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by Charalambos Pissouros

Investors Turn Cautious Ahead of Powell’s Speech

Most major EU indices closed virtually unchanged yesterday. During the US session, sentiment was brighter, but today, in Asia, appetite softened again. With no major headlines or a clear catalyst to drive the markets on Tuesday, and with no major releases scheduled on today’s agenda, it seems that investors may have taken a more cautious stance ahead of Fed Chair Powell’s keynote speech at the Jackson Hole economic symposium tomorrow.

Equity Markets Trade Mixed as Focus Locks on Fed’s Powell

The US dollar traded lower against the majority of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained only against JPY, while it was found virtually unchanged versus EUR and NOK. The greenback lost the most ground against CAD, NZD, and CHF in that order.

USD performance G10 currencies

The weakening of the dollar and the yen, combined with the relative strength of the commodity-linked currencies Loonie, Kiwi and Aussie, suggests that markets continued trading in a risk-on fashion yesterday. That said, the strengthening of the Swiss franc points otherwise. Thus, once again, we will turn our gaze to the equity world in order to get a clearer picture with regards to the broader investor morale. There, most major EU indices closed Tuesday’s session virtually unchanged, with the exceptions being Italy’s FTSE MIB and the UK’s FTSE 100, which fell 0.41% and 1.11% respectively. Things improved during the US session. Although the Dow Jones slid 0.21%, the S&P 500 and Nasdaq gained 0.36% and 0.76%. In Asia today, appetite softened again, with China’s Shanghai Composite tumbling 1.32%. Japan’s Nikkei 225, Hong Kong’s Hang Seng and South Korea’s KOSPI are currently virtually unchanged.

Global major stock indices performance

With no major headlines or a clear catalyst to drive the markets on Tuesday, and with no major releases scheduled on Wednesday’s agenda, it seems that investors may have taken a more cautious stance ahead of Fed Chair Powell’s keynote speech at the Jackson Hole economic symposium tomorrow. Last week, the minutes of the latest FOMC gathering revealed that several officials suggested that additional accommodation could be required, and added that fiscal support would also be necessary. However, they saw only modest benefits from adopting a yield curve control strategy, and thus, this was “not warranted” now.

With no clear picture as to what form any potential additional easing may take, investors may lock their gaze on Powell’s speech for more clarity on that front. They may also be looking for clues on the timing of any additional action, especially if the White House and Congress Democrats stay deadlocked in agreeing over a new coronavirus-aid package. If the Fed Chief suggests that further stimulus is on the cards, perhaps as early as next month, equites are likely to extend their uptrends, while the dollar is likely to continue tumbling. The opposite may be true, if Powell appears less dovish than anticipated, something that could scale back expectations over fresh accommodative measures before the end of this year. Market chatter also suggests that Powell may address a future approach to the inflation target, allowing consumer prices to move higher, and thereby delay any potential increase in interest rates. Something like that could add further pressure on the dollar, while it could prove positive for equities, as it would mean extra-loose monetary policy for longer.

As we noted several times in the past, among currency pairs, one of the major gauges of investor morale may be AUD/JPY. As a risk-linked currency, the Aussie tends to get benefited when the financial community trades in a risk-on fashion, with investors diverting flows from safe-havens, like the yen. The opposite reaction may be true, in case of deteriorating morale. With oil prices edging north yesterday due to US producers shutting most offshore output in the Gulf of Mexico ahead of Hurricane Laura, the Canadian dollar may also be among the beneficiaries in case risk-on trading is reignited. Therefore, CAD/JPY may be another pair to move decently higher. Having said that, we would not put too much faith on NZD/JPY, due to the RBNZ strengthening its language with regards to the prospect of adopting negative interest rates.

DAX – Technical Outlook

On Monday, we saw the German DAX rallying and breaking its short-term downside resistance line taken from the high July 21st. Yesterday, the index continued its journey north, but got held near the high of July 23rd, at 13218, from where the price corrected slightly lower. The MACD, on out 4-hour chart, had just moved fractionally below its trigger line, but remains well above zero. Such a picture may support the idea of seeing a further correction lower, however, if DAX stays above the aforementioned downside line, the bulls could take advantage of the lower price. For now, we will stay somewhat bullish.

As mentioned above, a small drift lower may end up testing the psychological 13000 hurdle, or the above-discussed downside line. If both of those provide good support, the index might get picked up by the buyers again and rise to the 13103 area, or even the 13218 zone, which is marked near the highs of July 23rd and August 25th. A failure of that zone to hold the index from rising further could result in a push higher, where the next potential resistance level may be at 13315. That level marks the highest point of July.

Alternatively, if the price suddenly drops back below the aforementioned downside line and slides below the high of August 21st, at 12938, that may spook the remaining bulls from the field. More bears might be joining in then in order to drag DAX to the 12750 hurdle, which is the low of August 20th. The index could stall there temporarily, however, if the bears are still feeling a bit more comfortable, they may send the price further south towards the next possible target, at 12629, marked by the low of August 21st.

German DAX cash index 4-hour chart technical analysis

AUD/JPY – Technical Outlook

Although AUD/JPY continues to balance above its short-term upside support line drawn from the low of July 13th, the pair is still struggling to overcome the area near the 76.71 barrier, marked by the highs of July 23rd, August 12th and 13th. For now, we will take a cautiously-bullish approach, because in order to aim for higher areas, a break of that 76.71 barrier would be needed.

If, eventually, the 76.71 hurdle surrenders to the bulls and we see a strong move above it, that may attract a few more buyers into the game. The bulls might then lift the rate to the highest point of July, at 76.86, a break of which could open the way to the 77.09 zone, which is the high of May 10th. If the pair gets a temporary hold-up there, we might even see a small correction back down. That said, if this time, the 76.71 area plays the role of a strong support, the bulls may enter the game and drag AUD/JPY up again. Another uprise and this time a break of the 77.09 territory would confirm another forthcoming higher high, potentially aiming for the 77.38 level, marked by the high of May 8th.

In order to shift our attention to some lower areas, we would prefer to wait for a break of the aforementioned upside line and a rate-drop below the 75.81 hurdle, marked by an intraday swing low of August 24th. Such a move may scare a few bulls from the field, allowing more bears to join in. AUD/JPY could then travel to the 75.60 area, marked by the low of August 20th, which may temporarily stall the slide. That said, if the sellers are still feeling a bit more confident, that area might break, this way opening the way towards the 75.48 obstacle, or even to the 75.10 level, marked by the low of August 3rd.

AUD/JPY 4-hour chart technical analysis

As for Today’s Events

As we already noted, the calendar appears relatively light today. The only economic release worth mentioning is the US durable goods orders for July.  Both the headline and core rates are expected to have declined to 4.3% mom and 2.1% mom, from 7.6% and 3.6% respectively.

With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories is coming out and the forecast points to a 3.694mn barrels slide after a 1.632mn decline the week before. That said, bearing in mind that, yesterday, the API (American Petroleum Institute) report revealed a 4.500mn barrels fall, we would consider the risks surrounding the EIA forecast as tilted to the downside, which could add further fuel to yesterday’s rebound in oil prices.

As for the speakers, we have three on today’s agenda: ECB Executive Board member Isabel Schnabel, BoC Senior Deputy Governor Carolyn Wilkins, and BoE Chief Economist Andy Haldane.


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