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Powell prolongs stimulus punchbowl

August 30,2021 06:52:03

Overnight Headlines

*USD broadly weakened and is below trendline support

*US stocks closed mostly at record highs post Powell’s dovish tone

*Gold benefitted form a softer dollar and gained 1.4%

*Oil mixed after Hurricane Ida, pares gains

USD fell against all of its peers on Friday with the DXY closing 0.4% lower at 92.86. This is just below trendline support from the June lows. The index is modestly lower again this morning. Initial near-term support is at the mid-August lows at 92.47/8. EUR is trading around 1.18, just below its mid-month highs. JPY appreciated against the dollar with USD/JPY closing below 110. AUD is now poised at trendline resistance around 0.73. Both the aussie and kiwi logged weekly rises of more than 2%, their largest on the greenback in about 10 months.

US equities hit fresh highs with gains broad based. Cyclicals and small caps were the outperformers, with the Russell 2000 enjoying its best week since March. The S&P rose 0.9% and the Nasdaq 1.2%, both record closes. Bond yields dropped back in a sign investors are paring back rate hike expectations. Positive sentiment continues today with all Asian markets in the green and futures higher in the US and Europe.

Market Thoughts – Goldilocks scenario remains

Friday’s eagerly awaited speech by Fed Chair Powell failed to deliver more precise details about the Fed’s tapering plans. While preparing markets for a reduction in asset purchases sometime this year, he maintained that the Fed is far off from hiking rates. Powell was vague on timing and he reiterated that tapering is separate from a decision to raise rates.

This was music to stock market bulls and dollar bears. The market took a “Goldilocks” view in that stimulus will be reduced, but not so quickly as to snuff out the recovery. Powell’s more balanced, dovish view was in contrast to several regional Fed members who had highlighted the case for the Fed to start tapering in the near future. In effect, monetary policy stimulation is here to stay for quite some time.

Chart of the Day – Gold breaks higher

Bond yields have fallen and real yields nosedived after Powell’s caution. The test for the first Fed tightening of rates will now be “substantially more stringent” than that used for tapering. This is great news for gold as it pushed the dollar lower.

Spot prices traded to their highest since the end of July. Friday’s bullish move traded through $1800, the 200-day SMA and trendline resistance from the June peak. Gold bugs will target recent highs where prices failed around $1832. Support sits at $1800. Much in the macro picture will now depend on data with Friday’s NFP report the next major risk event.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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