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A lot of market participants would have been in wait and see mode in the run up to the FOMC meeting minutes release last night and it turns out that there is little change to both how they view the market today and their expectations going forward, so all of the previous themes continue to be in play. We may get higher but temporary inflation, the markets are on shaky foundations whilst the global economies try and get going post Covid, unemployment and prices are the Fed’s main focus and there is more need for fiscal stimulus from the government rather than anything new from the Federal Reserve.
What we may have then in the US dollar market is a bear market correction as interest rates as low as they are and as supportive as they are for the US dollar, the trade deficit and fiscal deficit are going to put downward pressure on the US dollar’s ability to appreciate. Currently the US dollar index is at resistance having found a supply zone and we await to see if any market structure below can get tested especially the $90.60 level.
At the end of next month, I am expecting volatility to have risen in the US dollar and depending on how well the US Treasury and the Fed can co-ordinate policy between now and then, we could see a spike higher in the need for US Treasuries and the yields that have been rising, reverse that course. The talk from the Fed is that they are going to allow the inflation to rise above the intended target, so that is the markets main narrative. We are all supposed to be looking for reflation in the economies and inflation to continue rising. No one seems to be worried about a money market event like the one we had back in September 2019 in the over-night lending markets, so that is what I am looking out for.
Today is the turn of the ECB to release their minutes, so I am not planning on making much in terms of a trade in the euro crosses until that event has passed. There will be talk of ‘envelopes’, PEPP and asset purchases, but we await to see if they are having to come up with new ideas or whether they are keeping to the old ones for now.
The EURUSD found support on the daily chart from last summer’s resistance high levels around the 1.1950 prices but the pop higher did not take out the significant daily swing high, so market structure is still showing lower highs and lower lows. ActivTrader trader’s sentiment shows that the traders are bullish by 60% in favour of higher prices, while we trade below the 20 period daily moving average. Tomorrow we get new data from the eurozone PMI so that may be more market moving as it is a flash reading.
The EURGBP is in a down trend for 2021 but looking at the sentiment indicator 81% of traders are bullish, which could suggest these traders are going to have their stops tested and prices could accelerate lower. The EURGBP is testing the lower range levels from an area of balance formed in the Spring of 2020 and there is a pocket of prices that formed during the fear around the early stages of covid-19 pandemic, and I doubt will give much support should we start testing them.
In the US session we look to the US economic data releases for the Building Permits, US Philly Fed Business Index and US Initial Jobless claims and then the US EIA weekly crude oil inventories. There are a lot of Fed members talking this week and we still have two voting members talking today, so we should be wary of their comments causing some market volatility. Plus, there we are still in the earnings seasons so we have several companies which include Walmart reporting which can add to the market moves too.
