Análisis de mercado diario

The date has been in the diary/calendar for several weeks. The build-up has been hectic with much chatter and discussion about what will happen and the repercussions. Surely the event won’t let us down?

The Jackson Hole symposium has served as a forum to announce or at least lay the groundwork for many policy changes over the years. For instance, Fed Chair Powell’s speech last year unveiled a dramatic shift in the central bank’s approach to monetary policy. He said the Fed would tolerate more inflation and aim to limit shortfalls from full employment, rather than seeing excess employment as a problem to be solved.

This time around, Powell may not deliver such radical fireworks, but that does not make it less challenging.

The biggest question facing the Fed is whether the increase in inflation is transitory or not.

Another wave of coronavirus simply adds a new element to the discussions.

Virtual conference again

The conference has been shortened and made into a virtual one for the second year running.  Does this change not just the delivery of the speech but the contents too?

The market is looking for clarity over its tapering plans. And yet the virtual move highlights the uncertain environment the Fed has to operate in as it seeks to withdraw emergency policy support.

Perhaps that is the key point right there – “emergency” monetary policy measures are still in place. Yet, inflation is on the rise and there are few signs of it easing anytime soon. The latest Fed minutes showed the majority on the FOMC agree progress has been made towards the symmetric 2% goal. The very strong July labour report surely convinced a few of the Fed doubters too. 

Dollar impact

The majors are more or less confined to recent ranges with broad measures of FX volatility still subdued. The risk rally stalled yesterday as traders readied themselves for today’s seminal speech. Expectation that Chair Powell will adopt a more cautious tone means the bar for a dovish surprise seems higher than compared to a more hawkish tilt.

If Powell simply endorses the prospects of Autumn tapering with the Delta-variant effects downplayed, then the dollar will find support.  Any further discussions on the timing and length of tapering, as well as the hiking cycle to follow will be bullish.

In the medium term, consensus still sees the Fed normalising policy measures faster than most of its peers. But one possible scenario sees Chair Powell acknowledge imminent tapering, but a much more patient Fed when it comes to kicking off the hiking cycle. The market is pricing in only 50bp of interest rate rises over the next two years.

An intriguing afternoon awaits …

Exención de responsabilidad: El contenido de este artículo incluye opiniones personales, y no debe ser interpretado como asesoramiento sobre inversión personal y/o de otro tipo y/o una oferta y/o solicitud de ninguna transacción con instrumentos financieros y/o garantías y/o pronóstico de rendimiento futuro. ForexTime (FXTM), sus afiliados, agentes, directores, responsables y empleados no garantizan la precisión, validez, puntualidad o compleción de ninguna información o dato disponible, y no asume ninguna responsabilidad por cualquier pérdida que resulte de cualquier inversión realizada en base a ellos.

Markets are fairly quiet with a slight retracement of the risk rally we have seen this week. Four days of gains in most risky assets, from fresh record highs in US stock markets to the commodity/risk related currencies are showing signs of slowing this morning. How sustainable this rally is should be answered by Fed Chair Powell’s speech tomorrow, expected at 15.00 GMT. Will the Delta variant spread upend and delay tapering plans? Or are those risks manageable and tapering is on track to happen before year end?

The full agenda of speakers is set to be released today, after the Kansas City Fed, who organise the event, decided to condense the two-day programme to Friday only.

Low vols

The dollar is sat near one-week lows with FX volatility muted.

The Deutsche Bank FX Volatility Index is near historical lows with traders not expecting to see Powell offer markets any new information. Activity in the US equity options market is similarly relaxed with investors looking past the Jackson Hole event. S&P options are currently pricing in a one-day move of about 0.6% tomorrow.

Measures of trader’s expectations in bond markets and US Treasuries are also subdued. A widely watched index devised by the Bank of America and the futures exchange, ICE, is just a little higher than its five-year average.

Fed speakers today

Ahead of Chair Powell’s speech tomorrow, we do get to hear from two other central bankers from the Federal Reserve who are speaking today. Bullard and Kaplan are known Fed hawks so any substantial pull back from their usual stance positioned around an October start to tapering asset purchases could further lower expectations for Jackson Hole.

Remember that Kaplan has been one of the Fed’s most forceful supporters for starting to reduce support for the economy. But he raised eyebrows recently by saying he may need to adjust his hawkish stance if the Delta variant slows economic growth materially.

Exención de responsabilidad: El contenido de este artículo incluye opiniones personales, y no debe ser interpretado como asesoramiento sobre inversión personal y/o de otro tipo y/o una oferta y/o solicitud de ninguna transacción con instrumentos financieros y/o garantías y/o pronóstico de rendimiento futuro. ForexTime (FXTM), sus afiliados, agentes, directores, responsables y empleados no garantizan la precisión, validez, puntualidad o compleción de ninguna información o dato disponible, y no asume ninguna responsabilidad por cualquier pérdida que resulte de cualquier inversión realizada en base a ellos.

Has the market mood shifted too far? Last week, we were all fearful over the beginning of the end of emergency stimulus measures even though the world was having to contend with the increasing spread of the Delta variant. A Chinese regulatory crackdown also hit a variety of stock market sectors in the name of greater “social cohesion” in favour of corporate profits. This spooked Asian markets with the Hang Seng index moving into bear market territory, with “peak growth” lingering in the shadows.

This week, although the latter has been evident again in more disappointing economic data, markets are now hopeful that Chair Powell will deliver dovish comments in the vein of other FOMC officials like Kaplan’s more cautious approach to policy outlook due to the Delta variant. But China has apparently recorded zero cases of coronavirus for the first time in several months while the third busiest port in the world in China has just reopened. We are now getting to the stage when Chair Powell only has to be a bit more hawkish sounding than most expect in order to see some volatility.

FX markets quiet

That said, implied volatility measures of FX moves over the Jackson Hole meeting are not elevated. This points to very few hints being given about the policy outlook. Or at least not a great deal of new colour on the Fed’s gradual move towards tapering. The dollar is currently trading marginally below 93 on the DXY with EUR/USD trading around 1.1750.

Disappointing German business survey data released earlier today actually had the opposite effect on the single currency than what would normally be seen. EUR/USD moved higher from an intraday low with markets perhaps positioning for a worse print. The world’s most traded pair is still stuck in a down trend with trendline resistance from the June highs capping any upside. Last week’s new long-term low at 1.1663 is key.

Oil claws back losses

Today, Brent crude is building on its biggest two-day gain since November. Prices are now back to testing the 50% midpoint of the July move lower. Increased demand in India and Mexico’s oil platform fire are offsetting Delta worries on the fundamental side. Near-term support sits at $67.46 with bulls aiming to push black gold above $73 initially.

Exención de responsabilidad: El contenido de este artículo incluye opiniones personales, y no debe ser interpretado como asesoramiento sobre inversión personal y/o de otro tipo y/o una oferta y/o solicitud de ninguna transacción con instrumentos financieros y/o garantías y/o pronóstico de rendimiento futuro. ForexTime (FXTM), sus afiliados, agentes, directores, responsables y empleados no garantizan la precisión, validez, puntualidad o compleción de ninguna información o dato disponible, y no asume ninguna responsabilidad por cualquier pérdida que resulte de cualquier inversión realizada en base a ellos.

At the start of this trading week, the USD index formed a 'golden cross', whereby its 50-day simple moving average crossed above its 200-day counterpart. Such an event typically suggests that more gains are in store.

However, also on Monday, this index completed an 'evening star' which is a bearish, three-candlestick pattern that usually denotes the reversal of a trend.

Faced with these seemingly conflicting technical indicators, the question facing traders now is, "where to next for this USD index"?

Note that this index measures the greenback’s performance via six currency pairs, all in equal weights:

• EURUSD
• GBPUSD
• USDCAD
• AUDUSD
• NZDUSD
• USDCHF

Dollar climbs on heightened ‘tapering’ expectations

The greenback has been on an uptrend since that May-June trough, fueled by expectations that the US Federal Reserve is closer to easing up on its asset purchases that have supported financial markets since the pandemic. This process of paring back its quantitative easing programme is also simply known as “tapering”.

As the Fed buys less bonds, prices are expected to fall and their yields should then eventually rise. When yields rise, that should bring the US dollar along with it, hence the uptrend.

Markets are currently forecasting that the tapering process could be completed by 4Q 2022 which would then pave the way for a US interest rate hike. As Fed officials had indicated during their June FOMC meeting, we could see interest rates being raised twice in 2023. That caught markets by surprise and triggered a climb of more than 3% for this index since that June policy meeting, even after taking into account the recent pullback.

Such prospects for tapering to happen sooner rather than later have far-reaching consequences across various asset classes, influencing how much money flows into tech stocks vs. cyclical stocks, or bonds, and even gold.

Markets could get next major cue on tapering this Friday

Amid such a narrative, investors and traders worldwide will be closely monitoring what Fed Chair Jerome Powell might say about the central bank's tapering timeline, if he mentions it at all, this Friday. Powell is scheduled to deliver his highly-anticipated speech virtually at the Jackson Hole Economic Symposium, the Fed’s flagship event.

• Should Powell urge for more patience before embarking on the tapering process, that could prompt the US dollar to unwind more of its recent gains. The prior cycle high around 1.090 should then offer support, followed by potentially stronger support around the site of the 'golden cross' of 1.085.
   
• However, should Powell align closer with the hawkish chorus among Fed officials who are signaling that tapering is closer at hand, that could spur the US dollar onto fresh year-to-date highs. Dollar bulls are likely to eye the 1.12 mark which served as the support region for this USD index back in October 2020, provided this index can breach the 1.11 line once more.

Ultimately, it could be down to how strong a signal Powell sends during his Jackson Hole speech. It could turn out to be a non-event, as some segments of the markets believe.

However, seasoned market watchers would only know that all it takes is just one word and that could be enough to jolt markets worldwide.

Where to next for the US dollar?

Going back to the technical perspective, note that this USD index has now pulled back from overbought levels and is trading back within its Bollinger band. Its 14-day relative strength index has also moderated back into the  sub-70 region (prices are said to be overbought when the RSI has hit or breached the 70 mark). Such indicators suggest that some of the froth has been cleared out of this USD index, leaving it poised to climb higher if indeed Powell’s words this Friday point markets in that direction.

In summary, I expect the US dollar’s uptrend to remain intact, as long as the Fed doesn’t abruptly back away from its intentions to taper.

Exención de responsabilidad: El contenido de este artículo incluye opiniones personales, y no debe ser interpretado como asesoramiento sobre inversión personal y/o de otro tipo y/o una oferta y/o solicitud de ninguna transacción con instrumentos financieros y/o garantías y/o pronóstico de rendimiento futuro. ForexTime (FXTM), sus afiliados, agentes, directores, responsables y empleados no garantizan la precisión, validez, puntualidad o compleción de ninguna información o dato disponible, y no asume ninguna responsabilidad por cualquier pérdida que resulte de cualquier inversión realizada en base a ellos.

The Fed meeting overnight has seen more selling in the greenback this morning as their statement signalled that a slightly more hawkish message was largely priced in. The reaction of markets the morning after a major risk event is often telling. So, the fact that the greenback is still offered perhaps points to a more restrained Fed going forward.

FOMC wait-and-see mode remains

Chair Powell and his fellow policymakers acknowledged that economic activity indicators have continued to strengthen and the economy has made progress towards its goals of price stability and maximum employment. But especially on employment, there is still some way to go for the recovery to be substantial enough to start tapering asset purchases. Inflation is still seen as transitory but is not broadly based and Chair Powell specified that one-off price rises, even if they are not reversed, are no sustained inflation.

Many in the markets are touting the Jackson Hole symposium at the end of next month as the big date for more taper detail. But, with only one NFP jobs report next week to be released before then, is that enough information for the Fed to shift their bias? There are then three FOMC meetings left in the year in September, November and December.

China sooths equity jitters

Equities finished mixed in the US with tech outperforming. Facebook beat earnings expectations but warned of a significant growth slowdown and the stock fell as much as 5% in extended trading. European bourses have started the morning in the green after China took steps to calm recent investor fears which helped the Hong Kong market gain over 3%.

Gold enjoying dollar woes

With the hawks disappointed after the FOMC meeting, dollar selling is helping to push gold out of its recent range. The bullish break is now within touching distance of the widely watched 200-day moving average at $1,822. A strong close above here should see the July highs at $1,829/34 come into view fairly quickly. Solid support sits at $1,789.  

Exención de responsabilidad: El contenido de este artículo incluye opiniones personales, y no debe ser interpretado como asesoramiento sobre inversión personal y/o de otro tipo y/o una oferta y/o solicitud de ninguna transacción con instrumentos financieros y/o garantías y/o pronóstico de rendimiento futuro. ForexTime (FXTM), sus afiliados, agentes, directores, responsables y empleados no garantizan la precisión, validez, puntualidad o compleción de ninguna información o dato disponible, y no asume ninguna responsabilidad por cualquier pérdida que resulte de cualquier inversión realizada en base a ellos.