Markets were generally calm ahead of the publication of the Federal Reserve’s meeting minutes yesterday, though the UK’s main share index slipped to a two month low as a combination of ex-divided trading and some bad news from a couple of insurance majors weighed on sentiment.
Had the market stayed open for longer it probably would have ridden on the coat tails of the US stock market which was lifted by the Fed minutes. The FOMC’s words were pretty much in line with expectations and the lack of any hawkish surprises was enough to boost equities, soften bond yields and weaken the US Dollar. Here are 4 takeaways from yesterday’s minutes.
1. Fed seem to be in no immediate rush to raise rates
The Fed seem happy with the pace of economic growth in the second quarter and also with headline unemployment falling (though whether the US labor market is truly improving is another story) and have noted that recent inflation rises are present but not a threat at the moment.
2. QE will end in October this year
The FOMC confirmed this scenario, indicating that the Fed would not pause or speed up its taper plans.
This was initially taken positively by the U.S. dollar, as the end of easing would mean that the Fed is a few steps closer to tightening monetary policy. Of course Fed policymakers were quick to add that this still depends on whether economic data reflects their projected economic rebound in Q2 or not.
3. Mario Draghi was probably cursing the FOMC
While he addressed markets and tried, in vain, to talk down the Euro by talking up the possible future action of the ECB, Mr Draghi said that he and all of the governing council are determined to keep monetary policy accommodate for an extended period and that they are united in using unconventional tools if necessary. On any other day this would have led to a Euro sell-off, but coming just an hour after the Fed said they weren’t about to raise rates anytime soon, the single currency climbed as the Dollar index fell. He may now need to re-think his approach to softening the Euro and perhaps even resort to action over conversation if he wants to be taken seriously.
4. Mixed views on labor market
The actual FOMC statement indicated that policymakers believed that labor prospects were improving, as they upgraded their employment forecast for the year. However, they still highlighted persistent risks, such as trends in the participation rate and long-term unemployment.
Take note though that this meeting was held prior to the release of the strong NFP data for the month of June, which reflected notable improvements in a few labor market indicators, such as wage growth. Some Fed officials are feeling more optimistic about reaching their goal of achieving full employment faster than anticipated.
5. Low U.S. bond yields led to USD selloff
Despite the Fed’s positive outlook, traders barely showed any love for the Greenback after the minutes were released. After the initial rally that lasted a few moments, the U.S. currency retreated when FOMC policymakers dashed hopes of a rate hike taking place early next year.
This led to a sharp decline in U.S. 10-year yields from an intraday high of 2.60% to 2.55%. As discussed in our Invest Diva education program, falling U.S. bond yields typically pushes Ms. USA down as this reflects weak interest rate expectations.
6. Problems with excessive risk-taking
Another factor that pushed the dollar lower against most of its forex counterparts was the return of risk appetite. After all, the promise of keeping interest rates low for the foreseeable future means a prolonged period of easy money for the U.S. economy. Lending and spending could continue to stay supported, sealing in better prospects for U.S. companies and overall economic activity.
This appeared to be a concern among a few Fed officials though, as some pointed out that measures should be taken to “address excessive risk-taking and associated financial imbalances.”
Some suggested that a more transparent communication strategy could address this. “It was observed that it would be useful for the committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate,” according to the minutes.
Intraday Forex Technical Levels
EUR/USD Intraday: bullish bias above 1.36.
Invest Diva likes: Long positions above 1.36 with targets @ 1.365 & 1.3675 in extension.
If pair goes nuts: Below 1.36 look for further downside with 1.3575 & 1.3555 as targets.
What’s up on the forex dance floor: Even though a continuation of the consolidation cannot be ruled out, its extent should be limited.
Supports and resistances:
1.37
1.3675
1.365
1.3611 Last
1.36
1.3575
1.3555
GBP/USD Intraday: bullish bias above 1.71.
Invest Diva likes: Long positions above 1.71 with targets @ 1.7165 & 1.72 in extension.
If pair goes nuts: Below 1.71 look for further downside with 1.7055 & 1.7005 as targets.
What’s up on the forex dance floor: A support base at 1.71 has formed and has allowed for a temporary stabilisation. The pair is expected to bounce off a bullish channel support.
Supports and resistances:
1.723
1.72
1.7165
1.711 Last
1.71
1.7055
1.7005
USD/JPY Intraday: the downside prevails.
Invest Diva likes: Short positions below 101.8 with targets @ 101.2 & 101.05 in extension.
If pair goes nuts: Above 101.8 look for further upside with 102 & 102.25 as targets.
What’s up on the forex dance floor: The RSI is bearish and calls for further downside.
Supports and resistances:
102.25
102
101.8
101.3235 Last
101.2
101.05
100.8
USD/CHF Intraday: the downside prevails.
Invest Diva likes: Short positions below 0.894 with targets @ 0.89 & 0.888 in extension.
If pair goes nuts: Above 0.894 look for further upside with 0.896 & 0.8975 as targets.
What’s up on the forex dance floor: As long as the resistance at 0.894 is not surpassed, the risk of the break below 0.89 remains high. The pair is trading in a bearish channel.
Supports and resistances:
0.8975
0.896
0.894
0.8922 Last
0.89
0.888
0.886
NZD/USD Intraday: the upside prevails.
Invest Diva likes: Long positions above 0.8775 with targets @ 0.8835 & 0.886 in extension.
If pair goes nuts: Below 0.8775 look for further downside with 0.8735 & 0.871 as targets.
What’s up on the forex dance floor: Even though a continuation of the consolidation cannot be ruled out, its extent should be limited.
Supports and resistances:
0.89
0.886
0.8835
0.8806 Last
0.8775
0.8735
0.871
AUD/USD Intraday: under pressure.
Invest Diva likes: Short positions below 0.9415 with targets @ 0.934 & 0.9325 in extension.
If pair goes nuts: Above 0.9415 look for further upside with 0.9455 & 0.9485 as targets.
What’s up on the forex dance floor: Technically the RSI is below its neutrality area at 50.
Supports and resistances:
0.9485
0.9455
0.9415
0.9372 Last
0.934
0.9325
0.929
USD/CAD Intraday: the downside prevails.
Invest Diva likes: Short positions below 1.0695 with targets @ 1.0615 & 1.058 in extension.
If pair goes nuts: Above 1.0695 look for further upside with 1.0725 & 1.075 as targets.
What’s up on the forex dance floor: Even though a continuation of the technical rebound cannot be ruled out, its extent should be limited.
Supports and resistances:
1.075
1.0725
1.0695
1.0666 Last
1.0615
1.058
1.0555
US Index Levels
S&P500
Short positions below 1968 with targets @ 1937 & 1923 in extension.
Alternative scenario: Above 1968 look for further upside with 1978 & 1986 as targets.
Dow Jones
Short @ 16795 with targets @ 16620 & 16525 in extension.
Alternative scenario: Above 16930 look for further upside with 16995 & 17090 as targets.
Nasdaq 100
Short positions below 3895 with targets @ 3808 & 3783 in extension.
Alternative scenario: Above 3895 look for further upside with 3919 & 3946 as targets.
Russell 2000
Short positions below 1183 with targets @ 1147 & 1132 in extension.
Alternative scenario: Above 1183 look for further upside with 1194 & 1211 as targets.
