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tickmill-analytics

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What we learned from the Fed this week. Is carry trade alive and well?


Central banks of major advanced economies and emerging market countries have recently expressed completely different views on further near-term evolution of price growth - the former believe that high inflation won’t last long, while the latter apparently do not agree with this. The Mexican Central Bank unexpectedly joined the Russian and Brazilian Central Banks, which began their tightening cycle relatively aggressively. The bank surprised investors on Thursday by announcing a rate hike from 4% to 4.25% in response to inflation running above 6%, which failed to cool down despite expectations. None of the Bloomberg economists surveyed expected this decision.

The peso strengthened against USD and, together with other EM currencies, now looks like an attractive territory for investors, as following the “parade of speeches” by the Fed officials this week, one can say that the debate about tightening of credit conditions has been postponed at least until the conference in Jackson Hole in August. Growing policy divergence between the Fed and EM Central banks as well as low volatility are expected to be the key drivers of carry trade flows.

Screenshot-2021-06-25-at-17-05-14.png


Dynamics of major EM currencies against the dollar since the beginning of the week


The S&P 500 set a new record of 4,270 points on Thursday as Biden seems to be making success in getting his infrastructure plan through Congress. News came in yesterday that he managed to reach agreement with a number of Republican senators. Curiously, the plan includes stimulus, however provides little detail about tax increases. Those sectors, which seem to be hanging over by strict regulation and the treat of increased taxes can apparently relax for now. The combination of the fiscal package and absence of imminent tax hikes sets the stage for a modest summer rally in risk assets, given a period of low volatility, in which strong downside moves are not common to see.

The final comment from the Fed this week came from Vice President Williams. Speaking on Thursday, the official chose to join his fellow hawks in stating that there is a risk of more upside in inflation and monetary policy must be prepared for it. Thus, he hinted that persistently high inflation readings will most likely force him to vote for reducing the pace of asset-purchases (QE) earlier than expected.

In opposition to Williams and other hawk officials, chairman Powell spoke. On Tuesday, he said that the fear of high inflation isn’t a sufficient condition to start raising rates. The initial market reaction to Powell comments was as if the Fed had extended low-rate guidance, but trading in the second half of the week indicated that the market would likely start pricing in monetary policy tightening if inflation in the US exceeds the reading in May (5% in CPI) over the next two months or will continue to accelerate.

Many market participants do not share Powell's opinion on inflation. For example, BoFA in its latest report expects inflation to remain elevated for two to four years, and only a collapse in the financial market could prevent Central Banks from raising rates.

The share of cash in portfolios of investors according to BoFa data is at 11.2%, which is well below the long-term averages. In the week ending Wednesday, investors bought $ 7bn in shares and $ 9.9bn in bonds, reducing investments in short-term money market instruments by $53.5bn.

In the second half of 2021, the key market topics, according to the BoFA, will be high inflation, the transition of global central banks to policy tightening and slowdown in economic growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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Delta variant is getting on the market radar. What does it mean for equity markets?


The newsflow related to the new Covid-19 delta variant is putting a dent on equity markets. What disturbs the most is that even countries with a high proportion of vaccinated people are forced to return some social curbs as this raises the question about vaccines efficacy. Some countries attempt to contain the outbreaks, others are taking preventive measures, however market worries stem from the fact that growing number of key economies are getting involved in this trend. Stock markets in Europe fell today after German newspaper Bild reported that in light of the threat of the new strain, European leaders will discuss measures for travelers returning from other countries. Tourism and travel sector led declines. Investors also reacted negatively to the news that Hong Kong has placed the UK on the list of countries with "extremely high risk", completely banning the entry of travelers from this country. The UK100 index posted the largest loss today among the major European indices, potentially reflecting investor doubts about the effectiveness of the Astra Zeneca vaccine against the new strain.

In the forex market, the dollar is taking a decisive offensive ahead of the June Non-Farm Payrolls report on Friday. The US economy is expected to add 700,000 jobs, which will increase the chances of an early start of tightening of the Fed policy. Last week, a number of representatives of the Fed spoke in favor of raising rates, only the head of Powell chose a bearish tone, but the impact of his remarks on the market was short-lived.

Last week, on Friday, data on US income and expenditures were released, which showed disappointing MoM gains. However, the main interest of the market was of course focused on inflation indicators. Annual growth of Core PCE, which is the preferred Fed measure of inflation, amounted to 3.4% in annual terms, monthly growth did not meet expectations. The US debt market apparently cheered bullish inflation release, yields of longer-maturity Treasuries dropped, indicated that investors flocked into bonds following release of the data.

Despite the fact that the Fed considers inflation to be temporary, it is at its highest since 1992:

Screenshot-2021-06-28-at-17-50-30.png


There are many upside inflation risks, in particular if firms in the US continue to experience hiring problems. Like last time, the dollar may react upward, and Treasury yields will rise if the NFP report shows that monthly wage growth will again significantly exceed the forecast. This will most likely indicate that the labor shortage in the United States persists, which means that companies may be inclined to raise prices, shifting inflation to consumers. It is highly likely that the markets will perceive this as an increased risk of the Fed's sudden move towards tighter credit conditions.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Fears of new Covid-19 strain fuel risk-off USD rally

The Dollar rose to the weekly high amid flight of investors from risk assets in Europe and Asia. A growing number of countries announce restrictions and partial lockdowns (for example, in Australia) as well as impose travel curbs with certain countries. The United States has added Saudi Arabia to its covid list with the note “not desirable to visit” which is not a good sign for risk sentiment outlook. In addition to local sell-off in affected sectors, government responses force markets to take seriously the threat of the spread of the new strain. A direct consequence of this is an overall rise in risk aversion level.

The data on inflation in Germany were in line with the forecasts, however markets needed an upside surprise to keep the euro supported. The absence of inflation risks in the data is a favorable signal for the ECB, which seeks to delay the start of tightening policy. The report fueled sell-off in EURUSD.

From the technical point of view, EURUSD outlook is becoming more bearish. The price consolidated below the lower bound of the trend channel after the breakout, which increases the chances of a further decline:

Screenshot-2021-06-29-at-17-10-00.png


The situation is similar in GBP, only the decline there is even more powerful, since the Bank of England disappointed with its policy decision last week while covid situation is apparently slightly worse than, for example, in Europe:

Screenshot-2021-06-29-at-17-44-43.png


Despite the rise in cases, the hospitalization and death rates need to be closely monitored to see if the government can move to restrictions. If the numbers are favorable, the risks of new restrictions in GBPUSD will decrease, which will speak in favor of strengthening of the pair. However, it is too early to talk about it.

Currencies sensitive to oil prices suffered losses on Tuesday awaiting OPEC's decision to increase production by 500 thousand bpd. OPEC meeting is due later this week. The correction in oil may continue should key oil consumers roll out more restrictions, which will undermine the outlook for oil demand growth.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Preliminary data indicates US jobs market remained tight in June


European indices remain on a slippery slope due to expectations of new covid restrictions. Intraday losses range from half to one percent. The June inflation release in the Eurozone did not come with a positive surprise for the Euro, inflation rose in line with expectations, which allows the ECB to take its time to raise interest rates.

US data ahead of Friday's labor market report indicate a likely positive surprise. The Conference Board's Consumer Optimism Index rose more than expected, with significantly more respondents from the previous month pointing to improved job opportunities and higher income.

The main indicator increased from 120 to 127.3 points, which is only slightly below the maximum reached before the pandemic. The average consumer optimism index over 20 years is 94.7 points, from this point of view the June reading is really encouraging. Interestingly, both the current conditions index and the expectations index rose, which sets the stage for extension of the positive trend in the next few months.

Before the NFP report, it is import to look at the details of the report that are related to the labor market. The share of respondents who believe that vacancies are plentiful (54.4%) minus the share of respondents who believe that it is difficult to find a job (10.9%) has reached its highest value since 2000:


Screenshot-2021-06-30-at-17-37-59.png



The value and monthly dynamics of the indicator suggests that the demand for labor continued to grow at a decent pace in June. Surprisingly, this may negatively affect the payrolls indicator, since at the same time with the growing demand, there is a shortage of labor supply, which slows creation of jobs. Some workers see no reason to discontinue receiving government benefits and payments, some parents were forced to stay at home because some US schools still conduct remote studies. There is also a part the workers who lost their jobs and decided to retire as the stock market boosted their pension savings over the year. In general, there are several factors that are holding back the growth of labor supply, creating unusual tensions in the labor market, where employers must compete for workers.

Monthly growth in wages is likely to be stronger than forecasts, which should increase pressure on the Fed to raise rates and cut QE. Risks to the dollar and long-dated bond yields are skewed upside what could explain strong dollar performance this week and prevailing pressure in USD currency pairs with major opponents.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Dollar rise may continue this week. What are the key resistance levels?



The Dollar index resumed rally on Monday amid signs of renewed distress in equity markets. Demand for Dollars could also start to pick up as investors price in potential bullish surprises in the June US CPI release on Tuesday as well as Powell speech on Tuesday and Wednesday.

In the second half of the last week, greenback rally took a short break as June Fed meeting Minutes failed to provide an evidence of a hawkish shift in the Fed’s stance. Recall that after the FOMC meeting in June, there was a growing perception that the Fed may start to taper QE soon and wants to send markets a signal about that. The release of the Minutes lowered chances of this outcome as emphasis in the report was that the goals to reduce unemployment have not been achieved and therefore it is too early to adjust stimulus settings. At the same time, it was noted that the topic of QE tapering did come up in the debates.

The dollar was selling moderately last Thursday and Friday, with the price bouncing off the upper border of the mid-term trendline:


Screenshot-2021-07-12-at-15-42-27.png




The 100-day SMA is entering a rally for the first time in a long time, and the 200-day SMA also appears to be making a low. The price is close to the moving averages, from this point of view, it will be easy to develop the upward momentum. Breakdown and consolidation above the 92.75 level may become a signal for medium-term purchases.

A strong US CPI report may act as a catalyst for an upturn, but it’s tough to expect inflation to be much higher than forecast. Starting in June, the influence of the low base effect (purely technical factor of increased inflation readings) has been reducing, in addition, the CPI and PPI of China for June, which contribute to the growth of inflation in the rest of the world, have also disappointed:


Screenshot-2021-07-12-at-17-35-11.png



In China, the PBOC suddenly lowered the banking reserve ratio. This measure means that the central bank eases monetary policy and is designed to free up liquidity for lending or accumulating more assets on banks’ balance sheets. The PBOC often takes this measure when authorities anticipate a weakening of economic activity or an increase in bad debts. In this case, the amount of funds that banks can direct to long-term assets will be about 1 trillion yuan which is considerable as the total private debt is about 18.5 trillion yuan. The PBOC’s decision to ease monetary policy may also reflect concerns about inflation dynamics in June.

The second potentially negative signal from the PBOC can occur on July 15 when it will decide on the medium-term financing rate. If PBOC decides to cut the rate, coupled with the decrease in RRR, this can be perceived as an attempt to stimulate lending activity, at a time when the economy is seemingly on the solid footing. This could be a risk-off signal for financial markets.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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High US inflation doesn’t scare if we look under the hood of the report


June inflation report came as a surprise to investors, however, there seems to be no major shift in Fed expectations after the release. The intraday market reaction after release of the report was quite emotional: USD soared up, long-dated Treasuries fell in price and US stock indexes slipped. By Wednesday, those movements ran out of steam: 10Yr Treasury bond yield retreats, futures for US indices trade in green while USD completely unwound post-report gain:


Screenshot-2021-07-14-at-18-03-23.png



Should we expect Powell to address persistent inflation in his speech today and hint at the possibility of an even earlier withdrawal of stimulus? I think not, and here's why.

Trying to decipher whether high US inflation is temporary or not, i.e., whether or not the Fed should try to adjust the policy or rhetoric in response to its behavior, it might be useful to break it down into key consumption categories and consider contribution of each separately, since there are temporary and permanent drivers of inflation. Consider contribution of the main components in June in the table below:


Inflation-US.png




I marked in red the positions that made the main contribution to inflation. It can be seen that the monthly inflation rate for used cars was 10.5%, breaking this year's record. At the same time, the percentage contribution of this component to the CPI reading was about one third.

Fuel price inflation also made significant contribution. On a monthly basis, gasoline prices rose 2.5%.

Otherwise, it can be seen that the numbers are very, very modest. For example, the rental rate for primary residence increased by an average of 0.23% on a monthly basis.

The increase in the price of used cars and fuel can be confidently attributed to temporary drivers, since the demand for them is caused by stimulated consumer demand due to fiscal support measures, seasonal factors as well as world oil prices. Therefore, it would be strange to believe that the Fed will change its opinion on inflation after this report. Markets seem to have also digested the information and the consensus on temporal nature of recent high inflation remains dominant, which is evident, in particular, from the absence of investor flight from long-dated bonds and weak USD performance today.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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June CPI report didn’t impress Powell leaving USD without support


Powell’s cautious comments yesterday curbed USD gains and should support currencies which offer high interest rates as their appeal also depends on how long US interest rate will stay low. Growth opportunities in EUR and GBP against greenback are rather limited, however EM, NOK and other cyclical and commodity currencies deserve attention of investors.

Powell yesterday attempted to strike a balanced position between what the data say and the Fed's own forecasts. While acknowledging that the rise in inflation in recent months has been unexpected and that the situation needs attention, he also said that the underlying reason of growth is a "perfect storm" caused by several drivers that must soon wear off. In his opinion, the Fed should consider the rapid rise in prices as a temporary, unless, of course, it will be repeated year after year. He also believes that current inflation still falls short of the definition of “moderately above the 2% target”.

Recall that breakdown of June inflation into components showed that the two biggest growth drivers was fuel and used cars – prices of the latter in the past three months have been rising average by 9% MoM! Increased demand for fuel, due to, among other things, the effect of seasonal factors, the rally in the oil market spurred fuel prices and its impact on inflation also rose:

Inflation-US.png


Prices for new cars also grew at a decent pace - 2.0% in June. Home rent, which accounts for a large share of income, increased by 0.5% MoM.

The concentration of inflationary pressures only in certain components suggests that inflation is indeed more temporary than persistent. Therefore, the impact of the CPI report on market expectations regarding the Fed was short-lived.


Powell's comments were able to stop decline in EURUSD fueled by CP report, however growth prospects are dim and instead it is reasonable to expect the price to move in a range, as the ECB has clearly outlined its position on tightening the policy - it should not be expected in the near future. The same can be said for the Bank of England. The Fed is a little closer to the beginning of tightening the policy, but more data is needed to clarify the timing, so the potential for strengthening the USD remains against low-yielding currencies - EUR, GBP, JPY. But again, markets need more data.

Weak data on the Chinese economy and easing PBOC policy stance also suggest that the process of transition to higher interest rates by other major central banks may slow. China's GDP grew in the second quarter by 7.9% (forecast 8.1%). This week, the Bank of China lowered its RRR and refinanced part of its debt under its medium-term lending program, which is regarded as increases in monetary stimulus support for the economy. In the current situation this may be viewed as a signal of slowing economy which will have repercussions for the rest of the world as well.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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The risk of more downside in equities remains high as bond market moves spell trouble


Correction in risk assets apparently took a break on Tuesday, however weakness in oil and greenback strength persist. After a brief respite early in the session, greenback went on the offensive against major peers, commodity currencies, nonetheless it failed to develop conclusive advantage against emerging markets currencies complex. This is important positive signal suggesting that broad-based flight from risk hasn’t started yet. GBP and NZD led declines against USD, which at the time writing were down 0.60% and 0.55%.

The rally of long-dated Treasury bonds is probably the biggest warning signal that calls for caution. On Tuesday we saw another leg of growth despite major gains on Monday and last week, which could indicate some major shift in sentiment. 10-year bond yield plummeted to 1.14% on Tuesday to the lowest level since February 2021. When demand for long-term bonds rises, investors either expect inflation to ease or start to price out policy tightening from a central bank (or have a mix of these expectations). One way or another, both expectations are likely driven by worsening economic growth prospects.

One of the leading indicators of anxiety/optimism is the spread between yields on 10-year and 2-year US Treasury bonds. When it rises, markets are more likely to expect expansion and vice versa. Since May 2021, this indicator paints a worrying picture:

Screenshot-2021-07-20-at-18-33-28.png


Markets are being swept by a new wave of concerns over the new Covid-19 delta strain. Despite progress in vaccination, the incidence is growing rapidly in parts of Asia and Europe. The threat of new restrictions boosts risk aversion, given the recent powerful rally which sent parts of the market to very elevated levels, risks are shifted towards continuation of risk-off.

Emerging "inconsistencies" in the story of global recovery have been reflected in the odds of early tightening of the Fed's policy. Expectations are shifting in favor of the fact that at the upcoming event in Jackson Hole, as well as at the September meeting of the FOMC, there will be no signals about early start of QE tapering (decline in the rate of Treasury and MBS purchases). In line with Fed Chief Powell's position that employment gaps justify continued monetary stimulus, the move to rate hikes could be delayed until 2022. Until the Fed sheds lighter on this matter, uncertainty related to the next Fed move will be a factor of pressure on risk assets.


The markets are now experiencing their fourth correction this year. The average size of retracement is 4-5%, the current correction is about 3.5% from the highs, that is, nothing critical yet.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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This EURUSD technical pattern is a worrying omen for Euro bulls

US equities managed to rebound on Tuesday which discouraged further selling, European markets and US index futures picked up the tone of recovery on Wednesday. As I wrote earlier, EM currencies were remarkably resilient to the mix of strong USD and weak oil prices on Tuesday, some of them even managed to rise against the dollar, which could indicate that risk aversion wasn’t broad-based.

Today, investors apparently discount worrying headlines regarding pandemic and turn their focus on corporate reports. European indices clawed back 1% on average after yesterday's fall, futures for major US indices rose from 0.1% to 1%. Interestingly, the leaders of yesterday's sell-off – cyclical shares and industrial stocks - rebounded stronger than others - the gains of the DOW and Russell 2000 are the highest among the key US stock indices.

Long-term Treasury yields also rebounded after dropping to a five-month low on Monday which provided welcomed respite as the recent relentless drop in yields was one of the main reasons to worry. Demand for long-term bonds rises when inflation expectations subside or the central bank is expected to keep rates low longer. Both reasons are clearly linked to expectations of a slowdown in economic growth.

Major FX pairs sway in narrow trading ranges, greenback index holds near the opening, cementing support at 93 points. The minutes of the BoJ meeting indicated the Central Bank is concerned about the possibility of inflation recovering despite solid PPI growth and ongoing pickup in activity as behavior of companies operating many years in deflationary environment prevents them from freely transferring rising costs to consumers. The market interpreted this as a signal of yet another delay in paring down stimulus, in particular, slowing down the pace of asset purchases and therefore sold the yen today. The Yen was the only major currency that declined against USD, besides, the rebound from 100-day moving average helped yen sellers to increase pressure:

Screenshot-2021-07-21-at-17-34-18.png



EURUSD holds near 1.18 level ahead of tomorrow's ECB meeting, however selling pressure is apparently subsiding. The meeting promises to be interesting in terms of the impact on the foreign exchange market and the euro, as there is a fairly high level of uncertainty about certain aspects of ECB policy. Christine Lagarde said earlier that the ECB should soon release results of its strategic policy review, it is not known how this will affect the long-term path and the final level of interest rates.

From a technical point of view, the pair is forming an inclined pennant within the downtrend, which indicates that the pair stays in control of sellers which implies higher chances of a downward breakthrough with a short target of 1.17 - the lowest level since April:

Screenshot-2021-07-21-at-17-51-34.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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What to expect from the Fed meeting this week? Technical setup in EURUSD



Despite the shocks associated with local Covid-19 outbreaks and calm summer season, stock markets find the strength to reach fresh peaks. On Friday, SPX broke through resistance at 4400 as the US economic data and expectations regarding the Fed meeting favored the risk-on move. On Monday, there was a slight pullback that affected all major asset classes. Longer-maturity bonds saw increased demand while risk appetite somewhat eased. Emerging market and commodity currencies stayed under pressure while oil price failed to score additional gains. Gold rebounded. USD stayed offered which is somewhat unusual when combined with broad weak equity performance, however the sell-off could be due to the uncertainty about upcoming Fed meeting, where Powell may disappoint fans of tight monetary policy if he again focuses on employment challenges in the US.

The correction last week failed to gain momentum as the key selling trigger - local Covid-19 outbreaks and associated potential economic setback - quickly proved to be unsustainable. Markets were fast to discount the gloom as several data sources indicated growing evidence that correlation between growth of daily cases and deaths weakened, especially in countries with high vaccination rates:

covid-cases-1.jpg


The decision of the UK to announce complete lifting of restrictions, despite the surge in incidence, did not seem very far-sighted and even provoked a negative reaction in the GBP, but now the authorities' calculation is clear.

What we need to know before the July Fed meeting? According to the new concept of monetary policy, the Fed will do its utmost to strengthen employment, more precisely to increase its inclusiveness - to involve in work as many people as possible, including people from vulnerable groups. Willy-nilly, the Fed will have to sacrifice price stability, i.e. let inflation fly over the 2% target in this economic cycle. With 6 million fewer employed compared to the pre-crisis period, despite an impressive rebound, the Fed has very little incentive to respond by raising rates to increased inflation rates provided it is seen as temporary. Any, even the slightest hint of a faster monetary policy tightening is likely to lead to a sell-off of risk assets, large USD and Treasury gains as additional hawkish Fed shifts after very hawkish dot plot update in June seem unlikely.

In case of a dovish stance of the Fed at the meeting on Wednesday, the divergence of policies of the Fed and the ECB should weaken a little and EURUSD may have a chance to recoup losses in August. From the point of view of technical analysis, on the daily EURUSD chart, one can consider the falling wedge pattern, which in the classical literature is considered as a reversal formation. Possible entry points for a long can be 1.17 (1) and 1.175 (2):




EURUSD-ENG.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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