All Eyes on the US - Fed Meeting, US Q2 GDP and PCE Inflation Data
It’s a big week for the dollar and other major assets such as gold, the S&P 500 and the USDJPY. On Wednesday, Jerome Powell and the boys are back with their latest thoughts on monetary policy. Thursday sees a Q2 US GDP print which if it comes in strong enough could take us back above pre-covid levels, followed by the Fed’s favoured inflation metric – PCE index on Friday. The Non-Farm payrolls print on August 6 will also be a very important piece of data for the Fed and market to deal with.
No policy changes to the Fed Funds rate and QE programme are to be expected, with the main focus for this meeting rather on the robust discussions taking place within the FOMC around tapering. In order to maintain maximum flexibility Powell will most likely continue to keep tapering chatter alive, but veer away from details and specifics such as a start date or pace of reductions for QE. Renewed growth slowdown concerns as the delta variant ramped up has probably given Mr Powell some additional time before having to provide further detail on tapering. I think the earliest we’ll get more concrete details about tapering will be at the Jackson Hole Conference in late August, with a formal announcement and forward guidance at the September meeting. This potentially tees up December as the official start date for the process of tapering. It could toggle between December and January depending on how the economy progresses as well as the covid epidemiological pathway. The June meeting lit the tapering fuse and momentum will continue in that direction of travel at upcoming meetings.
Given the FOMC’s dual mandate of price stability and employment, they face a tricky scenario whereby inflation is coming in very hot, yet the jobs recovery is lagging behind lethargically. However, Powell has dealt with this by sticking to his belief that inflation pressures are transitory as we heard at his recent testimony to Congress. Some hawks are getting anxious though and will continue to apply pressure, I think the first expression we saw of this was the hawkish shift in the Fed dot plot in June. I continue to see upcoming Fed meetings containing an embedded hawkish bias with upside risks due to an earlier tapering timeline on a faster attainment of their goals.
The greenback is in a win-win position at the moment. When risk aversion hits it benefits from the left tail of the dollar smile, strengthening against high beta cyclical currencies. When conditions are more benign and risk sentiment normal, the right tail of the smile comes into play against the funding currencies like the euro and yen as their central banks remain uber dovish – allowing differentials between interest rate expectations to widen.
DXY continues its travel within the ascending channel. Price has slipped mildly below the 92.8 mini support. A golden cross - 50-day SMA crossing above the 200-day SMA has taken place. For now dips are being supported by the 21-day EMA and lower line of the ascending channel. The only negative I can see on the charts is the negative divergence on the RSI, however, it still remains above the key 55 support level. On the upside the March 31 high around 93.5 would be my initial target and on the downside I’d monitor the 92.3/4 zone (21-day EMA).
Gold is another asset which feels the repercussions of rate moves. Given its yieldless characteristic, the yellow metal feels pain as real rates move upwards. Higher real yields feed through to the dollar, helping lift the greenback higher. The Fed would have to completely lose control over inflation for it to be a driver of the gold price, which I see as unlikely. Even so, many have rotated towards Bitcoin as a hedge against fiat devaluation, begging the question of how gold would actually perform under an exuberant inflationary regime. As a result of the above I lean bearish on gold.
Gold is struggling around the 200-day SMA and is now hovering on its upper trend line of the descending channel and the horizontal support around the $1800 level. The 50-day SMA is still above the 200-day SMA for now. The 21-day EMA looks to be toggling between dynamic resistance and support for gold of late. The RSI was rejected around the 55 resistance area. Upside target $1840 (50-day SMA) if price can break through the 200-day SMA and on the downside I’d say keep an eye on $1768 support.