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Fed will hike aggressively also in the future

DJ chart 09 22

DJ created a lower high yesterday and plummeted after the Fed said it would remain aggressive. According to Powell additional large increases were likely even if the risk of recession increases. As expected, under this scenario investors pulled their bids making the market vulnerable. Dow is getting relatively close to a highly important support level: The June low (at 29647) is now only 1% away. At the same time, we have an important market structure not too far from the current levels (at 30533). This is likely to result in a fluctuation between these two levels giving us trading opportunities on both sides. The market is also trading near to bear channel low which suggests the market is oversold and could bounce back a bit. Alternatively, a break below 29957 would be likely to push the market to 29760 or so. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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The longer-term view on equities has several uncertainties. Inflation, Russia’s war in Ukraine, China’s zero covid policy, and the energy crisis are all significant negatives for global growth. And, now it seems that on top of this the Fed could be even more hawkish than the central bank has signalled before. The Fed bankers projected that the rates would be at 4.6% by the end of the year 2023. This is a significant increase from 3.8% in June.

USDJPY chart 09 22

USDJPY – The Fed hikes aggressively and BoJ keeps the ultra-dovish policy untouched – again!  This keeps USDJPY bids firm and the currency pair bullish as the interest rate differential between the US and Japan favours the dollar over the JPY. If USDJPY breaks above the 144.96 resistance and holds the levels above it we should see a move to 148.00 or so. My T1 for the pair is 146.80 and T2 147.60. Alternatively, the pair drops back into the range and trades down to 142.60.

EURUSD chart 09 22

EURUSD dropped into new lows for this year. I said yesterday that I expected EURUSD to move below 0.9864 if the Fed remains aggressively hawkish. Now the market trades below this level and we should expect to see further downside. Below 0.9864 my T1 is at 0.9760 and T2 at 0.9730.

DAX chart 09 22

DAX traded also lower and almost touched the channel low before turning higher. It’s interesting how well Dax has followed the channel (yesterday it reversed at the channel top). So in order for Dax to reverse the downtrend it needs to break out of the channel. Otherwise, the downside risk remains. The nearest key price levels are 12445, 12602 and 12860.

Gold chart 09 22

Gold was quite difficult yesterday as it just fluctuated around and didn’t manage to break out of the trading range. I’m surprised that the volatility created by the FOMC wasn’t enough to create a proper breakout. The market however is in a downtrend until we get a decisive break above 1680.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveThe Fed hiked by 75 bps to the 3%-3.25% range and promised more aggressive hikes.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.64%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate dropped more than expected. The July reading (YoY) came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • CHF SNB Monetary Policy Assessment and Policy Rate
  • CHF SNB Press Conference
  • GBP GBP Monetary Policy Summary and Official Bank Rate
  • USD Unemployment Claims
  • EUR French Flash Services PMI
  • EUR French Flash Manufacturing PMI
  • EUR German Flash Manufacturing PMI
  • EUR German Flash Services PMI
  • GBP Flash Manufacturing PMI
  • GBP Flash Services PMI
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m
  • USD Flash Services PMI
  • USD Flash Manufacturing PMI
  • CHF SNB Chairman Jordan Speaks
  • USD Fed Chair Powell Speaks

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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