The US dollar rebounded, while equities pulled back, perhaps due to a blast outside the Kabul airport in Afghanistan, as well as due to hawkish remarks by some Fed policymakers. Today, the financial world is likely to lock gaze on the Fed’s annual Economic Symposium and the speech by Fed Chief Powell, eager to see whether he will deliver a clear roadmap with regards to the Fed’s tapering plans.
Appetite Deteriorates on Kabul Attack and Fed Hawks ahead of Powell’s Speech
The US dollar rebounded and traded higher against all but two of the other major currencies on Thursday and during the Asian session Friday. It lost some ground only against JPY, while it was found virtually unchanged against EUR. The greenback gained the most versus CAD, GBP, and AUD in that order.
The strengthening of the US dollar and the yen, combined with the weakening of the risk-linked currencies, suggests that markets may have turned to risk-off trading yesterday. Indeed, taking a look at the performance of the equity world, we see that major EU and US indices were a sea of red, but today in Asia, although Japan’s Nikkei 225 and Hong Kong’s Hang Seng traded lower, China’s Shanghai Composite and South Korea’s KOSPI edged higher.
In any case, risk appetite was hit by a bomb blast outside the Kabul airport in Afghanistan, as well as by hawkish remarks by some Fed policymakers. In Afghanistan, a suicide bomb attack resulted in the death of more than 100 people, while with regards to the Fed, Dallas Fed President Robert Kaplan said that QE tapering should start in October or shortly thereafter, suggesting that a formal announcement may have to be made at the September gathering. Those remarks of his came in contrast with last Friday’s comments, when he noted that he may reconsider his hawkish stance should the coronavirus weigh on the economic recovery. St. Louis Fed President James Bullard and Kansas City Fed President Esther George were also on the hawkish side, with Bullard saying that the Fed should start trimming its purchases soon and end the program by early next year. All three of them downplayed the impact of the Delta variant, with George saying that her business contacts were telling her that the economic effects remained limited.
This may have come as a surprise to those expecting a more dovish approach following Kaplan’s remarks last Friday, as well as the third consecutive slowdown in the US PMIs. Today, the financial world is likely to lock gaze on the Fed’s annual Economic Symposium and the speech by Fed Chief Powell. Traditionally, the event takes place at Jackson Hole, Wyoming, but due to the coronavirus pandemic, it will be held online this year as well.
Investors will be eager to see whether Powell will deliver a clear roadmap with regards to the Fed’s tapering plans. Despite yesterday’s hawkish remarks by Kaplan, Bullard, and George, according to market chatter, some participants still anticipate a more cautious approach. Perhaps he will refrain from delivering a clear timeline, or he may suggest a slower pace in monthly reductions. For example, he could hint that once tapering begins, the monthly reduction would be USD 10bn worth of purchases. Given that the Fed currently buys USD 120bn worth of assets per month, this would mean that the process will last a full year, which means later interest rate hikes as well.
If indeed Powell sounds more dovish that Kaplan, Bullard and George, equities are likely to rebound again, while the US dollar is likely to pull back. However, this may not be a trend reversal for the greenback, rather than a correction, as relatively strong upcoming employment and inflation data may raise speculation that, despite Powell’s dovish stance, the majority of his colleagues may support an earlier action. As for the equities, it would be hard to call for a bearish reversal in case the future developments warrant a QE tapering very soon. After all, we saw Wall Street hitting fresh records even when expectations around the matter were brought forth. Yes, at first, we could experience a downside correction, but some participants may rush in to take advantage of the low interest rate environment for as long as it lasts, which could again result in another leg north. What’s more, although improving data will point to earlier and faster tightening, they will also point to an improving economic environment, which may also allow some stock buying.
Nasdaq 100 – Technical Outlook
The Nasdaq 100 cash index traded slightly lower yesterday, after hitting a new record of 15401 on Wednesday. Overall, the index continues to trade above the tentative upside support line drawn from the low of May 19th, and thus, we would consider the broader outlook to still be positive.
That said, another setback may be possible at some point soon, but if the bulls take charge from above the aforementioned upside line, we could see another test near 15401, the break of which would take the index into uncharted territory and perhaps open the path towards the round territories of 15500 and 15600.
Now, in order to start examining the case of a bearish reversal, we would like to see a dip below 14850, marked by the low of August 20th. This could confirm the break below the upside line and may initially pave the way towards the low of the day before, at around 14713. Another break, below 14713, could encourage the bears to dive lower, towards the 14550 territory, defined as a support by the low of July 8th.
AUD/USD – Technical Outlook
AUD/USD traded lower after it hit resistance slightly below the 0.7290 resistance, marked by the inside swing low of July 21st. Overall, the pair continues to trade below the downside resistance line drawn from the high of July 6th, and thus, we would consider the short-term outlook to still be negative, despite the August 20th – 25th recovery.
In our view, a dip back below 0.7220 may wake up some bears, who could push the battle down to the 0.7158 zone, near the inside swing high of August 20th. If they don’t stop there, the next barrier to consider as an important support may be the low of that day, at around 0.7105.
On the upside, we would like to see a break above 0.7330, which acted as a strong support between August 8th and 16th, before we start assessing the likelihood of a positive trend reversal. This may initially pave the way towards the 0.7380 zone, near the highs of August 11th and 13th, the break of which could aim for the 0.7415 and 0.7440 levels. If neither hurdle is able to stop the advance, then we could experience extensions towards the peak of July 13th, at 0.7503.
As for the Rest of Today’s Events
Besides Fed Chief Powell’s Jackson Hole speech, we get the US personal income and spending numbers for July, alongside the core PCE index for the month. Personal income is anticipated to have accelerated marginally, to +0.2% mom from +0.1%, while the spending rate is expected to have fallen to +0.3% mom from +1.0%. As for the core PCE index, no forecast is available. The preliminary UoM consumer sentiment index for August is also due to be released and the forecast points to a rise to 70.9 from 70.2.
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