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by Darius Anucauskas

Dovish FOMC, Equities Correct Lower, ECB Account Of Monetary Policy

Yesterday, the Federal Reserve released its July meeting minutes, which showed that the Fed still believes that accommodative monetary policy is still required. Equities took a turn south. Later on, the spotlight will fall on the ECB, as it publishes the account of monetary policy meeting. And finally, we will get the US initial and continuing jobless claims for the past week.

FOMC Meeting Minutes

Yesterday, the Federal Reserve released its July meeting minutes, which showed that the Fed still believes that accommodative monetary policy is still required. Also, during that meeting, the Committee decided to keep their benchmark rate unchanged, in the range of 0% - 0.25%. As we look back at historic data, last time the rates were so low was in the period from December 2008 till December 2015. According to the CME’s FedWatch Tool, there currently no expectations for the target range to change all the way till March 2021. Given that the Fed is currently on the dovish side, the rates are like to stay at these current levels, just as the FedWatch Tool suggests. Also, as quoted in the minutes: “…Committee would undertake to maintain the current target range for the federal funds rate at least until one or more specified economic outcomes was achieved-and also touched on calendar-based forward guidance-under which the current target range would be maintained at least until a particular calendar date.”

The US indices were seen hanging around near their highs prior to the release of the minutes. But after the minutes were delivered, US indices lost ground and drifted lower. The S&P 500, Nasdaq 100 and Dow, all closed in the red on Wednesday, triggered by the Fed’s dovish tone in its July meeting minutes. This morning, the Asian markets followed suit and took a small hit too. However, given that there is still no clear signal for a reversal to the downside, we will treat this decline as temporary correction. The technology sector, which is currently the main driver of the market, still looks quite strong. But we will continue monitoring it closely, in order to see when investors will start taking some profits of the table, which might quickly change the tone in the equity world.

Major Indices

One of the winners, after the minutes were released, was the US dollar. The dovish tone of the FOMC helped USD to gain against all of its G10 currencies. The greenback has been acting, lately, as a safe-haven, benefiting during some bearishness in the market. The biggest gains were against the Swiss franc and the British pound, whereas the yen and the Canadian dollar were able to stay the best performers among the losers. That said, although there could be a chance now for the US dollar to strengthen a bit more, still, if the equities get boost and climb higher, USD might reverse south again.

USD Performance

 

 

ECB Account Of Monetary Policy and US Initial And Continuing Jobless Claims

Later on, the spotlight will fall on the ECB, as it publishes the account of monetary policy meeting. During the last meeting, the Bank decided to raise its PEPP (its pandemic emergency purchase program) by EUR 600bn to a total of EUR 1350bn, extending to “at least the end of June 2021”. The committee also said that they are ready to adjust their policies accordingly, to ensure inflation moves towards their aim in a sustained manner.

And finally, we will get the US initial and continuing jobless claims for the past week. As we can see, both readings continue to decline, which is a good sign that Covid-19 related labour market issues are being managed well. Although the current expectations are for another decline in both data sets, if by any chance, the actual numbers show up on the worse side, that may shake up the US market positivity, which has been dominating so far. However, the negative effect from that might be short-lived, as market participants will focus on other key factors, such as preliminary PMIs and the coronavirus daily cases.

US initial vs continuing jobless claims

DJIA – Technical Outlook

Looking at the technical picture of the DJIA cash index on our 4-hour chart, we see that this morning it fell below its key support area, at 27663. At the same time, the price remains below a short-term tentative downside resistance line drawn from the high of August 11th. Currently, the cash index is correcting back up a bit, however if it struggles to get back above the 27663 hurdle, this may result I another slide. We will remain cautiously bearish, at least for now.

As mentioned above, if DJIA moves a bit higher but fails to get above the 27663 hurdle, that could send the index down again. The price may drift to one of its key support areas, at 27460, a break of which might clear the path to the 27195 level. That level is marked near the high of July 15th and near the low of August 7th.

In order to examine higher areas again, we would like to see a break of the aforementioned downside line first and then a push above yesterday’s high, at 27919. That may spark interest in the eyes of more buyers, who could help lift DJIA to the 28045 obstacle, or even the 28156 zone, marked near the current highest point of August. The acceleration could get halted around there, but if the bulls are still feeling more comfortable, a break of that zone might open the way to the 28248 level, marked by the high of February 25th.

DJIA-240

USD/CAD – Technical Outlook

Yesterday, USD/CAD found good support near the 1.3133 hurdle, from which it rebounded strongly to the upside. The pair could continue moving a bit further north, however, let’s not forget that overall, the rate still remains below a short-term downside resistance line taken from the high of July 14th. For now, we will aim a bit higher, but we will stay somewhat bearish overall.

A push above today’s high, at 1.3233, could clear the path to the 1.3270 area, marked near the high of August 14th. Slightly above it runs the aforementioned downside line, which if remains intact, could invite the bears back into the game. USD/CAD could end up sliding back to the 1.3233 obstacle, a break of which might send the rate to the 1.3175 level, marked by intraday swing highs of August 18th and 19th.

Alternatively, if the pair is able to break above the aforementioned downside line and climb above the 1.3320 barrier, marked by an intraday swing high of August 11th and an intraday swing low of August 12th, that might attract even more buyers into the game. USD/CAD could drift to the 1.3347 obstacle, or even the 1.3400 hurdle, marked near the high of August 7th. The rate may stall there temporarily, but if the buyers continue to believe in themselves, then a break of that hurdle could open the way to the 1.3459 level, marked by the high of July 30th.

USDCAD-240

As For The Rest Of Today’s Events

Today we will also get the Philadelphia Fed manufacturing index for the month of August. That reading is expected to have declined from 24.1 to 21.0. However, that would still be considered as a decent number, as whatever is above zero, indicates improving conditions.

Canada will deliver its ADP nonfarm employment change figure. Currently, there is no forecast available, but the previous numbers have been on a steady rise from June.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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