There have been some significant swings in bond and forex markets in the past 24 hours as traders prepare themselves for what could be a ground-breaking speech from the chairman of the Federal Reserve, Jerome Powell today. However,. Given the importance of the speech, we see a calm and cautious look to forex majors, whilst equities are also flat. Markets have been anticipating a dovish shift from chair Powell, and it was interesting to see the dollar weakening once more into the close yesterday, whilst the huge rally on Wall Street continued. However, will these dovish expectations be met?
Powell speaks via a webcast in the Jackson Hole Economic Symposium and the key issue is how he is set to address the FOMC’s forward guidance. Minutes of the last Fed meeting seemed to play down negative rates or yield curve control right now, but forward guidance is certainly an important part of the toolbox. Will the Fed adopt an “Average Inflation Targeting” measure, and if so, then how formal will this be? At this stage the Fed may do little more than allow an overshoot of inflation above the 2% target, allowing, a range of possibly +1.5% to +2.5%. Inflation has been consistently below 2% for much of the past decade, only being above 2% briefly on a couple of occasions. The most recent was in 2018 when the FOMC was hiking rates, with inflation pulling quickly lower. Allowing an overshoot of the 2% target without tightening rates could help to improve inflation expectations. It would also set in place the expectation that the Fed is going to remain ultra-loose on monetary policy for several years to come. This would be negative for yields and the dollar too. If Powell also leaves the door open to yield curve control, then the market will see this as dovish. However, this clearly leaves the risk for Powell not being as dovish as expected and a near term dollar rally. We would see this as simply a counter-trend move though as the path of dollar weakness through the rest of 2020 seems to be set.
Wall Street closed positively again yesterday with the S&P 500 +1.1% at 3478. Futures are shading slightly lower today though, with the E-mini S&Ps -0.2%. Asian markets were mixed overnight, with Nikkei -04% and Shanghai Composite +0.2%. In Europe, the outlook is cautious this morning, with FTSE futures -0.1% and DAX futures +0.1%. In major forex, the slightest hint of a USD negative move, but essentially little real sign of intent ahead of the speech. In commodities, gold and silver are around half a percent lower, paring yesterday’s gains, whilst oil is around the flat line as markets appear to have priced in the impact of Hurricane Laura, for now.
It is another quiet European morning for the economic calendar and the real action is into the US session. Prelim US GDP for Q2 (second reading) is at 1330BST and there is forecast to be a mild positive revision to -32.5% (from -32.9% in the Advance reading). Weekly Jobless Claims at 1330BST are forecast to improve again to 1.000m (from 1.106m last week). Fed chair Powell’s Jackson Hole speech is at 1400BST. The we have the Pending Home Sales for July at 1500BST which are expected to improve by +3.0%.
Chart of the Day – German DAX
The DAX has been a strong performer within Europe, but continues to lag its Wall Street peers. However, with Wall Street breaking out across the board recently, can the DAX follow suit? Technically we see the DAX continues to build a positive outlook. Weakness is bought into and the market continues to find higher lows as a feature of the run higher. A ten week uptrend may not be as steep as the original recovery trends of a few months ago, but remains on track to pull the market higher and supports at 12,660 today. Support at 12,630 seems to be another important low (above the key higher low of 12,253 from late July). In the past month, a pivot has formed around 13,060 which now becomes supportive on an upside break this week. With momentum confirming the move to one month highs, the bulls will now be eying the key July high of 13,313. They will also have eyes on closing the old February bear gap at 13,235/13,500. We look to use weakness as a chance to buy, with 13,060 initially supportive, but any near term correction that finds support around 12,800 (another old pivot) and above the ten week uptrend is a good chance to buy.
There has been a subtle shift in sentiment on EUR/USD as the week has developed. Whereas last week we had seen the dollar gradually clawing back some of its losses, this week the move has gradually stalled. Negatively biased candles are turning into positively biased candles as support has continually formed around 1.1750/1.1780. Momentum indicators have also stabilised in their near term corrective slip and are into the region of good buying opportunity levels once more. Holding above 1.1750 will retain a positive bias that the market is primed for the next run at resistance, currently at 1.1965. Fed chair Powell’s speech is crucial today and the market is rather understandably almost flat this morning. We still favour longs for a test of 1.1965 and towards 1.2000, and even if there is a near term move below 1.1695 key support, we would bide out time for the next chance to buy as we see the medium term outlook positive on EUR/USD.
A strong reaction higher in the past couple of sessions leaves Cable bulls well positioned moving into Powell’s speech today. Bolstering the key near term support at 1.2980/1.3000 with a low at 1.3050 of the past week, along with a pull back above 1.3200 (an old long term resistance) shows the bulls primed to make their move. Momentum indicators have unwound and are now turning up with bullish intent for another run higher. The technicals are set up for another move above 1.3265 resistance from last week. The question is one of volatility now, as markets are sure to react to what could be a fundamentally game changing speech by Fed chair Powell today. Support at 1.2980 is the key gauge now, but even if this were to be breached on near term volatility, we struggle to see sustainable dollar strength now and we would look to use the weakness as another chance to buy Cable in due course.
A session of fluctuating fortunes for Dollar/Yen closed with a near -40 pip loss and a bear candle which represents another failure for a recovery. We discussed previously of the need for the bulls to break clear of the 106/107 pivot band to break the run of lower highs. This latest failure at 106.55 will be a concern now that the resistance at 107.00 is simply bolstered and is another chance to sell. The near term uptrend has been breached and pick up in momentum has faltered. We continue to view this move as a near term rally within a medium term bear trend and is a selling opportunity. There will be volatility to play out today, with the importance of Fed chair Powell’s speech (which will likely have a big impact on Treasury yields, which have a strong correlation with Dollar/Yen). For now, we still favour pressure on 105.40 initially and the low at 105.10 before likely further downside.
Volatility ramped up once more on gold yesterday as the bulls moved decisively to prevent a near term breakdown. The resulting rebound of over +$50 from session lows formed a decisive positive candle (a bullish engulfing/bullish outside day). Leaving a low at $1902 reflects the growing importance of the support effectively in the band $1900/$1910. Technically this was also important as the market again bounced of the support of the 11 week uptrend. However, the bulls are not yet in control though. Failing at the resistance of a now three week downtrend this morning leaves a symmetrical triangle consolidation pattern formation and the market is still lacking decisive trend moving into Fed chair Powell’s speech today, perhaps understandably. We anticipate elevated volatility to continue in the wake of the speech and there is still the risk of a near term breakdown. We would continue to view the 23.6% Fibonacci (of $1451/$2072) retracement as a near term gauge of sentiment (at $1926) and a decisive closing breach increases the corrective potential near term. The 11 week uptrend sits at $1907 today. Our strategy remains to buy gold into supported near term weakness, and once through Powell’s speech we should know more as to whether there is room for another leg lower. A close above $1955 would break the mini downtrend, and be a near term breakout (on the hourly chart this is shown well). The important resistance then becomes $2015.
Brent Crude Oil
The bulls pulled up just short of the resistance at $46.25 yesterday as a near term rally fuelled in part by Hurricane Laura seems to have hit the buffers. Despite this, the bulls are still in with a shout of an upside breakout to multi-month highs once more today. We continue to see near term weakness as a chance to buy on Brent Crude, with a n ongoing positive outlook. The uptrend of the past ten weeks (today around $43.80) may be quite shallow compared to trends earlier in the recovery, but it flanks a continued run of higher lows. Trading above all the moving averages sustains encouragement, whilst momentum indicators are still positively configured in their medium term configuration. We continue to be cautious of chasing breakouts as so often in recent weeks they tend to be followed by consolidation. It all suggests that we look to use near term slips as a chance to buy. The latest higher low at $43.60 leaves us with a good band of support between $43.60/$44.25. A close beyond $46.25 opens $48.40 initially but the bigger resistance is $53.10/$53.90. It just may take a while to get there.
Dow Jones Industrial Average
Wall Street has posted another positive session, with the Dow holding above the latest near term breakout support 28,000/28,155. Technicals are all still strongly configured and the bulls remain in the driving seat. Buying into near term weakness remains a viable strategy. The market is still in the process of rallying towards the old February bear gap at 28,400/28,890. This will be an interesting session today as just before the open, traders will be digesting Fed chair Powell’s speech. Depending upon how dovish the speech is perceived, there could be a sizeable influx of volatility. We would still look to use supported weakness as a chance to buy. Any higher low between 27,525/28,000 would be another good opportunity. The big near five month uptrend comes in around 27,140 today.