U.S. equities fall and USD rises, as investors translate Jerome Powell’s testimony as hawkish
The economic news calendar was dominated by American fundamentals on Tuesday with the calendar releases and political events. The recently appointed Fed chair Jerome Powell wasted no time, during his testimony in front of a House committee, when suggesting that both he and the Fed think asset prices may be too high and inflation may become an issue later in the year. He appeared to go further, by tentatively floating the idea that, as a consequence of a strong economy, the Fed/FOMC could consider raising the interest rate four times in 2018, as opposed to the three that had been projected during FOMC meetings in late 2017. His hawkish statement appeared to immediately demolish any lingering doubts that he’s Trump’s man – with a loose mandate to keep equity prices at record highs, for an indefinite period. Based on this first test he appears both capable and motivated to get ahead of the curve, to ensure that any reduction in the bubble that has blown up, will have the air let out slowly, as opposed to a catastrophic burst, with all the collateral damage such a collapse would cause.
Despite Mr. Powell’s claims, the USA economy is following a similar pattern to that witnessed in 2017, by delivering mixed signals from both the hard and soft economic data. Durable goods orders for January missed the forecast falling by -3.7%, as the advanced goods trades balance deficit deteriorated further to -$74.4b for January, whilst wholesale and retail inventories are building up. Consumer confidence did, however, beat the forecast and rise significantly in February, to 130.8.
Equity markets in the USA sold off sharply, whilst the USD acted in a classic risk off movement, by rising. A rise accentuated by FX traders taking long term long bets that four interest rate rises will inevitably cause the USD to rise sharply during 2018, from its recent multi year lows, versus many of its peers. USD rose circa 0.6% versus EUR, 0.4% versus GBP and 0.4% versus JPY, the dollar index continued its recovery from posting three year lows in early February, to rise by approx. 0.5% on the day. Gold failed to act as a traditional safe haven in the equity markets sell off, dropping to a two week low and by circa 1.2%. WTI also slumped, its approx. 1.5% fall represented the largest fall seen in two weeks. The yield on the ten year Treasury bond rose to 2.91%.
EURO
EUR/USD traded in a wide daily trend during the trading sessions, breaching S1 in the early part of the New York session, price then continued its daily trend to then breach S2, closing out down circa 0.6% at 1.223, a circa 300 pip drop since reaching a yearly high on February 16th. EUR/CHF developed a daily trend, falling through S1, price threatened to breach S2, closing down circa 0.5% at 1.148. Observed on a daily chart EUR/CHF was displaying classic dojo characteristics when using H.A. candlesticks/bars. EUR/JPY fell through the 200 DMA, although observed on the daily chart the security appears to be making higher lows over the past three daily candles, price whipsawed throughout the sessions; as European markets opened price rose through R1, to then fall through the daily PP, to fall to S1, closing out the day down circa 0.2% at 131.3.
STERLING
GBP/USD traded in a relatively tight range with a bias to the downside, initially rising up through the daily PP as London opened, the security gave up its gains to fall through S1, closing out down circa 0.4% at 1.390. The security has given up over 300 pips since printing its yearly high on January 25th. GBP/JPY has traded in a relatively tight sideways range since February 14th, as evidenced by price being caught between the 200 DMA and 100 DMA. On Tuesday price displayed classic whipsawing behaviour, oscillating in a tight range with a bearish bias; rising through the daily PP, to then fall back through the pivot point, to breach S1, to then recover the daily PP level, to once again give up the gains to close out down circa 0.1% at 149.2.
U.S. DOLLAR
USD/JPY broke out of a tight range in the New York session, breaching up through R1 to then break through R2, taking back the 107.00 handle, closing the day out up circa 0.4% at 107.35. USD/CHF traded in a tight daily range with a bias to the upside, breaking away from the daily PP, price breached up through R1, to reject the first level of resistance, falling back from a daily high of 0.939, closing out the day up circa 0.2% at 0.938. USD/CAD has risen significantly in a sustained trend since early February, price has risen from circa 1.2240 to 1.2770, a circa 430 pip rise, whilst breaching both the 200 DMA and 100 DMA over the past week. During Tuesday’s sessions the currency pair traded in a wide daily trend, breaching R1, to then take out R2, closing out up 0.6% at 1.277.
GOLD
XAU/USD lost circa 1% during Tuesday’s trading sessions, reaching an intraday low of 1,318, threatening to take out the yearly low of 1,308. Price breached S2, closing down at 1,318. The 100 DMA is currently cited at 1,299 and must be viewed as a legitimate target level, if the precious metal continues its recent falls.
INDICES SNAPSHOT FOR FEBRUARY 27th.
• DJIA closed down 1.16%
• SPX closed down 1.27%.
• FTSE 100 closed down 0.10%.
• DAX closed down 0.29%.
• CAC closed down 0.01%.
KEY ECONOMIC CALENDAR EVENTS FOR FEBRUARY 28th.
• EUR German Unemployment Claims Rate s.a. (FEB).
• Euro-Zone Consumer Price Index Estimate (YoY) (FEB).
• USD Personal Consumption (4Q S)
• USD MBA Mortgage Applications (23 FEB).
• USD Gross Domestic Product annualised (QoQ) (4Q S).
• USD Gross Domestic Product Price Index (4Q S).
CALENDAR EVENTS WHICH REQUIRE MONITORING ON WEDNESDAY FEBRUARY 28th.
Whilst German unemployment numbers are expected to remain consistent at 5.4% YoY in February, the focus for European news will be on the latest E.Z. CPI figure, currently at 1.3% YoY the forecast is for a fall to 1.2%. This inflation release could have serious implications on the value of EUR versus its peers, given that the ECB are concerned regarding the high value of the single bloc’s currency.
There’s several calendar releases on Wednesday that must be carefully watched by FX traders, personal consumption figures may offer up clues, with regards to the buildup of internal inflationary pressures, whilst mortgage applications, which fell sharply in January due to seasonal issues, may give an indication as to the confidence consumers have to take on large debt. However, it’s the GDP figures, both annualized and Q4, which traders and analysts will focus on as they’re released. Whilst the expectation is for an annualized fall to 2.4% from 2.5%, FX traders will monitor the release in relation to the Fed’s commitment to raise interest rates, based on the conviction of new Fed chair Jerome Powell; that the growth in the USA economy is robust enough to accept a possible 1% interest rate rise, in four stages during 2018.
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