The US Fed, Sentiment and PCE data, all put pressure on the US dollar today
Today's main event was of course the Fed Chair Powell speech from the Jackson Hole symposium, where he basically gave the FOMC more time to consider their taper strategy. I personally don’t see them doing anything that would rock the boat for Powell’s chances of getting a second term and for Biden to lose control of the Senate and US Congress. Neither of them can afford a market ‘Taper Tantrum’. The result is a possible announcement in September and a weaker US dollar on the lack of clarity and rate hikes.
Market Wrap
Your trading forex heatmap shows that the US dollar is coming under some serious pressure as traders unwind their taper/hike cycle bets. This move follows on from the widely anticipated Jackson Hole symposium which analysts had been saying was the possible date for the most telegraphed taper. Up until today, the forex markets had been trading within a tight range following on from Monday's move in the US dollar. The week's opening range now seems quite prophetic for what was to come, so maybe the early move was based on some industry knowledge or maybe it was a good unwind of buying the rumor sell the news.
The weakening US dollar may come to an abrupt halt if the EURUSD finds the 1.1800 level too much to get past. This level has been a mean reversion treat but a trend followers’ nightmare. What is needed is for a clear break away from this level and for the euro to decide whether the Fed will delay the rate hike further and so allow the euro to continue its rise from the March 2020 lows.
The S&P500 has broken out of the first hours trading range for the US session and has a higher probability TP1 target of 4518 now that the 4500 levels have been clearly taken. The move into the equities and the fixed income products currently is all about the relief that the fed is not tapering for a while longer. Usually, I prefer it when the markets are risk-on or clearly risk-off and equities move counter to fixed income.
The TLT 20-year Bond ETF is above the level when Fed Chair Powell’s speech hit the newswires as the yields fell due to the lack of clarity around rate hikes and tapering.
With US 10-year yields falling along with the US dollar, the precious metals markets have a chance to break higher. Gold is now trading above the 200-day exponential moving average and has broken higher from the near-term descending channel. There is some resistance above from the upper bounds of the larger corrective channel but if that were to break, gold would accelerate towards the $2k.
Another commodity to clearly benefit from a declining greenback is the Brent crude market. Brent recently found support near to the daily 200 ema and is now likely to close the week out above all 3 moving averages. This move higher is being pushed on as supply worries creep faster into the markets because of a storm approaching key oil infrastructure in the USA. Storm Ida in the Gulf of Mexico has shut down platforms as well as disrupting the refiners on land. Currently, Cuba is feeling the force of the hurricane but by Sunday Ida is expected to hit along the Louisiana coast, into the Mississippi Valley and Alabama.
The Fed today has eclipsed all other US dollar-related news, but it should be noted that Consumer confidence in the United States decreased 13.4% in August compared to July. The Index of Consumer Sentiment was at 70.3, down 5.1% from August 2020.
Also, we received the Fed’s preferred inflation metric Core PCE. Which showed prices in the US which exclude food and energy increasing by 0.3% m/m in July of 2021, with an upwardly revised 0.5% rise in June. The year-over-year rate came in at 3.6% which was in line with expectations.
The US dollar had risen very quickly after the June FOMC meeting and between then and now has tracked higher taking out the March 2021 swing highs. If the August swing low should break the $92.25 level is a measured move lower for an AB=CD correction. The 1.618% extension would take out the major late July 2021 swing low and that opens the possibility of a retest of the June FOMC candles low.
The emotional nature of trading around these Tier-1 news events does unwind itself eventually and as nothing fundamentally has changed to the monetary policy, I was surprised that we got to the end of August for traders to look particularly US dollar bearish. I was calling for a revisit of the June FOMC low pretty much as soon as we closed out that day. Today is another example of a sentiment trade but with no real change in fundamentals, which may end up with speculators trying to front-run the September FOMC meeting, in which case today's bear US dollar turns bullish.
If we wait for a break of structure at least we will be able to mitigate risk in whichever direction we trade. Current intraday resistance is around $92.80 on the DXY and intraday support is near $92.50.