Risky assets rallied after the Fed introduces the biggest rate hike (75bp) since 1994. This moved the Fed Funds target rate to the 1.5% – 1.75% range. Fed bankers indicated there would be further rate hikes by the end of the year, taking the key US interest rate to 3.4% by year-end. The rally in risky assets was quickly reversed though and now stocks indices and commodity currencies have corrected back to pre-announcement levels. 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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DAX put in a higher low yesterday and reacted somewhat positively to the FOMC decision. This created some hope for the bulls that the market could be ready to react higher. There just isn’t any hard evidence (in a form of positive price action today) yet to support the bullish view. There’s a decent risk that this doesn’t happen due to various risks ranging from stagflation to geopolitical risks and the high interest rates. The key price levels for intraday trading in DAX today are 13219, 134001 and 13650. If DAX can break out of the range to the upside we have a measured move target at 14060. If the breakout happens to the downside then the measured move target is at 12820.
DJ looks pretty similar to DAX. The index is trading between a support and a resistance level. The market will break out of this range and the question is which way will it go and how much might it move after the breakout. As there are quite a few risks in the global economy at the moment it could well be that the breakout will happen to the downside. The measured move targets for DJ are 31750 and 29250. The nearest key levels are the range edges at 30140 and 31015.
AUDUSD is trying to reverse a recent downtrend. For this reversal to be successful the green team has to engage the market above yesterday’s low. At the time of writing this, the market is correcting lower together with the DAX and DJ. AUDUSD goes on my list of potential longs for this week. Today’s price action is in a key role and if we indeed see the bulls defending levels above 0.6850 there could be a long trade in this market.
USOIL – We studied oil in yesterday’s Live Analysis Webinar and noted how the market was losing momentum. Now that we have a decisive break below supports, the two downside targets I gave yesterday are valid. My target one is at 111 and the target two at 107. Alternatively, the market rallies decisively above the 114-115 resistance area and moves to the 119.50- 120 range.
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 Reserve||Fed hiked by 0.5% in May but according to Powell 0.75% hikes are off the table.|
|Stimulus||The Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe.|
|Yields||The US 10-year treasury yield has been drifting lower since early May as equity investors have moved over to T-Bonds in search of safety.|
|Employment||The May non-farm payrolls increased by 390K (436K previous) while the participation rate was confirmed at 62.3% (62.2% previous). The unemployment rate remained unchanged at 3.6%.|
|Inflation||The US annual inflation growth for May accelerated to 8.6%. This was the highest reading since 1981. Analyst consensus had expected the yearly rate to be 8.3%. The prices for energy (+34.6%) and food (+10.1%) made record increases. For food, this was the first increase of 10% or more since March 1981.|
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The Next Main Risk Events
- CHF – SNB Monetary Policy Assessment
- CHF – SNB Policy Rate
- CHF – SNB Press Conference
- GBP – MPC Official Bank Rate Votes
- GBP – Monetary Policy Summary
- GBP – Official Bank Rate
- USD – Philly Fed Manufacturing Index
- USD – Unemployment Claims
- JPY – Monetary Policy Statement
- GBP – Retail Sales m/m
- JPY – BOJ Press Conference
- USD – Fed Chair Powell Speaks
- USD – FOMC Member Waller Speaks
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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