During Powell’s testimony in the House, he repeatedly said the central bank stands ready to change its policy if inflation expectations overshoot

15 July 2021, 06:12

Market Focus

US equities edged slightly higher on Wednesday as Fed Chair Jerome Powell reiterated that the current price surge is temporary. The Nasdaq and Dow Jones Industrial Average index both climbed 0.13%, while the S&P 500 index gained little as 0.05%. On the earnings front, Bank of America failed to deliver upbeat earnings, while Wells Fargo & Co. beat analyst estimates. The 10-year US Treasury yield retreated 7 basis points to 1.35%.

During Powell’s testimony in the House, he repeatedly said the Fed believes price increases are linked to recovery in pandemic most impacted industries, and the central bank stands ready to change its policy if inflation expectation overshoot. Regarding demand and supply mismatch in the labor market, he commented such mismatch should be temporary, noting that extra unemployment insurance will soon expire for most states, so it won’t be a factor for much longer. Powell was also asked about the increase in house prices, one of the most critical sectors that elevated recent US CPI. He said the Fed has limited capacity to do anything about it, and the purchase of MBC should not cause any material impact to the housing market.

Bank of Canada kept interest rate unchanged at 0.25%, and here are Bloomberg’s key takeaways from its monetary policy report:

  • The central bank will cut its bond purchases by a third to C$2 billion a week.
  • Governor Tiff Macklem emphasized that many drivers of higher inflation are temporary and include supply bottlenecks that will be resolved.
  • There’s still a lot of room for growth in the labor market.
  • Macklem said nothing would change investors perceptions of divergence with Fed. And he seems to be fine with BoC as an outlier.

Main Pairs Movement

Kiwi dollar soared 1.28% on Thursday as RBNZ announced it will reduce monetary stimulus. Governor Adrian Orr said it will halt bond buying under its Large-Scale Asset Purchase program by July 23rd. This surprising move prompt speculators to expect some sort of rate hikes as early as this August.

The hawkish announcement from the Bank of Canada initially delivered a decent boost to the Canadian dollar, gained as much as 0.68%. However, the oil-linked currencies pared all of their gains as crude oil prices tanked. The UAE has finally reached a preliminary deal to resolve its standoff with OPEC+, newly set baseline for UAE is 3.65 million barrels a day from May 2022, marked a 0.48 million barrels increase from the current level. The increase in overall supply weighed down on the WTI and Brent crude oil futures, plunged 2.82% and 2.26% respectively.

US dollar was on the back foot against its G-7 peers, with the dollar index dipping 0.37%. The retreat was attributed to Powell’s comment to water down heated discussion of potential early Federal Reserve asset purchase tapering, explicitly stated: “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”

Technical Analysis

XAUUSD (Daily Chart)

The precious metal, gold, jump to one-month tops, 1820 region, after the Fed Chair Jerome Powell’s dovish comments. After three days of consolidation, gold seems to have confirmed a near-term bullish trend. The upside momentum is expected to keep up its strength as the positive MACD is getting solid and the RSI is not yet in the overbought territory, providing gold rooms to extend further north. The next resistance is pegged near 1829; if a breach of 1829 is successful, then it will head toward the next hurdle at 1876 before reclaiming 1900. On the downside, the near-term trend will turn bearish if gold trades below the midline of the Bollinger band or the 20 SMA, around the 1787 region.

Resistance: 1829, 1876

Support: 1770, 1676

EURUSD (4- Hour Chart)

EURUSD recaptures 1.1820 level after Fed Powell’s dovish comments. From the technical perspective, EURUSD pulls back after reaching the lower bound of the Bollinger band on the 4- hour chart; however, the intraday bias remains bearish since the pair still trades below the 20 and 50 simple moving averages. At the moment, the pair is contesting its minor resistance at 1.1837; if the pair can breach 1.1837, then the bias will become bullish. The pair has some potential to penetrate as the RSI has not reached the overbought territory, giving some room to move upward. That being said, the recovery can extend but needs to trade beyond a critical Fibonacci resistance level at 1.1837.

Resistance: 1.1919, 1.1985

Support: 1.1837, 1.1704

GBPUSD (4- Hour Chart)

GBPUSD trades toward 1.3900 amid the UK’s strong inflation data and Powell’s dovish comments. From the technical aspect, the intraday bias turns neutral after the previous slides. The support pivot at 1.3800 successfully holds the ground, resulting in a momentum change in GBPUSD. At the time of writing, the pair hovers around, 1.3858, the midline of the Bollinger band; the pair is lacking of directions as the MACD is currently neutral and the RSI reading is around 50. If a break of the midline of the Bollinger band occurs, then the pair will have some potentials to contest the next immediate resistance at 1.3926; on the other hand, if the pair fails to breach the midline, then it will potentially head toward 1.38, turning back to bearish mode.

Resistance: 1.3926, 1.4000

Support: 1.38, 1.3744, 1.3675