Powell’s words yesterday soothed the markets with an assurance that the Fed is not going to be in a hurry to start tapering their asset purchase program. In his testimony to the US House of Representatives Financial Services Committee, Powell expressed his belief that the strong inflation seen after the US economy started opening again isn’t going to last. The reaction to Powell’s speech in the currency markets has been mixed with the commodity currencies moving slightly lower and the JPY rising slightly. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
There is no significant change in the USD index since the time of Powell’s speech. The major stock indices didn’t react strongly either with the S&P 500, the Nasdaq and the Dow Jones Industrial Average being almost unchanged at the time of writing this. In precious metals, the story is quite similar, no significant reaction to Powell’s speech in the prices of gold or silver.
WTI Crude (-2.82%) traded lower, however, but instead of Powell’s speech, the move was driven by a deal between the OPEC+ countries that was seen in the markets as a compromise. The deal allows the UAE to increase production next year and takes time to finalize. Therefore, it seems that yesterday’s move lower was probably related to profit-taking after a long-run higher in the price of oil as US data signalled lower demand for oil over the week ending July 9th.
In yesterday’s trading the S&P 500 (+0.12%), the Nasdaq (-0.22%) and the Dow Jones Industrial Average (-0.13%) traded sideways while there was more action at the sector level. Following the drop in the price of oil, the energy sector (-2.98%) did quite badly. The financial sector (-0.46%) followed, although with smaller losses, as Powell’s speech moved the yields lower. Investors moved money over to the consumer staples (+0.89%), the real estate (+0.88%) and the utilities (+0.87%) sectors. This suggests some nervousness on behalf of the investors.
Some of the biggest names in banking released their second-quarter profits yesterday. Wells Fargo & Co (WFC, +3.98%), Bank of America Corp (BAC, -2.51%) , Citigroup Inc (C, -0.29%%) and JPMorgan Chase & Co (JPM, -0.34%). Citing growth in deposits, loans and credit card spending the banks’ reported a combined profit of $33 billion.The biggest winners in yesterday’s trading (among the TIOmarkets equity CFDs) were WFC (+3.98%), AAL (+3.00%), AAPL (+2.41%), KO (+2.25%) and CTXS (+1.94%). The biggest loser unsurprisingly was Devon Energy, DVN (-5.76%) that suffered as the price of oil and the energy sector, in general, came lower. Other significant losers yesterday were (ILMN, -4.67%), BB (-3.79%), EOG (-3.71%) and SLB (-3.46%).
Chinese GDP disappointed slightly at 7.9% (8.0% expected) while the Australian employment change was a positive surprise (29.1K, 19.7K expected) and so was the Australian unemployment rate (4.9%, 5.1% expected). No major reactions in the AUDUSD. The next major risk event today the Fed Chair Powell’s second testimony, although we don’t expect to hear anything new from the Fed Chair. For more information and details see the TIOmarkets economic calendar here.
Market update: We pointed out in yesterday’s report how NZDCAD has broken out of a bullish wedge, retraced back to the SMA(20) and rallied on the back of the news that the RBNZ is looking to start tapering by the end of the next week. It was reported yesterday that the new pace of QE by the BOC is $2 billion per week, down $1 billion ($1Bn of taper, as forecasted by the analysts). As a result, the NZDCAD traded above the 0.8781 resistance which suggests that the BOC was expected to be more hawkish. The technical picture remains bullish as the pair has gained strength and has broken the 0.8781 resistance level. The key S&R levels in NZDCAD are 0.8596, 0.8667, 0.8781 and 0.8852. The two resistance levels roughly coincide with the 23% and 38.% Fibonacci retracement levels at 0.8768 and 0.8875 respectively. A decisive move below 0.8667 would negate the bullish technical indications.
GBPUSD retraced back to the bullish wedge formation but attracted buying at the level and is rallied 0.37% yesterday. This behaviour is in line with our bullish expectations of this pair. If the market doesn’t move below yesterday’s low of 1.3800 it looks likely that the pair will move to the 1.3838 and perhaps even beyond. The next significant resistance is at 1.4000. A move below 1.3844 would turn the technical in GBPUSD bearish.
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 FED||The Fed has now changed the tune and is moving away from the ultra-accommodative monetary policy. Currently, the expectation is that the first-rate hike would take place in the second quarter of 2022.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration is negotiating with the Senate Republicans to introduce a $1.2 trillion infrastructure stimulus plan.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||Even though the June NFP report came in better than anticipated (+850K) the total is still 6.8 million jobs lower than at its peak in February last year. However, the Fed has said earlier recently that believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.|
|Inflation||The year on year headline CPI change for June was 5.4% (4.9% expected. This suggests the Fed might have an incentive to move quicker in their tapering plans.|
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Market News & Facts
- Chinese GDP 7.9% (8.0% expected)
- Australian employment change 29.1K (19.7K expected)
- Australian Unemployment Rate 4.9% (5.1% expected)
- BOC tapering: $1Bn per week vs $1 Bn expected
- Australian July Consumer Confidence Index +1.5% m/m (-5.2% expected)
- SNB’s Jordan: long-term inflation expectations well-anchored
- US CPI for June +5.4% y/y (4.9% expected)
- US, UK trade ministers agree to address China’s anti-competitive practices
- Another 4 to 6 weeks of lockdown in Sydney, Australia
- Fed’s Barkin: tapering delayed if labour market recovery slow
- Germany wholesale price index for June 1.5% (1.7% previous)
- Dutch Covid-19 cases up eight-fold in a week
- China state media: more economic support on the way
- Japanese June PPI 0.6% m/m (0.6% expected)
- Lagarde: ECB policy guidance to change
- UK GDP m/m +0.8% (1.5% expected)
- Record high coronavirus cases in South Korea
- Sidney stays in lockdown as cases increase
- Analyst consensus: BOC to taper by 1 bn CAD next week
- Chinese CPI 1.1% y/y (1.3% expected)
- ECB inflation target to 2%
The Next Main Risk Events
- USD – Fed Chair Powell Testifies
- NZD – CPI q/q
- JPY – BOJ Outlook Report
- USD – Core Retail Sales
- USD – Retail Sales
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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