Post Jackson Hole reaction was tricky with dovish initial spike, followed by hawkish reversal -- finally closing the week dovish; DXY on the highs, US equities on ATH's, Gold held the 1900.00 support level and yields initially rallied Thursday but pared gains on Friday.
Market based inflation expectations rose on Thursday and Friday post Chairman powell's speech, with the 5-year 5-year forwards rising to 1.86% from 1.81% Wednesday; and 10-year breakeven rate rising to 1.77% from 1.72%.
Nominal 10-year yields initially rose to test 78bps on Thursday, post Chairman powell's speech but pared back gains to close the week at 73 bps.
The real yield story is still driving markets. For real-yields to continue falling, inflation expectations will need to continue to rise and nominal yields will either have to remain flat, or resume the recent downwards trend. So these are the key things I am keeping an eye on.
Powell made no mention of explicit forward guidance, while he did say that "inflation would run moderately over 2.00% target for some time, but not extend over long periods". The new updated statement on longer-run goals could set the stage for the Fed to release more detailed Forward Guidance, perhaps at the mid-September meeting. Powell's remarks do cement the dovish outlook for policy. The median expectation at the Fed is for the next rate hike until after 2022.
Early Friday morning, Japanese president Shinzo Abe resigned, causing the JPY to strengthen sharply 1.50%, which is further putting downwards pressure on the USD. If this theme continues to play out then is further dollar weakness factor.
Both PM favourites have expressed concerns on Japan's monetary regime under Abe and this could potentially put the job at the BOJ under pressure, which is Yen positive. Also the Yen is a safe haven asset and will strengthen in times of uncertainty. Will be one to keep an eye should the Yen continue to strengthen significantly then would add downwards pressure on the already weak US Dollar.
Main data is August jobs report release on Friday. Looking at the July numbers, a rise in COVID-19 cases did not impact the economic recovery or employment numbers, despite some states reimposing lockdown measures. High frequency data has showed growth in employment conditions in August, initial jobless claims have been ticking lower, continuing claims has also improved on the month.
In terms of the overall dovish picture, it's unlikely the jobs numbers on Friday change the landscape much. If the number is worse than expectations this would further cement the "lower rates for longer" and strengthen the argument for further dovish Fed policy. And if the numbers are better than expected, then market based inflation expectations may get a boost, but this will not influence the Fed's current stance on monetary policy.
With market based inflation expectations rising and yields falling on Friday, Gold price rallied 2.20% closing at 1965.00. With the Fed committed to AIT gold price could remain supported. Technically, the 1900.00 area of support is really key in the near term, if price can stay above then is more bullish. Price also moved above key trendline resistance which may help the bulls open up towards the 2000.00 mark and the 18th-Aug high at 2020.00. Above there is the ATH at 2090.00.
Risk is below the 1900.00 mark, although if price breaches, that level may not necessarily mean bearish view just yet. For a bearish view we would like to see real-yields higher.
Persistent US Dollar weakness is strengthening all major currencies, and the EURUSD is back on the 1.1900 mark and the July high. This is the fourth test of this resistance with a brief breach above on 18th-August, this level has yet to be broken with conviction. Medium term fundamentals (reflation story) still remain bearish for the US Dollar, however positioning is what makes this trade difficult.
However on the daily timeframe the Stochastic, a measure of overbought-oversold conditioning, is actually less overbought than price looks. Since August, the stochastic has trended lower from it's 95 reading mid-July, as price has consolidated sideways, it's allowed price to work off it's overbought condition. There's two ways to interpret this:
(A) Some would say there is a bearish divergence here between price and the stochastic and thus price will fall. And that with price on mighty 1.1900 resistance this could well be the case, price falls back down towards daily support at 1.1700.
(B) The bullish thesis is that the current USD weakness has been very persistent, and I would not atall be surprised to see the EUR/USD move above key chart resistance at 1.1900 onwards up towards 1.2000 and beyond although 1.20 has been tough to crack, and the fact the stochastic is now lower, may enable bulls to now drive the stochastic back into overbought territory and allow price to push up above resistance.
All in all, super key area here for the EUR/USD, above 1.1900 with conviction more bullish and below more bearish. Lean more towards the bullish side if real yields continue to decline, in line with my ultra loose monetary policy correlations theme. Might just be worth waiting and watching how price responds at present levels and not be the first man over the top so-to-speak.
About the Author - Alex Clark
Alex began investing 6 years ago. He loves the game of solving problems before other people and watching how price reacts to confirm his original thesis. He loves to see the madness of crowds play out directly in front of him, and think about how he can get involved while keeping the risk managed.
Macro investing is his passion, because you have to learn about something you know nothing about quickly and accurately. Keep you on your toes and your reward is profit. Alex started working for Amplify Trading as a trader and mentor in Jan 2020 where he teaches new traders how to trade and coaches and mentors traders currently trading.