Jackson Hole and Fed speeches are the focus for the US dollar today
The day has arrived, and the market volatility should start to pick up on headline news announcements. Whether anything fundamentally changes is yet to be seen but the consensus is for the Fed to talk more Hawkish and for announcements to be made regarding a taper this year, probably from November. The key to trading this market is to find significant levels of support and resistance and wait for the price to come to you.
Market Brief
The big day has arrived, which means all eyes and ears will be on what is happening within the Fed’s Jackson Hole Symposium. We have already started hearing from Fed members who would be in favor of the FOMC announcing a taper this year and from 12:30 BST we will start to have more interviews and speeches starting with Fed’s Bostic on CNBC. These talking heads will no doubt add some intraday volatility to risk assets, but the main event is Fed Chair Powell’s speech which is scheduled for 15:00 BST. It is very unlikely that anything fundamental will change today, the rates will not move, the QE purchases will remain $120bln per month and the talk of inflation being transitory will remain. What is likely to change is the probability of a taper announcement in November this year. With market analysts assessing whether September’s FOMC meeting will be the earliest possible taper announcement. The point is there will be some moves ahead of the announcements and speeches, which invariably will be emotionally based, speculative, and short-lived. If this is the case the buy or sell the rumor depending on which way you are positioned will be unwound after the fact. On days like these, it is better to be flat ahead of the news headlines and then wait for some market structure, some fundamentals, and some clarity before making a trade.
One set of data the Fed themselves will be looking at is today’s release of the US PCE and US Advanced Trade Balance, with the focus on the PCE.
The forex heatmap shows a mixed response to recent events. Currently, the Australian dollar is showing relative strength against its peers even though the Australian retail sales data came in worse than expected in the overnight session.
The ActivTrades sentiment indicator shows that traders on the platform are becoming ever more bullish the Aussie especially against the euro.
The AUDUSD has two clear levels of support and resistance, and the future direction will be on the back of a break of either of these. If the US dollar continues to rise, I will be looking to take a short off the 0.7360 resistance area. If the US dollar index were to itself find resistance at current levels, I will be waiting for either a quick return towards the 0.7120 level or for a new range to build as a supporting platform before rising above the 0.7360 level. Taking a trade here on the AUDUSD is midway between significant support and resistance so currently unlikely to be the easiest of places to mitigate risk. The RBA has been reluctant to move monetary policy, but they would ideally become more Hawkish and tighten, assuming the authorities can get a better handle on the coronavirus infections.
The EURUSD makes up most of the US dollar index and looking at the daily chart there are some clear lines in the sand that traders are focusing on.
The biggest magnet appears to be the 1.1800 level, with any dip below finding some support above the 1.1600 level currently. The most recent resistance level above the pivotal 1.1800 is around the 1.1880 level. I am still keen to see the double bottom that formed in the Autumn of 2020 get swept and if the sellers come back in force at the break of the 1.1600, the next support level for me is 1.1300.
German import prices increased y/y by 15% in July beating market estimates, according to a report published by the Federal Statistics Office this morning. On a monthly basis, the import prices rose by 2.2%. Meanwhile, the German export prices advanced by 6.3% in July compared to the same month a year ago. Energy contributed most to the rising prices, with base effects due to the coronavirus crisis also having a large influence.
The US dollar index itself has a clear line in the sand too at $93.30 with the last 200 days of price action moving slightly higher. Above the $93.30 level, my next zone of resistance is $94.20-$94.80 and then the upper target would be $96.70. On the downside, $92.00 would be a great initial short target with the $90 level being found quickly should the first level of support break.
Recent geopolitical events are making the markets more concerned, as Joe Biden's approval ratings are in a descending trend.
The month of August has been particularly bad for the President’s approval rating and if more dead US soldiers are returned home from Afghanistan this will reflect very badly and hinder his chances of controlling the congress from the mid-term elections. What the markets hate more than all is instability and deadlock. So everything President Biden does now in terms of keeping Chair Powell in the driving seat of the Fed, getting Infrastructure and Budget approvals will be a big macro driver for the markets.