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Fed Taper a Foregone Conclusion, Focus Instead on Taper Pace

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It’s FOMC decision day and a taper announcement seems a forgone conclusion. The question among investors is rather when the FOMC will complete its asset purchases (speed of tapering) and when they will start to raise interest rates.

Most economists expect the Federal Reserve to reduce bond purchases by $15 billion every month and complete the taper by mid-2022 (eight months).

As Fed policy makers have said that they want to end the taper before moving to possible rate hikes, most attention will be paid to the taper pace. In case of a quicker end to the tapering, the U.S. dollar will rise.

The focus will also be on the Fed’s language regarding inflation. If the committee retains the language that elevated inflation is “largely reflecting transitory factors”, the dollar will weaken. If today’s FOMC statement is however more hawkish, stating that inflation is lasting longer than expected, the dollar will strengthen as the market speculates on earlier rate hikes.

Speaking of rate hikes and even though the market speculates on a faster rate hike path, diverging from the forecast of Fed policy makers, economists expect the Fed to suggest a liftoff when the unemployment rate falls to 4 percent.

Traders prepare for heightened volatility around the time of the FOMC statement today at 18:00 UTC.

EUR/USD technical view: If the euro falls again below 1.1540, chances of a bearish 1.15-breakout increase with lower targets seen at 1.1480 ad 1.1450. On the upside, price breaks above 1.1640 and 1.1670 will spur bullish momentum towards 1.1720.

GBP/USD technical view: Below 1.3580 we will turn our focus to lower targets at 1.3550 and 1.3450. On the upside, the 1.3750-area could serve as a resistance whereas a break above 1.3780 could attract more buyers towards a higher a target at 1.3820. However, larger fluctuations will be expected tomorrow, which is why the cable could be reluctant to big price movements today.

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Fed Taper is Priced-in, U.S. Dollar Pulls Back

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Speaking of inflation, the headline U.S. CPI number came in marginally higher than expectations while the core CPI print was in line at 0.2 percent (MoM). Most FOMC participants saw inflation risks as weighed to the upside and price pressures could sustain for longer than policy makers expected, yesterday’s FOMC minutes showed. A taper will be almost certainly announced at the Fed’s November meeting. The U.S. dollar weakened in the aftermath of yesterday’s reports since much of that expectation has been already priced in.

DAX

The best performer was the DAX that provided buyers a good gain (in our case a 100-points-profit). As long as the index holds above 15000, we will focus on a potential test of the 15500-area.

EUR/USD: We expect the pair to trade between 1.1750 and 1.15 in the near-term. Chances are slightly in favor of the bulls right now.

GBP/USD: A sustained break above 1.37 could drive the pair towards 1.3850 but sterling bulls should be cautious since sterling’s outlook clouded over somewhat. Falling back below 1.3540, a next lower target is seen at around 1.3370.

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USD Holds Onto Gains, Focus On PCE Index

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Sentiment remains dominated by mounting fears about slowing economic growth, elevated inflation, supply-chain bottlenecks and a global energy crunch. The U.S. dollar holds onto its gains heading into the weekend with market participants bracing for the Federal Reserve to wind down its stimulus.

Next week’s focus will be on the non-farm payrolls report that is expected to show more than double the job gain from August.

Today we will keep an eye on the U.S. personal consumption expenditures index (PCE) due for release at 12:30 UTC. Bear in mind that the Fed uses the PCE price index as its main measure of inflation. A surprise reading could thus impact the greenback.

EUR/USD: A next crucial target for bears is seen at 1.15. On the upside, we expect a resistance to come in at around 1.1670.

GBP/USD: We see a lower target at 1.3350 now. Breaking however below 1.3280 could see an extended slide towards 1.3180. A current resistance is seen at 1.36.

DAX: Bears, watch out for lower targets at 15000 and 14900. A break below 14800 could generate an even stronger sell signal towards 14400. For a bullish breakout on the other side, we would need to see prices above 15650.

Have a good weekend!

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Here Is Why The Dollar’s Sell-Off Did Not Last

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U.S. inflation was less than forecast in August which is why the U.S. dollar sold off in a first response to the data. But why did the dollar dip not last and prices in the GBP/USD and EUR/USD reversed course? The answer is that inflation remains generally elevated while the 5.3 percent (YoY) headline and 4.0 percent core CPI are still far beyond the Federal Reserve target. This leaves the argument about whether pandemic-related inflationary pressures are transitory undecided. The Fed may have some more flexibility on when to start tapering but high inflation is till an argument for a more imminent taper decision.

Fed policy makers could eventually wait until December to officially announce a plan to taper asset purchases.

Technically, both GBP/USD and EUR/USD pulled back from short-term resistance zones. The cable reversed course after touching 1.3913 and is now looking at a break of 1.38. Below 1.3780, we look at 1.3730 and further 1.3650. In the EUR/USD we look at a trading range between 1.1840 and 1.1750 as long as bulls are unable to take out the 1.1850-barrier.

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U.S. CPI Data To Underpin Fed Taper Talks?

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The U.S. dollar traded slightly lower ahead of today’s U.S. CPI report which is scheduled for release at 12:30 UTC.

If August CPI data shows that inflationary pressures slowed-down, we will see a bearish reaction in the dollar, pushing both EUR/USD and GBP/USD higher. An upside surprise, on the other side, would lead to a stronger dollar as traders pull forward bets on the timing of monetary tightening. At the Jackson Hole Symposium last month, the Federal Reserve led market participants believe that policy makers would wait longer before withdrawing stimulus but there has been speculation in recent days that the Fed may drop a hint of a forthcoming taper announcement at their FOMC meeting next week. This would be dollar-positive. But a hawkish signal will also depend on elevated inflationary pressures.

We could know more in the afternoon.

EUR/USD: The pair was able to stabilize again above 1.18 after testing 1.1770. Above 1.1830 we could see a run for 1.1870-80. Below 1.1790, the pair could test 1.1750.

GBP/USD: Remaining above 1.3750, chances are slightly in favor of a bullish move towards 1.3970. Below 1.3730, the focus shifts to a lower target at 1.3630.

 

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From Fed Taper To ECB Taper

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U.S. Nonfarm payrolls disappointed last Friday with only 235,000 jobs created in August.

The U.S. dollar sold off in an imminent response to the report but the greenback’s decline was limited after several days of weakness while bigger currency movements remained absent.

Despite the weaker than forecast job growth, average hourly earnings rose 0.6 percent last month, bolstering the dollar as hawkish Federal Reserve officials might sound the alarm. Speaking of a taper, traders now shift their focus to the November 2-3 FOMC meeting after policy makers have one more report from September in hand.

EUR/USD

The euro’s recent climb cannot be solely attributed to the dollar’s weakness, but also to speculation that the European Central bank is considering its own taper timeline.

According to economists surveyed by Bloomberg, the European Central Bank will start slowing down its pandemic bond purchases in the fourth quarter and may not exhaust the whole 1.85 trillion-euro program before it ends next year.

On Thursday, ECB policy makers will have to decide when to shift the institution away from its crisis mode. The inflation outlook now warrants stepping back stimulus, with inflation jumping to 3 percent, well above the ECB’s goal. The hawks have been very silent during the crisis phase but now as ‘normality’ is coming back, they could try to convince the doves to slow down the pace of asset purchases. More cautious policy makers will try to keep the focus on the uneven nature of the economic recovery and the risks from the delta strain.

The greatest danger comes however from a missing agreement between ECB policy makers and the risk that by December or January they still haven’t come to an agreement.

Technically, the euro touched its range resistance around 1.19 and traders wonder whether this could be the limit. Ahead of Thursday’s ECB decision we expect some corrective movements towards at least 1.1830 and eventually 1.1750. A break above 1.1910 however, could spur bullish action towards 1.1950 and 1.1980.

GBP/USD

The cable reversed shy of 1.39 whilst entering overbought territory. As long as the pair remains below 1.3930, we favor consolidative movements between 1.39 and 1.37.

U.S. markets are closed for the Labor Day holiday today but volatility is expected to pick up materially after the holiday.

We wish you good trades!

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No Fundamental Changes After Jackson Hole

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The market has been waiting for Jackson Hole throughout the summer and now that the Jackson Hole symposium is behind us, not much has changed as Federal Reserve Chair Jerome Powell didn’t offer a conclusive timeline for scaling back stimulus. He said the central bank could begin reducing its bond purchases this year but won’t be in a hurry to raise interest rates. One thing is certain following Powell’s virtual speech from Friday: A taper is coming. But this is what the market has already priced in, which is why the U.S. dollar sold off on the market’s interpretation that the Fed’s tempo is less aggressive than what was anticipated.

The focus now shifts to the U.S. jobs data on Friday for clues about the economic recovery.

We remind traders that the week before the U.S. Labor Day holiday is notorious for its quiet and illiquidity. In other words, big market moves could be missing in the coming days.

EUR/USD

The greenback fell and pushed the pair towards 1.1810. Since the pair entered overbought territory and tested the 1.18-resistance zone, we prepare for a correction in the latest upward movement. For the bullish movement to continue, we will keep tabs on a break above 1.1860 which could see a test of 1.1890-1.1920. Dollar bulls, on the other side, will have to wait either for a sustained break below 1.17 or a failed attempt to break above 1.19 in order to push the pair lower towards the crucial 1.16-support.

 

GBP/USD – As long as the cable holds above 1.3650-10, we see a next resistance at around 1.3820. An upside break of 1.3910 could spur bullish action towards 1.40. Breaking, however, significantly below 1.36 could pave the way for a sell-off towards 1.34.

DAX – The index marked a short-term support at 15700. We will focus on a renewed break above 15920 in order to anticipate a higher target at 16050 but bullish momentum will depend on liquidity.

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Will Powell Send A Hawkish Message Despite Delta?

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It might be a big day for traders and big decision for Federal Reserve Chair Jerome Powell who will have to decide which message he conveys. Even if the delta variant creates further uncertainty, the Fed must decide whether the costs of extending the commitment to maximum stimulus have come to outweigh the benefits. The risk of bubbles and financial instability is growing, so it makes sense to phase out quantitative easing. This would be positive for the U.S. dollar which could climb to fresh highs on such confirmation. In the opposite case, if the Fed delays plans to taper its bond purchases as expected, we could see a sell-off in the greenback, pushing other counterparts higher in turn.

Powell’s highly awaited symposium speech is scheduled for today at 14:00 GMT.

Going into today’s event, chances are slightly in favor of the dollar this morning.

EUR/USD

The pair marked a short-term resistance at around 1.1775. Above 1.1780, we see a next target at 1.1815. Breaking above 1.1860 could see a test of 1.1890 and possibly even a run for 1.1940. Dollar bulls will wait for a renewed break below 1.1725 and more importantly below 1.17 in order to push the pair lower towards the crucial 1.16-support.

GBP/USD

The pair rebounded and as long as it holds stable above 1.3650-10, we pencil in higher targets at 1.3830 and 1.39. An upside break of 1.3910 could spur bullish action towards 1.40. Breaking, however, significantly below 1.36 could pave the way for a sell-off towards 1.34.

We wish you good trades and a beautiful weekend.

We wish you good trades!

Any and all liability of the author is excluded.

Copyright © All Rights Reserved 2021 MaiMarFX.

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All Eyes on Jackson Hole This Week

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We are back from our holidays and back at the trading desks, relaxed and revived. We hope that all of you are happy and healthy too.

The U.S. dollar has gained traction in August as investors sought safe havens amid rising risk aversion in the wake of concerns about Covid, the tapering of Federal Reserve stimulus and economic growth. Volatility was notably higher in recent days and traders brace for turbulences if anxiety continues.

Also, market participants are on high alert ahead of the August 26-28 symposium in Jackson Hole, an annual event that has been the setting for important announcements in the past. Traders view it as a potential venue for Federal Reserve Chair Jerome Powell to lay out the timing of the Fed’s expected move to taper its bond purchases. Traders hope for more clarity at the annual conference and want to hear from the central bank on when it will reduce its $120 billion of monthly bond purchases. While many market participants expect a taper by December 2021, the greenback’s rise could gain momentum if we get an exact timeline this week. The opposite could however happen in case Powell refrains from delving into the policy outlook during the symposium. Disappointment could thus lead to a sell-off in the dollar. We could know more on Thursday.

From a technical perspective and after the U.S. dollar has gained ground against other major currencies, both EUR/USD and GBP/USD were approaching crucial support barriers last week. The sell-off eased somewhat at the beginning of this week while the euro and cable seem to start a small rebound.

Both EUR/USD and GBP/USD have been in a downtrend since May 2021.

EUR/USD – 1.16- A make-it or break-it level

After the euro broke below 1.17, traders have shifted their focus to the crucial 1.16-support. If 1.16 breaks significantly, we could see a sharp sell-off with lower targets at 1.14 and 1.10. If 1.16, however holds, we anticipate rebounds towards 1.18 and 1.19. In short-term time frames we now expect the pair to trade between 1.1760 and 1.1640.

GBP/USD

After failing to climb back above 1.39, the cable went downhill towards 1.36 and thus entered its medium-term support zone which extends from 1.3650 to 1.34. We expect the pair to trade between 1.3850 and 1.3450 now. We bear in mind that the cable is currently in oversold territory, making rebounds more likely.

DAX

The index trended upwards after dipping towards 15600 last week. A break above 15920 could lead to another test of 16000 and maybe even an upward extension towards 16100. A crucial support zone is currently seen at around 15500.

We wish you good trades!

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Euro And Cable Draw Closer To Support Levels Amid Low Volatility

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The FOMC minutes showed that conditions of substantial further progress have not been met for the Federal Reserve to start tapering. The minutes contained some degree of uncertainty among policy makers which is why the U.S. dollar initially slipped on the release. However, large price swings are lacking since market volatility remains subdued.

Generally speaking, the Fed tapering prospects will lead to a stronger greenback in the medium-term but now doesn’t appear to be the right time to expect too much from the hawks.

EUR/USD: If 1.1780 breaks, we will watch out for falling prices towards 1.1730/1.17. Resistances are seen at 1.1850, 1.19 and 1.20.

GBP/USD: We still see a crucial support at 1.37 from where we could see some rebound but if bears are strong enough to push the pair significantly below 1.3670, traders should expect steeper losses towards 1.35. Resistances are seen at 1.3850, 1.39 and 1.40.

DAX: We have already reached our weekly profit target while we were able to book good profits in three consecutive trading days. The index’s price range remains sideways between 15750 and 15450. Any break above or below this area should be considered as a potential chance for larger moves.

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We wish you good trades!

Any and all liability of the author is excluded.

Copyright © All Rights Reserved 2021 MaiMarFX.

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