Another day of choppy trading as the markets are in a wait and see mode ahead of the FOMC press conference. Not even the disappointing US retail sales figures were able to really move the markets. Traders are keen to hear whether the Fed officials have been discussing tapering and if so to what extent. It is certainly possible that the T-word has been mentioned but it’s a long way from tapering discussions to actually taking action on that front. The economy is still in a recovery phase with unemployment at rather high levels and, as we well know, the Fed doesn’t believe the recent rise in prices to be more than just a transitory phenomenon. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The early signs of strength seeping into the US Dollar Index recently indicates that traders have been exiting USD shorts as they believe that the Fed’s next move is more likely to be dollar bullish than dollar bearish. With so many traders already short the USD it makes sense to start reducing the short side exposure in the currency. Especially, when the worst is behind in terms of the Covid-19 pandemic and it is therefore not likely that the Fed would add to the existing stimulus measures. As things get better and the economy keeps on recovering, it’s more likely that the next move from the Fed is going to be supportive of the dollar. While the FOMC is the main risk event today the UK and Canada release their inflation numbers. The weekly oil inventory data is due today also.
It was a quiet day also in the US stock markets. NASDAQ Composite (-0.71%) lost the most ground among the major indices while the S&P 500 (-0.20%) and the Dow Jones Industrial Average (-0.27%) saw minor losses as traders weren’t ready to bid for stocks ahead of the FOMC meeting and the US core retail sales numbers disappointed (-0.7% vs. 0.4% expected). Energy (+1.90%) was the only sector that saw some serious action as the bullishness seen in oil spilt over to energy sector stocks. The real estate and technology sectors saw the biggest outflows and closed down by 0.92% and 0.61% respectively.
Gold (-0.51%) and silver (-1.25%) futures closed lower but the price of oil kept on climbing. The light crude oil futures market has rallied 9.76% this month after increasing by 1.75% yesterday and 0.92% in today’s trading. So many expectations have been built into the price that one has to start questioning whether the move is getting overdone. The immediate upside potential is getting limited and we could soon see the rally lose momentum. After some strength earlier this week cryptos started to lose momentum in yesterday’s trading. BTCUSD hit the 41800 resistance we have focused on before and finished the day almost unchanged at -0.89% while ETHUSD and LTCUSD closed lower by 0.77% and 2.71% respectively.
We said earlier that the EURUSD is trading in a downward sloping trend channel which indicates the rallies are more likely to fail than succeed. This week the market has been moving in a tight range (just above the 50-day SMA) waiting for the FOMC meeting. As it is clear highly likely that there will be no major moves before we hear from the Fed it makes sense to focus on the price action that takes place around the time of the FOMC statement and the press conference. The key support and resistance areas are 1.2050 – 1.2065 (reactionary low, the 38.2% Fibonacci retracement level and the channel low), 1.2178 – 1.2200 (the 20-day SMA and the channel high).
After collapsing in May bitcoin has attracted some buying above the 30K mark. The recent rally has taken the crypto behemoth back to the 41K resistance level that was strong enough to stop the bitcoin bulls on May 26th. Now the market has tried to push higher and if successful we could see a rally that would take the market approximately to 47K – 51K where the next significant resistance area is (a broken swing point support, a declining trendline and the 23.6% Fibonacci retracement level). The width of the recent range indicates that should the resistance be broken, the market would be likely to move to the upper end of the resistance area. A failure to penetrate the resistance would make it likely that the market retraces again to the 50% Fibonacci retracement level (at 34372).
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 on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The 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.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the second in a row (+559K vs +645K expected). The unemployment rate decreased from 6.1% to 5.8% but the fact that it happened while the labour force participation rate decreased makes it less good news.|
|Inflation||The 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
- 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.
- Elon Musk: Tesla accepts bitcoin payments if clean energy used in mining
- Germany wholesale price index for May +1.7% m/m (+1.1% previous)
- UK April GDP m/m +2.3% (2.4% expected)
- The UK Prime Minister Boris Johnson: A one-month delay to re-opening
- Large Manufacturer conditions in Japan for Q2 -1.4% (+1.6% previous)
- US Senator Warren: crypto regulation is needed.
- PBOC Governor Yi Gang: China’s 2021 consumer inflation less than 2%
- US Republican senators saw some progress in infrastructure talks
- RBA may start to dismantle some of the QE structure soon
- China May CPI came in at 1.3% y/y (1.6% expected)
- China PPI was confirmed at 9.0% y/y (8.5% expected)
- China state media to Australia: Diversify your iron ore exports away from China
The Next Main Risk Events
- GBP – CPI
- CAD – CPI
- USOIL – Crude oil inventories
- USD – FOMC Economic Projections
- USD – FOMC Statement
- USD – Federal Funds Rate
- USD – FOMC Press Conference
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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