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Towards the end of the FOMC press conference, Chair Powell told the virtual meeting attendees that “Strong data is ahead of us, it’s coming”.
Judging by the FOMC rate decision the strong data is not imminent and if you go by their dot plot for rates, the stronger data is not likely to materialise before 2023. So, for the next 2 years, at least, the sovereign rate setter is keeping things unchanged. Which for some market participants will sound like folly, and it is they who will continue to sell US Treasuries in an attempt to push the yields higher, in an attempt to force the Fed to change course. The saying is “don’t fight the Fed”, so it will make for an interesting battle in the coming months.
The overall Fed themes are Dovish, so the expectations if you follow that line is, that the US dollar will weaken, inflationary pressures may arise, but the year-on-year data from March through April 2020 is about to fall out of that dataset, so the rise in recorded inflation will normalise again, having come from such a low base due to the economic shutdown.
The Fed is taking a more pragmatic stance, in that they are no longer just going to pay lip service to the 2% inflation target, they actually want to see it and then have inflation moderately sustain at those levels. Until they can make the judgment call on what ‘Substantial Progress’ is within the inflation and seemingly more importantly employment data, they will do whatever is necessary to support the economy, using all of their toolboxes.
The US employment rate peaked around 2001 and after the massive drop-off in 2020, the rate has recovered several percentage points but is still below late 2019 levels and is similar to the rate of employment in the mid-1970s. Fed Chair Powell seemed happy with the way things were going pre-covid so I am going to make an assumption that ‘Substantial Progress’ in the jobs data will be when the data points to a continuation of the trend seen from 2010 to late 2019. He pointed out that the drop in unemployment did not now mean there would be a pick-up in inflation as that relationship had long disconnected. Pointing out that in 2016-2019 when jobs data was good and getting better, inflation was not running high.
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Looking at the charts, the hourly candle for EURUSD following on from the rate decision shows how dovish the market was for the US dollar going forward. The rise of 80 pips and a close at the day’s highs, suggests that there is more upside to come as the markets reprice and unwind their bullish US dollar bets. 1.2035 to 1.2050 will be a significant target and marks the halfway point from the EURUSD high in late February 2021 to the recent March 2021 swing low. In the middle of that range is a lot of market structure that had acted as support for the most part of 2021, and I am sure it will now act as significant resistance.
If the price does close above last week’s price range, we will have formed a weekly swing low and more importantly will be trading back inside the price action of the major breakout candle from the last week in November 2019. We will have also held the mid-point of the impulsive run-up from November 2020 to the January 2021 high. This would also add to my bullish thesis and give me confidence that when we get above the lower time frame resistance areas, we can start looking for pullbacks to get long.
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The USDCAD over the last couple of weeks has been bearish as the price of energy is rising. At 1.24000 the Loonie finds itself at an area of technical support and previous weekly demand but that is not to say it can bounce from here. A weaker US dollar will only add fuel to the bearish sentiment for this pair, so we could be targeting the 1.2000 big figure in the coming months. The ActivTrader sentiment indicator shows that 90% of the retail traders are bullish on the USDCAD.
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Today we have the Bank of England and their policy announcement. Following the current themes from the central banks, no policy changes are expected and although yields are rising, they will not react yet. Trader sentiment is mildly bearish the GBPUSD, which to me means we are more likely to test the highs above the current trading range and start trading into the 1.40** price levels again.
Later on, today we have the US jobless claims report and market expectations are for initial claims to again be above 700k, which would add another data point to the longest sustained period at these elevated levels, as we approach a full year since the start of the coronavirus pandemic and the economic shutdown that ensued.
