A little messy ahead of the weekend
Depending on how you want to look at it, there are a few key takeaways from Fed chair Powell’s speech yesterday. The most important one is that he mainly reaffirmed that low rates are here to stay for longer as the Fed moves to ‘average’ inflation targeting.
But is that story really anything new? The market had some sense that the Fed isn’t going to raise rates over the next five years potentially and this cements those expectations.
The bigger story might have been that they want to gain a further edge in the “race to the bottom”, offering quite a lot of vagueness about policy views in general.
In some sense, the Fed basically said that it will interpret the economic and market situation so long as it fits their policy needs at any given point in time.
If anything, we can expect more central banks to respond similarly to try get ahead of the Fed and we have already seen that with the RBNZ today here.
As for the market reaction, the dollar is weaker today after a volatile back and forth action yesterday. Stocks closed higher for the most part but the biggest reaction in my view is the bond market as Treasury yields soared:
This is resulting in a squeeze higher in yen pairs with USD/JPY rebounding strongly from a low of 105.60 post-Powell to near 107.00 earlier in the day.
For 10-year Treasury yields, watch out for the April high @ 0.782% as a breach above that will start to threaten a similar breakout as seen at the start of June.
Amid month-end rebalancing flows, it is making for a tricky period to trade the dollar but the narrative for yen pairs is arguably the more straightforward affair for now.
Higher yields = Lower yen = Higher yen pairs/crosses; vice versa.
Looking ahead, there isn’t much on the calendar in Europe to shake things up so expect the market to still try and figure out what the play is post-Powell ahead of the weekend.
0600 GMT – Germany July import price index
Prior release can be found here. A proxy and lagging indicator of inflation pressures, a minor data point.
0600 GMT – Germany September GfK consumer confidence
Prior release can be found here. Consumer confidence is expected to bounce back further, reaffirming that economic sentiment is improving though it remains to be seen how sustainable this will all be in the latter stages of H2 2020.
0645 GMT – France August preliminary CPI figures
Prior release can be found here. After a more solid bounce in July, French inflation is expected to fall this month and that should be more reflective of underlying price pressures in the region amid the fallout from the virus outbreak.
0645 GMT – France Q2 final GDP figures
The preliminary release can be found here. As this is the final release, it isn’t expected to produce much – if any – reaction whatsoever in the market.
0700 GMT – Switzerland August KOF leading indicator index
Prior release can be found here. The data here measures the future trends of overall economic activity in the Swiss economy. A minor data point.
0900 GMT – Eurozone August final consumer confidence
0900 GMT – Eurozone August economic, industrial, services confidence
Prior release can be found here. Confidence levels are expected to improve further, signifying better optimism but it remains to be seen how much of this will translate to hard data and also addressing concerns surrounding the sustainability of the recovery.
That’s all for the session ahead. I wish you all the best of days to come and good luck with your trading! Stay safe out there.