official Daily Market Notes by Tickmill.co.uk

[tickmill-analytics]

What we learned from the Fed this week. Is carry trade alive and well?

Central banks of major advanced economies and emerging market countries have recently expressed completely different views on further near-term evolution of price growth - the former believe that high inflation won’t last long, while the latter apparently do not agree with this. The Mexican Central Bank unexpectedly joined the Russian and Brazilian Central Banks, which began their tightening cycle relatively aggressively. The bank surprised investors on Thursday by announcing a rate hike from 4% to 4.25% in response to inflation running above 6%, which failed to cool down despite expectations. None of the Bloomberg economists surveyed expected this decision.

The peso strengthened against USD and, together with other EM currencies, now looks like an attractive territory for investors, as following the “parade of speeches” by the Fed officials this week, one can say that the debate about tightening of credit conditions has been postponed at least until the conference in Jackson Hole in August. Growing policy divergence between the Fed and EM Central banks as well as low volatility are expected to be the key drivers of carry trade flows.

 

Dynamics of major EM currencies against the dollar since the beginning of the week

The S&P 500 set a new record of 4,270 points on Thursday as Biden seems to be making success in getting his infrastructure plan through Congress. News came in yesterday that he managed to reach agreement with a number of Republican senators. Curiously, the plan includes stimulus, however provides little detail about tax increases. Those sectors, which seem to be hanging over by strict regulation and the treat of increased taxes can apparently relax for now. The combination of the fiscal package and absence of imminent tax hikes sets the stage for a modest summer rally in risk assets, given a period of low volatility, in which strong downside moves are not common to see. 

The final comment from the Fed this week came from Vice President Williams. Speaking on Thursday, the official chose to join his fellow hawks in stating that there is a risk of more upside in inflation and monetary policy must be prepared for it. Thus, he hinted that persistently high inflation readings will most likely force him to vote for reducing the pace of asset-purchases (QE) earlier than expected.  

In opposition to Williams and other hawk officials, chairman Powell spoke. On Tuesday, he said that the fear of high inflation isn’t a sufficient condition to start raising rates. The initial market reaction to Powell comments was as if the Fed had extended low-rate guidance, but trading in the second half of the week indicated that the market would likely start pricing in monetary policy tightening if inflation in the US exceeds the reading in May (5% in CPI) over the next two months or will continue to accelerate.

Many market participants do not share Powell's opinion on inflation. For example, BoFA in its latest report expects inflation to remain elevated for two to four years, and only a collapse in the financial market could prevent Central Banks from raising rates.  

The share of cash in portfolios of investors according to BoFa data is at 11.2%, which is well below the long-term averages. In the week ending Wednesday, investors bought $ 7bn in shares and $ 9.9bn in bonds, reducing investments in short-term money market instruments by $53.5bn.

In the second half of 2021, the key market topics, according to the BoFA, will be high inflation, the transition of global central banks to policy tightening and slowdown in economic growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Delta variant is getting on the market radar. What does it mean for equity markets?  

The newsflow related to the new Covid-19 delta variant is putting a dent on equity markets. What disturbs the most is that even countries with a high proportion of vaccinated people are forced to return some social curbs as this raises the question about vaccines efficacy. Some countries attempt to contain the outbreaks, others are taking preventive measures, however market worries stem from the fact that growing number of key economies are getting involved in this trend. Stock markets in Europe fell today after German newspaper Bild reported that in light of the threat of the new strain, European leaders will discuss measures for travelers returning from other countries. Tourism and travel sector led declines. Investors also reacted negatively to the news that Hong Kong has placed the UK on the list of countries with "extremely high risk", completely banning the entry of travelers from this country. The UK100 index posted the largest loss today among the major European indices, potentially reflecting investor doubts about the effectiveness of the Astra Zeneca vaccine against the new strain.

In the forex market, the dollar is taking a decisive offensive ahead of the June Non-Farm Payrolls report on Friday. The US economy is expected to add 700,000 jobs, which will increase the chances of an early start of tightening of the Fed policy. Last week, a number of representatives of the Fed spoke in favor of raising rates, only the head of Powell chose a bearish tone, but the impact of his remarks on the market was short-lived.

Last week, on Friday, data on US income and expenditures were released, which showed disappointing MoM gains. However, the main interest of the market was of course focused on inflation indicators. Annual growth of Core PCE, which is the preferred Fed measure of inflation, amounted to 3.4% in annual terms, monthly growth did not meet expectations. The US debt market apparently cheered bullish inflation release, yields of longer-maturity Treasuries dropped, indicated that investors flocked into bonds following release of the data.

Despite the fact that the Fed considers inflation to be temporary, it is at its highest since 1992:

 

There are many upside inflation risks, in particular if firms in the US continue to experience hiring problems. Like last time, the dollar may react upward, and Treasury yields will rise if the NFP report shows that monthly wage growth will again significantly exceed the forecast. This will most likely indicate that the labor shortage in the United States persists, which means that companies may be inclined to raise prices, shifting inflation to consumers. It is highly likely that the markets will perceive this as an increased risk of the Fed's sudden move towards tighter credit conditions.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Fears of new Covid-19 strain fuel risk-off USD rally

The Dollar rose to the weekly high amid flight of investors from risk assets in Europe and Asia. A growing number of countries announce restrictions and partial lockdowns (for example, in Australia) as well as impose travel curbs with certain countries. The United States has added Saudi Arabia to its covid list with the note “not desirable to visit” which is not a good sign for risk sentiment outlook. In addition to local sell-off in affected sectors, government responses force markets to take seriously the threat of the spread of the new strain. A direct consequence of this is an overall rise in risk aversion level.

The data on inflation in Germany were in line with the forecasts, however markets needed an upside surprise to keep the euro supported. The absence of inflation risks in the data is a favorable signal for the ECB, which seeks to delay the start of tightening policy. The report fueled sell-off in EURUSD.

From the technical point of view, EURUSD outlook is becoming more bearish. The price consolidated below the lower bound of the trend channel after the breakout, which increases the chances of a further decline:

The situation is similar in GBP, only the decline there is even more powerful, since the Bank of England disappointed with its policy decision last week while covid situation is apparently slightly worse than, for example, in Europe:

 

Despite the rise in cases, the hospitalization and death rates need to be closely monitored to see if the government can move to restrictions. If the numbers are favorable, the risks of new restrictions in GBPUSD will decrease, which will speak in favor of strengthening of the pair. However, it is too early to talk about it.

Currencies sensitive to oil prices suffered losses on Tuesday awaiting OPEC's decision to increase production by 500 thousand bpd. OPEC meeting is due later this week. The correction in oil may continue should key oil consumers roll out more restrictions, which will undermine the outlook for oil demand growth. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Preliminary data indicates US jobs market remained tight in June

European indices remain on a slippery slope due to expectations of new covid restrictions. Intraday losses range from half to one percent. The June inflation release in the Eurozone did not come with a positive surprise for the Euro, inflation rose in line with expectations, which allows the ECB to take its time to raise interest rates.

US data ahead of Friday's labor market report indicate a likely positive surprise. The Conference Board's Consumer Optimism Index rose more than expected, with significantly more respondents from the previous month pointing to improved job opportunities and higher income.

The main indicator increased from 120 to 127.3 points, which is only slightly below the maximum reached before the pandemic. The average consumer optimism index over 20 years is 94.7 points, from this point of view the June reading is really encouraging. Interestingly, both the current conditions index and the expectations index rose, which sets the stage for extension of the positive trend in the next few months.

Before the NFP report, it is import to look at the details of the report that are related to the labor market. The share of respondents who believe that vacancies are plentiful (54.4%) minus the share of respondents who believe that it is difficult to find a job (10.9%) has reached its highest value since 2000:

 

The value and monthly dynamics of the indicator suggests that the demand for labor continued to grow at a decent pace in June. Surprisingly, this may negatively affect the payrolls indicator, since at the same time with the growing demand, there is a shortage of labor supply, which slows creation of jobs. Some workers see no reason to discontinue receiving government benefits and payments, some parents were forced to stay at home because some US schools still conduct remote studies. There is also a part the workers who lost their jobs and decided to retire as the stock market boosted their pension savings over the year. In general, there are several factors that are holding back the growth of labor supply, creating unusual tensions in the labor market, where employers must compete for workers.

Monthly growth in wages is likely to be stronger than forecasts, which should increase pressure on the Fed to raise rates and cut QE. Risks to the dollar and long-dated bond yields are skewed upside what could explain strong dollar performance this week and prevailing pressure in USD currency pairs with major opponents.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Dollar rise may continue this week. What are the key resistance levels?  

The Dollar index resumed rally on Monday amid signs of renewed distress in equity markets. Demand for Dollars could also start to pick up as investors price in potential bullish surprises in the June US CPI release on Tuesday as well as Powell speech on Tuesday and Wednesday.

In the second half of the last week, greenback rally took a short break as June Fed meeting Minutes failed to provide an evidence of a hawkish shift in the Fed’s stance. Recall that after the FOMC meeting in June, there was a growing perception that the Fed may start to taper QE soon and wants to send markets a signal about that. The release of the Minutes lowered chances of this outcome as emphasis in the report was that the goals to reduce unemployment have not been achieved and therefore it is too early to adjust stimulus settings. At the same time, it was noted that the topic of QE tapering did come up in the debates. 

The dollar was selling moderately last Thursday and Friday, with the price bouncing off the upper border of the mid-term trendline:

 

The 100-day SMA is entering a rally for the first time in a long time, and the 200-day SMA also appears to be making a low. The price is close to the moving averages, from this point of view, it will be easy to develop the upward momentum. Breakdown and consolidation above the 92.75 level may become a signal for medium-term purchases.

A strong US CPI report may act as a catalyst for an upturn, but it’s tough to expect inflation to be much higher than forecast. Starting in June, the influence of the low base effect (purely technical factor of increased inflation readings) has been reducing, in addition, the CPI and PPI of China for June, which contribute to the growth of inflation in the rest of the world, have also disappointed:

In China, the PBOC suddenly lowered the banking reserve ratio. This measure means that the central bank eases monetary policy and is designed to free up liquidity for lending or accumulating more assets on banks’ balance sheets. The PBOC often takes this measure when authorities anticipate a weakening of economic activity or an increase in bad debts. In this case, the amount of funds that banks can direct to long-term assets will be about 1 trillion yuan which is considerable as the total private debt is about 18.5 trillion yuan. The PBOC’s decision to ease monetary policy may also reflect concerns about inflation dynamics in June.

The second potentially negative signal from the PBOC can occur on July 15 when it will decide on the medium-term financing rate. If PBOC decides to cut the rate, coupled with the decrease in RRR, this can be perceived as an attempt to stimulate lending activity, at a time when the economy is seemingly on the solid footing. This could be a risk-off signal for financial markets. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

High US inflation doesn’t scare if we look under the hood of the report

June inflation report came as a surprise to investors, however, there seems to be no major shift in Fed expectations after the release. The intraday market reaction after release of the report was quite emotional: USD soared up, long-dated Treasuries fell in price and US stock indexes slipped. By Wednesday, those movements ran out of steam: 10Yr Treasury bond yield retreats, futures for US indices trade in green while USD completely unwound post-report gain:

 

Should we expect Powell to address persistent inflation in his speech today and hint at the possibility of an even earlier withdrawal of stimulus? I think not, and here's why.

Trying to decipher whether high US inflation is temporary or not, i.e., whether or not the Fed should try to adjust the policy or rhetoric in response to its behavior, it might be useful to break it down into key consumption categories and consider contribution of each separately, since there are temporary and permanent drivers of inflation. Consider contribution of the main components in June in the table below:

 

I marked in red the positions that made the main contribution to inflation. It can be seen that the monthly inflation rate for used cars was 10.5%, breaking this year's record. At the same time, the percentage contribution of this component to the CPI reading was about one third.

Fuel price inflation also made significant contribution. On a monthly basis, gasoline prices rose 2.5%.

Otherwise, it can be seen that the numbers are very, very modest. For example, the rental rate for primary residence increased by an average of 0.23% on a monthly basis.

The increase in the price of used cars and fuel can be confidently attributed to temporary drivers, since the demand for them is caused by stimulated consumer demand due to fiscal support measures, seasonal factors as well as world oil prices. Therefore, it would be strange to believe that the Fed will change its opinion on inflation after this report. Markets seem to have also digested the information and the consensus on temporal nature of recent high inflation remains dominant, which is evident, in particular, from the absence of investor flight from long-dated bonds and weak USD performance today.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

June CPI report didn’t impress Powell leaving USD without support

Powell’s cautious comments yesterday curbed USD gains and should support currencies which offer high interest rates as their appeal also depends on how long US interest rate will stay low. Growth opportunities in EUR and GBP against greenback are rather limited, however EM, NOK and other cyclical and commodity currencies deserve attention of investors.

Powell yesterday attempted to strike a balanced position between what the data say and the Fed's own forecasts. While acknowledging that the rise in inflation in recent months has been unexpected and that the situation needs attention, he also said that the underlying reason of growth is a "perfect storm" caused by several drivers that must soon wear off. In his opinion, the Fed should consider the rapid rise in prices as a temporary, unless, of course, it will be repeated year after year. He also believes that current inflation still falls short of the definition of “moderately above the 2% target”.

Recall that breakdown of June inflation into components showed that the two biggest growth drivers was fuel and used cars – prices of the latter in the past three months have been rising average by 9% MoM! Increased demand for fuel, due to, among other things, the effect of seasonal factors, the rally in the oil market spurred fuel prices and its impact on inflation also rose:

 

Prices for new cars also grew at a decent pace - 2.0% in June. Home rent, which accounts for a large share of income, increased by 0.5% MoM.

The concentration of inflationary pressures only in certain components suggests that inflation is indeed more temporary than persistent. Therefore, the impact of the CPI report on market expectations regarding the Fed was short-lived.

Powell's comments were able to stop decline in EURUSD fueled by CP report, however growth prospects are dim and instead it is reasonable to expect the price to move in a range, as the ECB has clearly outlined its position on tightening the policy - it should not be expected in the near future. The same can be said for the Bank of England. The Fed is a little closer to the beginning of tightening the policy, but more data is needed to clarify the timing, so the potential for strengthening the USD remains against low-yielding currencies - EUR, GBP, JPY. But again, markets need more data.

Weak data on the Chinese economy and easing PBOC policy stance also suggest that the process of transition to higher interest rates by other major central banks may slow. China's GDP grew in the second quarter by 7.9% (forecast 8.1%). This week, the Bank of China lowered its RRR and refinanced part of its debt under its medium-term lending program, which is regarded as increases in monetary stimulus support for the economy. In the current situation this may be viewed as a signal of slowing economy which will have repercussions for the rest of the world as well. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

The risk of more downside in equities remains high as bond market moves spell trouble

Correction in risk assets apparently took a break on Tuesday, however weakness in oil and greenback strength persist. After a brief respite early in the session, greenback went on the offensive against major peers, commodity currencies, nonetheless it failed to develop conclusive advantage against emerging markets currencies complex. This is important positive signal suggesting that broad-based flight from risk hasn’t started yet. GBP and NZD led declines against USD, which at the time writing were down 0.60% and 0.55%.

The rally of long-dated Treasury bonds is probably the biggest warning signal that calls for caution. On Tuesday we saw another leg of growth despite major gains on Monday and last week, which could indicate some major shift in sentiment. 10-year bond yield plummeted to 1.14% on Tuesday to the lowest level since February 2021. When demand for long-term bonds rises, investors either expect inflation to ease or start to price out policy tightening from a central bank (or have a mix of these expectations). One way or another, both expectations are likely driven by worsening economic growth prospects.

One of the leading indicators of anxiety/optimism is the spread between yields on 10-year and 2-year US Treasury bonds. When it rises, markets are more likely to expect expansion and vice versa. Since May 2021, this indicator paints a worrying picture:

 

Markets are being swept by a new wave of concerns over the new Covid-19 delta strain. Despite progress in vaccination, the incidence is growing rapidly in parts of Asia and Europe. The threat of new restrictions boosts risk aversion, given the recent powerful rally which sent parts of the market to very elevated levels, risks are shifted towards continuation of risk-off.

Emerging "inconsistencies" in the story of global recovery have been reflected in the odds of early tightening of the Fed's policy. Expectations are shifting in favor of the fact that at the upcoming event in Jackson Hole, as well as at the September meeting of the FOMC, there will be no signals about early start of QE tapering (decline in the rate of Treasury and MBS purchases). In line with Fed Chief Powell's position that employment gaps justify continued monetary stimulus, the move to rate hikes could be delayed until 2022. Until the Fed sheds lighter on this matter, uncertainty related to the next Fed move will be a factor of pressure on risk assets.

The markets are now experiencing their fourth correction this year. The average size of retracement is 4-5%, the current correction is about 3.5% from the highs, that is, nothing critical yet.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

 

This EURUSD technical pattern is a worrying omen for Euro bulls

US equities managed to rebound on Tuesday which discouraged further selling, European markets and US index futures picked up the tone of recovery on Wednesday. As I wrote earlier, EM currencies were remarkably resilient to the mix of strong USD and weak oil prices on Tuesday, some of them even managed to rise against the dollar, which could indicate that risk aversion wasn’t broad-based. 

Today, investors apparently discount worrying headlines regarding pandemic and turn their focus on corporate reports. European indices clawed back 1% on average after yesterday's fall, futures for major US indices rose from 0.1% to 1%. Interestingly, the leaders of yesterday's sell-off – cyclical shares and industrial stocks - rebounded stronger than others - the gains of the DOW and Russell 2000 are the highest among the key US stock indices.

Long-term Treasury yields also rebounded after dropping to a five-month low on Monday which provided welcomed respite as the recent relentless drop in yields was one of the main reasons to worry. Demand for long-term bonds rises when inflation expectations subside or the central bank is expected to keep rates low longer. Both reasons are clearly linked to expectations of a slowdown in economic growth.

Major FX pairs sway in narrow trading ranges, greenback index holds near the opening, cementing support at 93 points. The minutes of the BoJ meeting indicated the Central Bank is concerned about the possibility of inflation recovering despite solid PPI growth and ongoing pickup in activity as behavior of companies operating many years in deflationary environment prevents them from freely transferring rising costs to consumers. The market interpreted this as a signal of yet another delay in paring down stimulus, in particular, slowing down the pace of asset purchases and therefore sold the yen today. The Yen was the only major currency that declined against USD, besides, the rebound from 100-day moving average helped yen sellers to increase pressure:

 

EURUSD holds near 1.18 level ahead of tomorrow's ECB meeting, however selling pressure is apparently subsiding. The meeting promises to be interesting in terms of the impact on the foreign exchange market and the euro, as there is a fairly high level of uncertainty about certain aspects of ECB policy. Christine Lagarde said earlier that the ECB should soon release results of its strategic policy review, it is not known how this will affect the long-term path and the final level of interest rates.

From a technical point of view, the pair is forming an inclined pennant within the downtrend, which indicates that the pair stays in control of sellers which implies higher chances of a downward breakthrough with a short target of 1.17 - the lowest level since April:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

What to expect from the Fed meeting this week? Technical setup in EURUSD

Despite the shocks associated with local Covid-19 outbreaks and calm summer season, stock markets find the strength to reach fresh peaks. On Friday, SPX broke through resistance at 4400 as the US economic data and expectations regarding the Fed meeting favored the risk-on move. On Monday, there was a slight pullback that affected all major asset classes. Longer-maturity bonds saw increased demand while risk appetite somewhat eased. Emerging market and commodity currencies stayed under pressure while oil price failed to score additional gains. Gold rebounded. USD stayed offered which is somewhat unusual when combined with broad weak equity performance, however the sell-off could be due to the uncertainty about upcoming Fed meeting, where Powell may disappoint fans of tight monetary policy if he again focuses on employment challenges in the US.

The correction last week failed to gain momentum as the key selling trigger - local Covid-19 outbreaks and associated potential economic setback - quickly proved to be unsustainable. Markets were fast to discount the gloom as several data sources indicated growing evidence that correlation between growth of daily cases and deaths weakened, especially in countries with high vaccination rates:

The decision of the UK to announce complete lifting of restrictions, despite the surge in incidence, did not seem very far-sighted and even provoked a negative reaction in the GBP, but now the authorities' calculation is clear.

What we need to know before the July Fed meeting? According to the new concept of monetary policy, the Fed will do its utmost to strengthen employment, more precisely to increase its inclusiveness - to involve in work as many people as possible, including people from vulnerable groups. Willy-nilly, the Fed will have to sacrifice price stability, i.e. let inflation fly over the 2% target in this economic cycle. With 6 million fewer employed compared to the pre-crisis period, despite an impressive rebound, the Fed has very little incentive to respond by raising rates to increased inflation rates provided it is seen as temporary. Any, even the slightest hint of a faster monetary policy tightening is likely to lead to a sell-off of risk assets, large USD and Treasury gains as additional hawkish Fed shifts after very hawkish dot plot update in June seem unlikely. 

In case of a dovish stance of the Fed at the meeting on Wednesday, the divergence of policies of the Fed and the ECB should weaken a little and EURUSD may have a chance to recoup losses in August. From the point of view of technical analysis, on the daily EURUSD chart, one can consider the falling wedge pattern, which in the classical literature is considered as a reversal formation. Possible entry points for a long can be 1.17 (1) and 1.175 (2):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Cautious Fed tone fuels risk taking. What’s next for EURUSD, GBPUSD?

The Fed took another timid step towards tightening monetary policy at yesterday's meeting. The Central Bank also acknowledged that increased inflation may linger longer than originally anticipated. However, judging by the reaction of the dollar and bonds, the markets expected more aggressive rhetoric.

The Fed noted yesterday that the economy is heading in a direction that implies a move towards tighter credit conditions, but Powell said it will take a little more time to be convinced of the success of employment growth. Clearly, the debate over when to start cutting the $120bn QE is heating up, but it is unlikely that the Fed will formally announce it before December. Also, yesterday's meeting revealed a few details about how the QE cut will take place. By all appearances, the sale of MBS from the balance sheet will be carried out last, however, the monthly rate of purchase of Treasuries will decrease faster than MBS. However, market interest rates have been wary of the Fed's seemingly hawkish communication:

In addition, comments on inflation and the third wave of covid were more optimistic than anticipated. Powell reiterated its view that current high inflation is temporary however he also noted that there are risks of its acceleration. The increase in the number of new cases of Covid-19, according to Powell, calls for caution, but there is still no consensus on the economic damage from the third wave. The balance of optimism and caution in the Fed's communication leaves room for the regulator to shift to expectations that the federal funds rate hike will begin in 2022. Market expectations price in the first rate hike no earlier than 2023.

The dollar continued to decline after the Fed meeting in line with the idea discussed yesterday. Markets were obviously expecting a more hawkish stance from the Fed in view of the latest developments in US inflation, but instead they saw an extension of the wait-and-see attitude. The dollar index fell to a monthly low of 92 points, EURUSD rose to a two-week high, and GBPUSD was at a one-month high, due to increasing divergence of the policies of the Bank of England and the Fed. Recall that the Bank of England continues to lean towards the need to start raising rates, since the risks of economic damage from the third wave of covid, even after the complete removal of social restrictions, are decreasing. This is indicated by the growing gap in the rate of daily growth of new cases of Covid-19 after the lifting of restrictions and the rate of hospitalisation:

German inflation and US GDP data for the second quarter are due later today. Moderate pressure on the US dollar is expected to develop if the data exceeds expectations, as it will show that the Fed's dovish stance continues to be coupled with strong economic expansion in key developed economies, resulting in increased demand for risk.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US yields are about to bottom out

The dollar starts off the week on a weaker footing, however there is a great chance that bearish pressure will ease as we get closer to Friday. At the meeting last week the Fed left the door open for rumours about a hawkish policy shift in August and the key missing piece that may boost the odds of such an outcome is an upside surprise in the NFP report this Friday. 

The number of new jobs created in the economy (aka Payrolls) has taken center stage in the post-pandemic period in terms of impact on the Fed decisions. It is expected to post decent 900K gain. Stronger-than-expected Payrolls reading will likely fuel speculations that the Fed will hint about QE tapering during Jackson Hole Conference in August. In this case, the market will start to price in decreasing demand in the Treasury market (as a result of slowing Fed purchases) and given the passage of Biden infrastructure plan, which will be financed with new debt, investors may start to quit Treasuries en masse.

Recall that long-term Treasuries saw a strong rise in demand over the past two months (yield-to-maturity slid from 1.75% to 1.20%), however, neither weakening of global economic expansion, nor increased covid-10 risks, which were cited as primary catalysts of the move, didn’t started to materialise. According to JP Morgan, investors continue to fit bearish narratives into the Treasury bond rally similarly to the situation when they explained the Treasury sell-off caused by the actual rebalancing of Japanese investors before the end of the fiscal year (when the 10-year Treasury yields rose from 1.0% to 1.75% in 1Q) by sharply increased inflation expectations and growing risks of economy overheating. The investment bank points to the interesting fact that the latest slump in bond yields was not accompanied by a corresponding increase in open interest in Treasury futures, that is, investors did not make new bets on the deterioration of economic situation, but only adjusted the previous ones.

The sell-off in long-dated Treasuries earlier this year was accompanied by rebound in the dollar index from 89.5 to 93 points. The new wave of Treasury bond sales will most likely also provide strong support to the dollar. 

Preparations for this week's NFP report kicks off with today's ISM and Markit Manufacturing indices of activity. It is especially interesting to look at the dynamics of the sub-indices of employment and prices - the first will tell you what to expect from the NFP in the production sector, the second - whether the effect of delays and supply bottlenecks, as well as excessive strong demand, which slow down the economy, are disappearing. The key indicators of the report are expected to extend rise, i. e. the rate of expansion of activity in the sector remained positive in July. A weak report, in my opinion, will have a material impact on the market and will likely fuel more USD downside.

The ADP report and non-manufacturing PMI from ISM are due Wednesday. This time ADP lays down a more conservative estimate of job growth - only 700K (versus 900K NFP). Also pay attention to the hiring component of the ISM index - last month it was in the depressed zone and it is essential to see a rebound to expect strong NFP figure. The greenback are risk assets are expected to post pronounced reaction on release of the reports. 

 

 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

What does ISM Manufacturing data tell us about July NFP?  

The latest CFTC data showed that investors continued to build up USD longs ahead of the Fed meeting in August. Given the downside in USD last week, this dynamic was quite unexpected. It can be assumed though that by selling dollars after the Fed, market participants were either taking profits or pursuing short-term speculative goals. The data also showed that more long positions of speculators were closed in CAD and NZD futures, i.e., in currencies that have a relatively high correlation with the recession-recovery cycle of the world economy. This fact, of course, does not inspire optimism.

Aggregated data on the currencies of the G10 countries showed that net long position on the dollar increased in the week ending July 27 from 1.5% to 3.0% of open interest. The dollar increased its advantage against all G10 currencies with the exception of the CHF.

The changes in the CFTC positioning data indicate an increase in bullish sentiment for the dollar, despite the negative reaction of the US currency to the July Fed meeting. This may indicate that underlying drivers of the weakness could be short-lived as Fed tightening is in cards despite relatively dovish message last week, which should offer broad support to USD. 

The July ISM Manufacturing Activity Report showed improvements in two key components - prices and employment. The purchasing managers said that hiring of workers increased compared to the previous month while the situation with high prices for raw materials also changed for the better. The hiring sub-index rose from 49.9 to 52.9 points:

At the same time, the prices sub-index fell from an extremely high reading of 92.1 to 85.7 points:

Despite the fact that the broad indicator fell short of forecasts, the details of the report pointed to the dynamics favorable for a strong NFP report on Friday, and hence the stronger dollar. Recall that the major constraint in the expansion of US jobs was the labor shortage. It is clear from the ISM report that the manufacturing sector has begun to see positive shifts for job growth.

The leading ISM new orders declined for the first time in several months (from 66 to 64.9), which may be an early sign that activity in the sector will soon plateau.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

What to expect on ADP report today? Medium-term analysis of NZUSD

The NZD rose nearly half a percent against greenback after data released Wednesday showed that New Zealand's unemployment rate returned to the record low level that was before the virus outbreak. The share of unemployed fell from 4.6% to 4.0% in July, well ahead of the modestly positive forecast of 4.4%. Wage growth rate advanced to the highest level in 13 years, which indicates a strong increase in pro-inflationary risks and will likely prompt a hawkish intervention of the Central Bank. The RBNZ is expected to raise the rate at the upcoming meeting, however, the upside potential of the NZD is far from being exhausted, given that there is a risk of a large rate hike by 50 bp at once, as well as the risk that the Central Bank will not rule out the possibility of more rate hikes, which could form sustainable bullish sentiment on the NZD.
From the point of view of technical analysis, the bullish scenario for the NZD can be supported by the following observations. On the weekly NZDUSD chart, we can see a wedge pattern, the formation of which began at the end of last year and continues to this day. The wedge has a negative slope relative to the main bullish trend, therefore it can be considered as a trend continuation formation. On a larger scale, the idea of a trend continuation looks even more plausible because the multi-year peaks are still far away:

In the past few weeks, NZDUSD has been in indecision, which can be concluded from the shape of weekly candlesticks that had long tails and small bottoms - intra-week fluctuations were characterized by both up and down movements with a slight advantage for sellers:

The bounce from the lower bound of the pattern two weeks ago and expectations regarding RBNZ decision which warrant sustainable upside sentiment suggest that bulls may venture a test of the upper bound of the pattern in the area of 0.7150-0.7170 in the coming weeks. 
On Wednesday, the dollar is trying to maintain the edge ahead of release of the first batch of labor market data for July - ADP report and ISM report on activity in the services sector. The situation in the manufacturing sector, as shown by a series of data earlier this week (ISM, factory orders, equipment spending) suggests contribution of the sector to the growth of payrolls in July likely beat forecast. However, the share of employed in mfg. sector in the total employment is relatively small, so the ISM report in non-manufacturing sector is much more important in preparing for the NFP. Employment in services sector is now highly subject to fluctuations induced by swings in consumer mobility and social restrictions. Let’s be careful here, since it was in July that the incidence of Covid-19 began to rise in the United States:

Correlation of covid daily cases growth with severity social restrictions is gradually weakening, but this process is slow, so rising incidence in the US in July could still have a drag on creation of jobs due to the pressure on services sector. A negative surprise in ADP and ISM is likely to trigger a wave of dollar sales as it would become more difficult to expect a strong NFP, which is the key report for predicting the Fed's policy move in August.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

EURUSD may break 1.17 if the US July CPI indicates persistence in price growth

The dollar started the week on a positive note and on Tuesday continues to consolidate around the resistance at 93 points on DXY. Technically, there is a second retest in three weeks of the upper bound of the medium-term wedge pattern, which began to form about a year ago:

 

Most likely, this signals that buyers are gradually ramping up pressure ahead of the release of the US CPI in July, the upcoming conference in Jackson Hole, as well as against the background of an increase in the number of defensive deals due to the onset of the delta strain in certain regions. Also yesterday, the Fed representatives Rafael Bostic and Eric Rosengren made positive comments for the dollar. Their rhetoric came at a time when the market is quite certain that the Fed will begin to tighten policy this year, but they added a sense of urgency as they said they would prefer a fast approach. This means that the Fed may begin to wind down QE as early as September, if the employment recovery maintains the pace at about the same rate as in July (~1 million new jobs).

The speculation that the Fed may begin to wind down QE in September will definitely provide strong support to the dollar, since the scenario is far from the main one and yet to be factored in asset prices, including USD rate. Today's comments by Fed spokesman Loretta Mester on inflation risks may further clarify the possibility that the Fed will make a sharp hawkish shift in policy in September.

The only economic calendar report that deserves attention today is the NFIB Small Business Optimism Index. Therefore, the risk appetite in the market may now be driven by price movements in the commodity markets, which this week turned out to be significantly worried about demand outlooks. Oil began the week with a decline of more than 3% amid negative news from China related to the spread of the coronavirus. Industrial metal prices also reacted negatively to the heightened risks of new restrictions in China that could affect production. Nevertheless, we observe recovery in commodity prices on Tuesday as newsflow gradually improves. 

In addition, the release of the ZEW report on Germany is due today. It is unlikely that the positive surprise will be able to stop the downtrend in EURUSD, as investors are focused on the factor of the Fed's policy. The potential test of 1.17 level in EURUSD will coincide with a breakout of medium-term pattern in DXY, which looks logical, but development of this move will depend on whether the DXY price can gain a foothold above the boundary line:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

July US inflation failed to surprise markets as temporary drivers fade

Inflation in the US rose by 0.5% in July in monthly terms, which was in line with expectations, however, core inflation rose by 0.3%, which was less than the forecast of 0.4%. Annual inflation remained unchanged compared to June and amounted to 5.4%.

The data for the first time in several months indicated a sharp slowdown in the growth of used car prices. This CPI component showed an average growth of 10% MoM for three months in a row, making a significant contribution to the rise in overall inflation. In June, used cars rose in price by only 0.2%. In addition, prices for air tickets interrupted growth, sliding by 0.1% MoM. These two components were the main reason why core inflation fell short of forecasts:

It can also be noted that the coverage of inflation has become broader - the number of categories of goods where the monthly price increase was zero or positive has increased. For example, prices in recreation category rose by 0.6% MoM, in housing services by 0.4% MoM. Price growth of medical services amounted to 0.3% MoM 

Judging by the behavior of the key CPI drivers (cars, air tickets, fuel), the annual inflation has most likely passed its peak and is now going to decline. Nevertheless, return to the comfortable for the Fed inflation range with an average of 2% may be delayed. The main reason is the stimulus-driven boom in the US economy. Demand continues to recover faster than supply and with the scars the pandemic has left on the economy, adjustment will take longer than the policymakers expect. This also applies to the labor market, where the demand for labor also exceeds supply, which is why inflationary pressure on wages persists. The latest US NFIB report indicated that a record high proportion of small businesses have unfilled vacancies. JOLTS data for June showed that the number of posted vacancies was 3.4 million more than the number of people hired. On the side of production ISM data still point to record low levels of inventories, and delays in the supply of goods and raw materials are also near extreme levels.

 All this leads to the fact that price pressures in the economy continue to be high. Thanks to strong stimulus-fueled demand, companies feel that their price power is increasing. According to the same NFIB report, the number of companies that have raised or are about to raise final prices are at their peak for 40 years. Therefore, the prospects for inflation persistence in the United States remain very high, even though its peak may have already passed.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Weak US consumer sentiment data hints at weak July Retail Sales print

Risk appetite in equity markets eased on Monday after release of disappointing data on Chinese economy. Industrial production rose 6.4%, missing expectations of 7.8%. Fixed capital investments also grew at a slower pace than expected (10.3% versus 11.3% expected). Manufacturing in China is also one of the key barometers of global recovery, so weaker-than-expected growth could be an early signal that either the global recovery is peaking or expansion of manufacturing continues to be constrained by rising commodity prices, supply disruptions and bottlenecks. By the way, not only China has faced this problem during current phase of the business cycle.

The rise in retail sales in China was also a big negative surprise. In annual terms, it amounted to only 8.5%, which was significantly lower than the forecast of 11.5%. Oil prices weakened after release of the report, as did the AUD and NZD, which are also guided by consumption picture in China. However, the NZD is now being underpinned by expectations that the RBNZ's rate hike this week will also leave room for further policy tightening if price increases or the labor market continue to surprise.

Long positions in the dollar and pound rose, the latest CFTC data showed. Data for the week ending August 10 showed that speculators continued to build up their dollar longs. The aggregate long position on the dollar against the currencies of the G10 countries rose 3% from open interest.

Nevertheless, there was a pretty strong dollar sell-off on Friday. The index slipped from 93 to 92.5 points on Friday, amid very weak data from U. Michigan. According to the organization's report, consumer confidence in August fell from 81.2 to 70.2 points:

Weak data suggests that consumer momentum may have started to fade in July, which is likely to affect retail sales due tomorrow. The benchmark is expected to slow down by 0.2% on a monthly basis, a stronger negative surprise could lead to additional dollar sales, as in this case, the chances of the Fed's hawkish rhetoric should be noticeably reduced. This week the risks for the US dollar are shifted towards further easing:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Downbeat Retail Sales surprise could amplify negative impact of the Fed QT news, extending equity correction

Global equities are down for the second day in a row while USD stands firm ahead of release of the US retail sales report. Consumer optimism in the US dropped quite sharply in August, showed data from U. of Michigan on Friday laying the groundwork for downbeat surprises in US consumption while the latest Bank of America’s estimate of retail sales in July calls for a closer look at the possibility of further correction of risk assets. With market consensus of -0.2% MoM, the US bank did not skimp on pessimism, estimating that the monthly decline in retail sales could be as much as 2.3%:

 

At the same time, core retail sales, which more accurately reflect consumer optimism, may decline even more - by 2.7%. This is in line with the deterioration in consumer data from U. of Michigan.

One of the main reasons for a weak headline print may be decline in car sales. Inflation data for July showed that price growth for used cars fell from 10% to 0.2% MoM, so the decline in sales in this sector is already largely priced in. However, markets will likely react on surprising reading in core sales, i.e., retail sales which doesn’t include cars and fuel.

The risk of emerging slack of the key driver of economic pickup in the US - consumer boom, overlays expectations that the Fed this week and next will start to provide details on curtailment of monetary stimulus, in particular monthly bond purchases. Obviously, this will not be the right moment for this news as investors may start to price in a policy error from the Fed. In this case, we may observe an increased demand for long-term Treasuries, i.e., falling yields. So far, moderate sales of risk assets may be just an expression of these concerns.

Tomorrow, the minutes of the July Fed meeting are due, which will likely reveal some technical details on how the Fed can conduct QT and how long this process can take. Obviously, if these details appear in the data, it will be a hawkish signal for the markets, while weak economic statistics today are likely amplifying the negative market reaction to the Fed policy report tomorrow.  The risk for equities especially US stocks are skewed towards further losses in the coming days as the data may reveal that the Fed picked wrong time for announcements regarding withdrawing monetary stimulus. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Dollars surges on equity correction, markets fear Fed tightening

July Fed Minutes released on Wednesday hit risk appetite despite lack of clear hawkish shift in the tone of wordings. Markets saw renewed selling pressure albeit with more vigor thanks to synergy of selling catalysts – lackluster July US retail sales, growing hawkish bias of the Fed, growing dollar’s appeal as ultimate safe heaven, as well as seasonal weakness. Amid a surge of risk-off, greenback index soared to a 10-month high (93.50 level in DXY).

Small-cap and value stocks led declines with Russell 2000 futures falling 1.7% at the time of writing and European equity indices, populated mostly by value stocks, erasing 2% on average. SPX futures tanked 1% today, extending 1% loss of S&P 500 during NY session on Wednesday. There is a clear market bias to short stocks which upside is positively correlated with expectations of economic recovery suggesting a repricing of economic growth prospects is underway.  This bodes ill for potential depth of the current decline which may be the first serious market pullback after series of short-term dips earlier in the year whose depth was less than 5%.

Minutes of the July FOMC meeting showed that officials did discuss QE, but their opinions were divided over when to start phasing out stimulus. Some officials proposed to start this fall, others - at the beginning of next year. Nevertheless, the very fact that QE end is in sight and higher prospective interest rates on bonds will induce major equity-bond rotation dampened the mood in equities. After a brief upside bounce on the release of the Minutes, S&P 500 turned into decline:

 
 

But what’s really disturbing is that the Fed’s tapering story unfolds around the same time as US data started to show signs of fading growth momentum. Weak retail sales in July and consumer sentiment in August put a major dent on recovery hopes. There may be growing concern among investors that August data will extend the streak of downbeat US data surprises, which greatly adds to risk-off and makes current valuations fragile. 

Today there will be data on applications for unemployment benefits, which can somewhat ease bearish pressure if it shows that positive labor market trend remains intact. In addition, markets will watch on the Philadelphia Fed Business Outlook to see if US businesses are starting to feel any weakness of the economy. 

Considering DXY positioning, it can be seen that price made decisive breach of the upper line of the pattern:

The previous idea of a false breakout appears to be defied by the latest price action as DXY has been given powerful boost by flagging support in equity which induced safe-haven flows. The prospects of further decline also imply additional upside potential of the US currency with EURUSD’s next closest target at 1.16 level. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

The rebound of EURUSD may be short-lived as Fed Powell speech is ahead

Oil prices escape the grip of sellers and stage rebound on Monday after spending almost entire last week in correction. Equity markets rebounded as well which drove sell-off in USD as risk-off flows ebbed. Long-dated bond demand eased in top economies as risk appetite appears to be on the mend. 

Last Friday, Fed representative Robert Kaplan said he may reconsider his call to wind down QE early, as the delta variant has shifted the trajectory of the economic recovery to a less favorable one.

There is slight but growing risk that the Fed may disappoint market hawks this week signaling about prolonged QE. The RBNZ was unable to raise rates last week, citing a slowdown in the economy due to the new lockdown. Weak economic data for July, in particular inflation and retail sales, thwarted the Bank of England's plans to tighten policy. Other central banks have also softened their rhetoric somewhat in recent times.

Strong Korean data and Thailand's covid data have drawn investors into Asian equities. In addition, Chinese stocks have also gone up, which has not happened often lately. The Central Bank of China continues to set the USDCNY reference rate below 6.50, which indirectly supports other EM currencies.

The news that Yellen supported Powell's candidacy as head of the Fed for the next term could also have a positive impact on the markets. Given how Powell is smoothing out the position of fellow hawks in the shop, the extension of his term will definitely positively affect the chances of a longer withdrawal of the Fed from soft credit conditions.

Eurozone business activity has remained strong this month, although it has declined from its 20-year high in July. The data released on Monday came slightly worse than expected, which, however, did not prevent the euro from strengthening against the dollar. Markit noted that the economy maintained impressive momentum in the third quarter, with supply chain delays continuing to curb expansion. It also suggests that firms have not yet finished raising prices in response to rising costs, which bodes well for short-term inflation outlook.

The euro was encouraged by the dynamics of the employment sub-index, which remains at a record level for the second month in a row (56.1 points in August).

The main source of volatility this week should be Powell's speech at the Jackson Hole conference in Wyoming, USA. It is unlikely that equities will be able to develop today's rebound closer to the meeting, as the uncertainty about Powell's remarks is very high. The positions of other Central Banks also add contradictions. Dollar buyers are likely to be found with the dollar index (DXY) at 93.20 while EURUSD should face stiff resistance near 1.1750 this week as the pair develops rebound from a downtrend line as breach of April support level failed to sustain:

Disclaimer:  The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning:  CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.