The old saying goes: Don’t fight the Fed! The Fed is the 800-pound gorilla in the room and if you try to fight it you’ll just get badly hurt. To all of those that have tried to short the dollar, yesterday and the day before has been a stark reminder of this fundamental truth. If you are still trying to fight the Fed with your tiny retail account sit back and think about the hundreds of billions in big investment funds that are managed by highly qualified professionals and you’ll realise the foolishness of fighting the market that has aligned itself with the Fed’s new policy. Go with the momentum and you’ll be fine try to pick a bottom and you are most likely to be doomed. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

Those trying to fight the Fed have been really steamrolled over by the USD bulls. Since the time of the FOMC meeting two days ago AUD (-2.35%), NZD (-2.30%) and CHF (-2.12%) have suffered the biggest losses while EUR (-1.76%), CAD (-1.73%) and GBP (-1.45%) have also taken substantial hits. JPY (-0.30%) has interestingly shown quite a bit of relative strength. Today the weak retail sales numbers (-1.4% vs. +1.5% expected) added to the voes of those trying to long GBPUSD. Kuroda the head of BOJ commented on the need to continue the easy monetary policy to achieve the 2% inflation target even after the virus crisis. Next, the focus among the traders will turn on the ECB that seems committed to staying dovish but there is at least one hawkish voice: ECB’s Weidmann says PEPP should end soon. Especially after the virus is contained. He is known, however, to be a lone hawk. Both Lagarde and Lane have said that it is too early to end PEPP. 

Updated inflation expectations and the Fed policy change continued to lift the longer end of the US Treasury yields. The yield on 10-year notes moved to 1.511%. As a result, Gold (-4.65%) and silver (-7.03%) saw heavy selling and have in a couple of days collapsed to levels last seen in early May. The price of gold dropped to the 61.8% Fibonacci retracement level which means that gold has retraced more than half of the sizeable rally that started in March. The drop in the price of silver has been almost as big. The strength in the dollar has caused the price of oil (-1.54%) to trade lower too.

NASDAQ Composite (+0.87%) rallied while the Dow Jones Industrial Average closed down by -0.62%. Due to this divergence between the technology and the industrials the S&P 500 (-0.04%) finished the day almost unchanged. Not surprisingly, technology stocks were the clear winners also at the sector level and closed higher by 1.16%. The tech sector was followed by the healthcare (+0.76%) and the utilities (+0.55%) sectors. The energy (-3.40%) and the financial (-2.96%) sectors the biggest losers while the materials (-2.23%) and the industrial (-1.54%) also saw significant outflows. Nvidia (NVDA, +4.8%) rallied yesterday while some of the big names had less impressive but still significant gains. Apple (AAPL, +1.26%), Microsoft (MSFT, +1.37%), Amazon (AMZN, +2.17%) and Facebook (FB, +1.64%) were down in pre-market trading but finished the day strong. 

Market update. Our view was yesterday that as the Fed is edging towards ending the QE and the yields are rising the price of gold is likely to stay weak. This is why we highlighted a support zone at 1756 – 1770 (the 61.8% Fibonacci retracement level and a historical support level). Gold moved to this zone in yesterday’s trading and has now bounced higher by approximately 1.2%.  The price of gold has now retraced almost two-thirds of the earlier rally so some traders that have been short in gold are probably taking money off the table ahead of the weekend. It is, however, likely that the market remains highly tradeable (volatile) in the near future too. The 1756 – 1770 range (the 61.8% Fibonacci retracement level and a historical support level) is still the nearest key support area while the 1854 – 1861 range (the 23.6% Fibonacci retracement level and a recent swing point) is the only highly significant area of resistance above the current price. We will update our short-term view on gold next week.

We expected further downside in AUDUSD not only because of the USD strength but also as China has been curbing commodity prices, as well as state enterprise access to foreign commodity markets. At the same time, we’ve seen China instructing Australia to diversify its foreign trade. As you can see from the graph above the AUD has been one of the biggest losers since the FOMC statement was published. Yesterday AUD was under further pressure the pair finished the day 0.85% lower. AUDUSD traded to the 0.7500 – 0.7532 support zone we published here. This is a highly important support zone which if decisively broken suggests the currency pair has created a significant market top. In such a case we’d have technical projections suggesting the pair could eventually move to levels about 5% lower than the current market price. There are, however, important supports before this can take place. The nearest significant support area is at 0.7400 – 0.7420 (a channel low, a historical support level and the 23.6% Fibonacci retracement level). The nearest resistance level is at 0.7650.

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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 FEDThe Fed has changed the tune and is now moving away from the ultra-accommodative monetary policy. The median projection is that there will be two rate hikes in 2023.
StimulusThe US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.
YieldsAfter trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways since March. All in all, the yields and interest rates are extremely low on both nominal and real basis.
Employment The believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.
InflationThe year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m).

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 Market News & Facts 

  • Kuroda: BOJ to continue the QE to achieve 2% inflation 
  • Bank of England expected to hike rates in 2023
  • US jobless claims 412K (360K expected)
  • Democrats discuss spending up to $6 trillion on infrastructure
  • UK reports the highest number (11,007) of covid infections since February  
  • ECB’s Weidmann being hawkish (as usual) and says PEPP should end soon
  • ECB’s Philip Lane: premature to talk about ending the PEPP
  • RBA Governor Lowe says considering ending the bond-buying is premature
  • Australian employment change in May 115.2K (+30K expected )
  • Australian unemployment rate 5.1% (5.5% expected)
  • Canadian wholesale sales for April +0.4% (-0.9% expected)
  • EIA oil stockpile date for the US -7355K (-2500K expected)
  • China limits state enterprise exposure to overseas commodities markets
  • Australian consumer confidence 111 (110.7 previous)
  • Australia’s trade minister looks for a free trade agreement with the EU
  • Goldman Sachs to offer options and futures on ETHUSD
  • UK – Australia free trade deal to be announced today
  • New Zealand house prices up 1.5% m/m in May (24.7% y/y)
  • Lagarde says that it’s too early to discuss the end of PEPP purchases.
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The Next Main Risk Events

  • JPY –  Monetary Policy Statement
  • GBP – Retail Sales 
  • JPY –  BOJ Press conference
  • AUD – Retail Sales
  • EUR – ECB President Lagarde’s Speech
  • USD – Fed Chair Powell’s Testimony

For more information and details see the TIOmarkets economic calendar here.

Trade Safe!

Janne Muta
Chief Market Analyst

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DISCLAIMER TIOmarkets offers exclusively consultancy-free service. The views expressed in this blog are our opinions only and made available purely for educational and marketing purposes and do NOT constitute advice or investment recommendation (and should not be considered as such) and do not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets and its affiliates and consultants are not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions. The analyzes and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with any legal requirements for financial analyzes and must, therefore, be viewed by the reader as marketing information. TIOmarkets prohibits duplication or publication without explicit approval. FX and CFDs are leveraged products. They are not suitable for every investor, as they carry a high risk of losing your capital. Please ensure you fully understand the risks involved. All the prices in this report are CFD prices based on price charts provided by TIOmarkets unless otherwise stated. 

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