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