If progress continues as expected, the Fed may soon start tapering. Fed Chair Jerome Powell in his speech noted that the inflation threshold for tapering has been achieved but when it comes to employment not all of the FOMC members agree. “Many on FOMC think the test for employment to taper has been met; others think it is close,” Powell said. According to Powell, the Fed could move ahead at the next meeting but it depends on employment. He emphasized earlier that millions are still out of work but now he sees the labour market as ‘almost there’. This makes the next NFP report highly important. A bad report could delay tapering which would of course be dollar bearish. The FOMC also decided to keep the rates unchanged which was no surprise. Powell has stressed that the Fed will keep tapering and rate hike schedules separate. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The USD has been the strongest currency since the FOMC Statement yesterday but has started to lose some ground in today’s trading. AUD and NZD are the weakest currencies at the time of writing this. Heads up for the PMI numbers from France, Germany, the UK and the US. The PMI releases are often big market movers. The benchmark US 10-year Treasuries yielded 1.32% at the end of the trading yesterday. Previous close: 1.33%. All % performance charts in this report are courtesy of Tradingview.com.
Silver has suffered the most since the time of the FOMC yesterday while USOIL has been rather strong. Gold rallied to a resistance that sent the price lower. More hawkish Fed is bad for gold bulls and the rejection candles in both daily and 8h timeframes suggest further weakness for the gold market. See our USOIL and XAUUSD analysis further down in this report. All % performance charts in this report are courtesy of Tradingview.com.
The S&P 500 (0.95%), the DJIA (1.00%) and the Nasdaq (1.02%) indices rallied nicely yesterday even though the FOMC indicated they might start tapering soon. This indicates strength. Another indication of strength is nine of out 11 S&P 500 sectors closing in the green. The advance was spearheaded by the energy (3.08%) and the financial (1.67%) sectors. The best-performing stocks on our watchlist were DVN, COP, BA, EXPE and AAL while FDX, FB, ADBE, UPS and BIIB were the biggest losers. All % performance charts in this report are courtesy of Tradingview.com.
The above chart shows the % performance of each stock. Stocks are presented here with the S&P 500 tracking ETF (SPY, red line) to illustrate the performance of each stock relative to the benchmark index. This allows our readers to see the potential for intraday trading opportunities in these stocks. Often the sudden increase in volatility continues on the second day. You should, therefore, keep monitoring these stocks to see if they will satisfy your criteria for a trade. All % performance charts in this report are courtesy of Tradingview.com.
TToday’s biggest risk events are the PMI numbers from France, Germany, the UK and the US. Also, pay attention to BOE Monetary Policy Summary. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
The downtrend prevailed in EURUSD. Yesterday we gave the key price levels to focus on in EURUSD with the nearest level at 1.1748 (the high from the day before and the 23.6% retracement). The FOMC initiated volatility rallied EURUSD to this level, and after a slight penetration, the USD bulls took control driving the pair lower. Now, that the Fed signals tapering could start soon we have further reasons to believe that the USD continues to strengthen and thus EURUSD breaking out of the downtrend and rallying strongly is a low probability event. The key price levels for this market are 1.1664 (August low) and the 1.1748 – 1.1759 range (yesterday’s high and 23.6% retracement, the channel high). A break above 1.1755 would negate bearish indications in this market.
Market update: USOIL keeps on trending higher as demand for fuel grows while simultaneously stockpiles are declining. Oil production is still hampered after the recent hurricanes. We wrote yesterday how USOIL was rallying after US Crude Oil inventories fell more than anticipated as demand improves. The rally started at levels where the SMA(50) and a bull channel low coincided. We noted how the market was trending higher in 8h timeframe and that it was likely to tackle the 72.87 resistance next. Those following the trend now have profitable positions with a profit as the market has continued to move higher. The key price levels for USOIL are 66.90, 69.34, 72.87, 73.88 and 76.38. A break below 69.34 would negate bullish indications in this market.
Gold rallied to the 1782-1783 resistance area in the aftermath of the FOMC press conference. This level used to hold the price in a range for several days but acted now as a resistance level. The bearish rejection candle created at the resistance level yesterday together with the Fed signalling firmly that they are looking to taper soon indicates more weakness in gold. The nearest key price levels for XAUUSD are 1717.70, 1742.13, 1787.14 and 1808.61. The Fed changing its rhetoric and a series of higher lows and broken resistances would nullify the bearish indications in this market.
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||Fed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in 2021 but also voiced concerns about the spread of the delta variant. Now the Fed signals (September 22nd) that taper could start soon but hints that negative developments in the employment front could cause a further delay.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.|
|Yields||Apart from the recent pickup (that started in August 2021), 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||After two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.|
|Inflation||The month on month Core CPI (excluding food and energy) for August was confirmed at 0.1% (0.3% expected) while the headline inflation (y/y) came in line with expectations (5.3%, 5.3% expected, 5.4% prior). The core CPI increased 4.0% on a year-on-year basis after advancing 4.3% in July. Fed’s view that inflation is transitory seems correct.|
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The Next Main Risk Events
- CAD – Canadian Retail Sales and Core Retail Sales
- GBP – BOE Monetary Policy Summary
- USD – US Flash Manufacturing and Services PMI
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- FOMC: tapering could start soon
- Fed keeps the rates unchanged
- BOJ keeps its monetary policy unchanged
- API shows a drop in US crude stockpiles
- S&P ratings expect Evergrande to default
- Trudeau to win the Canadian elections
- RBA not looking to raise rates before 2024
- UoM consumer sentiment 71.0 (72.2 expected)
- New Zealand manufacturing PMI 40.1 (62 prior)
- Democrats looking to repeal Trump’s tax cuts
- China to release zinc, aluminium and copper from its reserves
- New Zealand GDP 2.8% (1.4% expected)
- Australian employment change -146.3k (-90k expected)
- UK August CPI 3.2% (2.9% y/y expected)
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