We said yesterday that 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. This is pretty much what the Fed said it would be doing and for the very reason we cited: Things are getting better! The vaccinations enable the economy to recover so the central bank said yesterday that it might need to raise interest rates much earlier than expected as the health situation is improving. The Fed also dropped the mention of the crisis weighing on the economy. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
This sent the bond yields and the USD sharply higher. The USD Index rallied 0.98% causing a sell-off in equities and precious metals. It is now expected that the Fed will hike the rates in 2023. The Fed signalled it would assess the need for the tapering meeting by meeting. With regards to the pandemic risk, the progress in vaccination, the Fed believes, allows the central bank to downgrade the risk.
Yields on the US 10-year Treasury bonds increased almost nine basis points to 1.57% sending the yield sensitive gold lower but also caused some weakness in cryptocurrencies. Gold and cryptos don’t have a yield of their own which is why they become less attractive relative to the USD when the Treasury yields move higher. The price of gold dropped over 3% initially before recovering a little and trades nows approximately 2.2% lower than before the FOMC. Silver, being an industrial metal suffered less and is currently down 0.96%
The price of oil was to some extent shielded by the expectation of higher global demand for oil while the supply would be likely to stay tight. The WTI light crude oil futures market closed lower by 0.04%.
NASDAQ Composite closed down by -0.24% but showed relative strength among the major indices yesterday. The S&P 500 lost -0.54% while the Dow Jones Industrial Average finished the day lower by -0.77%. Ten of the eleven S&P 500 sectors finished the day in the red. The utilities (-1.50%) and consumer staples (-1.33%) sectors took the most of the beating and the only sector gaining a little was the consumer discretionary sector (+0.05%). The heavily traded names like Apple (AAPL, +0.39%) and Tesla (TSLA, +0.92%) finished the day slightly higher.
The initial reaction from the equity investors isn’t as defensive as one might have expected it to be. Stocks that usually suffer from higher financing costs didn’t come tumbling down. Instead, we saw moderate selling in technology (Nasdaq -0.24%) and small & medium capitalisation stocks (Russell 2000 -0.23%).
The UK and Canadian CPI numbers were overshadowed by the FOMC and didn’t mean much at the end of the day. The UK inflation gauge came in higher than expected (2.1% vs. 1.8% expected) and the Canadian inflation change was confirmed at 0.5% (0.4% expected). Today we’ve seen Australian employment change coming in at 115.2K (30.5K expected) and the New Zealand GDP growth reported at 1.6% (0.5% expected). The main risk events today include the Swiss National Bank Monetary Policy Assessment and SNB Press Conference. Later on in the US session, the Federal Reserve Bank of Philadelphia releases the Philly Fed Manufacturing Index.
Yesterday in the Live Analysis Webinar we focused on USD Index forming higher lows and a bullish triangle that gave us a reason to believe the market could rally to 91.42 – 91.48 resistance area. This area is where the 50% Fibonacci retracement level and a recent reactionary high coincide.
USD Index rallied to the zone yesterday and after some hesitation earlier today the bulls are now pushing the dollar higher. The move higher was in line with our expectations as it was our view that the USD was more likely to be bullish.
We said yesterday (here) that 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.
After yesterday’s rally in the USD and the hawkish comments from the Fed, we have a new set of circumstances that drive the currency markets. In other words, now that the USD Index has bottomed we have a dollar positive trend. In such an environment, the rallies against the dollar are likely to fail and the directional impulse moves are most likely going to favour the dollar longs.
Our analysis on gold (here) was once again successful. We said three days ago: Now that the price of gold has broken below the rising trendline in today’s trading a lower reactionary high in the daily chart is created at 1906.90. Gold is approaching a key support level at 1855.60. If the support is broken it looks likely that the market will move to the 1820 – 1825 area.
This target area was reached and breached with gold now trading at 1813.50. With the Fed edging towards tapering and QE and yields rising the price of gold is likely to stay weak. The key support and resistance levels and or zones are 1756 – 1770 (the 61.8% Fibonacci retracement level and a historical support level), 1798 (the 50% Fibonacci retracement level) and 1854 – 1861 (the 23.6% Fibonacci retracement level and a recent swing point).
AUDUSD has been trading slowly to the downside over the recent weeks. Lower highs and lower lows have led to a 2.4% decline since mid-May. China’s curbing of commodity prices and state enterprise access to foreign commodity markets have kept the AUD bulls at bay. At the same time, we’ve seen China instructing Australia to diversify its foreign trade. All these factors are negative for Australia and when we combine this with the recent USD strength it makes sense to look for further weakness (failing rallies and supports) in the currency pair. The key support and resistance levels and zones in AUDUSD are 0.7500 – 0.7532 (the 50% Fibonacci retracement level and a reactionary low from April) and 0.7716 – 0.7750 (the 20-day and the 50-day SMAs and the channel high).
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 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.|
|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||The change of tune from the Fed is likely to bring a period of higher yields.|
|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.|
|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
- 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.
- 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)
The Next Main Risk Events
- CHF – SNB Monetary Policy Assessment
- CHF – SNB Press Conference
- USD – Philly Fed Manufacturing Index
- USD – Unemployment Claims
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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