quite impressively. Now it’s a question of whether that can be sustained if the Fed sticks to the hawkish script, or how aggressively it’s propelled higher if the “pivot” does come. ​

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.

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• Source: https://www.marketpulse.com/20230201/a-chaotic-day/