Consolidation Building Across Majors Ahead Of FOMC Minutes

 | Aug 21, 2019 08:20

Market Overview

There is a sense of consolidation taking over markets as a couple of key events loom that could help to mould a view on prospective Fed monetary policy. Firstly tonight the FOMC minutes for the July meeting will be eyed to see just how dovish the committee now is. There is a pricing for a rate cut in the September meeting, but increasingly dovish leanings from the minutes would help to cement future cuts as well.

Beyond that is Jerome Powell’s speech at Jackson Hole which will also be watched closely. There is a consolidation on Treasury yields, whilst on the technicals there are consolidation patterns forming on major markets such as EUR/USD, Gold, USD/JPY and Cable. With regards to Cable however, there has been a tick higher (albeit some given back early today) following comments from German Chancellor Angela Merkel suggesting that the EU would try to find a “practical solution” that would effectively render the Irish Backstop irrelevant. Quite whether this changes the course that seems destined for “no deal” on the 31st October deadline remains to be seen.

The ball is now with PM Boris Johnson again, but this just stokes the fire of intraday volatility on sterling once more. For now there seems to be little market reaction for the euro despite another deterioration in stability for Italian politics as Prime Minister Conte has resigned which increases the potential for further elections. Instability in Italian politics is not unusual but adds another shot to the cocktail of negative factors for traders to factor.

Wall Street closed lower yesterday with the S&P 500 -0.8% at 2900, but with US futures bouncing mildly today by around +0.3% we see a mixed outlook across Asian markets (Nikkei -0.3%, Shanghai Composite +0.1%. European indices are a shade higher around the open with FTSE Futures +0.1% and DAX futures +0.2%.

In forex, there is further consolidation on EUR around $1.1100 whilst GBP is giving back some of yesterday’s gains and JPY continues to chop around. It is interesting to see AUD once more outperforming NZD this morning (see Chart of the Day).

In commodities there is a slip back on gold (still under the near term pivot at $1510), whilst oil is a tick higher after a larger than expected API inventory drawdown.

The economic calendar is once more fairly light today, with a series of lower tier data releases to wade through, but the Fed minutes are the key focus. The UK Public Borrowing deficit is at 0930BST which is expected to show -£2.7bn of borrowing (i.e. a surplus) in July which would be not as large a surplus as the -£3.9bn in July 2018. Canadian CPI inflation is at 1330BST with the Bank of Canada’s core CPI at 2.0% in July. US Existing Home Sales are at 15:00 BST and are expected to improve to 5.39m (from 5.27m in June).

EIA Oil Inventories are at 15:30 BST and are expected to show the crude oil stocks to drawdown by -1.9m barrels (+1.6m barrels last week), with distillates to build by +0.6m barrels (-1.9m last week) and gasoline to build by +0.1m barrels (-1.4m barrels last week). The FOMC minutes for the July meeting are at 1900BST and traders will be focused on any signs that point towards an ongoing series of rate cuts.

Chart of the Day – AUD/NZD

There has been a notable turn around in performance of the Aussie versus the Kiwi. For over four months there was a consistent slide in the Aussie, a run of higher lows and higher highs on AUD/NZD is pushing through resistance of the July high at 1.0545. This has coincided with a push through the 61.8% Fibonacci retracement of 1.0729/1.0263 at 1.0550 to open the 76.4% Fib at 1.0620. This 76.4% Fib also coincides with the May high around 1.0630. Momentum is increasingly strong with the RSI into the 60s (where 60 has limited the previous rebounds since April). The MACD lines are also pulling decisively above neutral whilst the Stochastics are strongly configured. This all suggests buying into weakness now. The hourly chart shows a consistent run of higher lows whilst hourly momentum is positively configured (RSI above 40 and MACD above neutral). Initial support of yesterday’s low at 1.0550 coincides with the 61.8% Fib at 1.0550.