Today’s report: Reconsidering the Fed pivot trade
The story into the end of the week is all about a repricing of Fed expectations. The market had been all excited about that recent softer US CPI read and tried its hardest to pressure the Fed into a more accommodative message. And yet, this hasn’t been the case.
Wake-up call
- hawkish Schnabel
- retail sales
- Fed pivot
- rate hikes
- soft data
- RBNZ Orr
- Inflation headache
- Dealers report
Peformance chart: 30 Day Performance vs. US dollar (%)
Suggested reading
- Two Nations Divided by an Uncommon Inflation, J. Authers, Bloomberg (August 18, 2022)
- Holes in the Recession Story, J. O'Neill, Project Syndicate (August 16, 2022)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has come under intense pressure in recent months, with setbacks accelerating below the critical multi-year low from 2017 at 1.0340. This has set up a short-lived dip below monumental support in the form of parity. At the same time, technical studies are tracking in oversold territory, suggesting additional setbacks should be limited. Back above 1.0500 would be required to take the immediate pressure off the downside.EURUSD – fundamental overview
The Euro was unimpressed by hawkish ECB comments, this after ECB Schnabel said a 50bp rate hike was on the table for September. The Euro was also unable to do anything with an upward revision to Eurozone CPI, with the currency more worried about a hard landing for the economy and yield differentials that slant more heavily in favor of the US Dollar. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.EURUSD - Technical charts in detail
GBPUSD – technical overview
The market continues to be exceptionally well supported on dips below 1.2000. Unless we see a monthly close below 1.2000, we expect this to continue to be the case. Look for a push back above 1.2300 to strengthen the case for the establishment of a meaningful base.GBPUSD – fundamental overview
The Pound was definitely rattled by the Truss pledge for a regulatory shakeup. And while rate hike odds in the UK have been bumped up, the Pound continues to suffer at the hands of a US Dollar getting more demand from an even more hawkish Fed trajectory. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.USDJPY – technical overview
Technical studies are in the process of unwinding, with scope for correction in the days and weeks ahead. Look for additional upside from here to be well capped. Next key support comes in at 130.00.USDJPY – fundamental overview
The Yen has come under more pressure into the end of the week, this on the back of an unwinding of more dovish leaning Fed bets. The market was looking for the Fed to cut rates in 2023, but all of the hawkish talk has been pricing these odds off the table. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.AUDUSD – technical overview
Overall pressure remains on the downside despite the recent recovery and conditions remain quite choppy. A break back above 0.7137 would be required to take the pressure off the downside. Until then, scope exists for a lower top below 0.7284 and deeper setbacks towards 0.6500.AUDUSD – fundamental overview
The Australian Dollar was under pressure on Thursday, taking hits from a discouraging Aussie jobs report and a market that has been moving back to pricing in a more hawkish Fed. However, we did see the Australian Dollar hold up relatively well, on the expectation the RBA will still be looking to move forward with its rate hike timeline. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.USDCAD – technical overview
A recent surge back above 1.3000 signals an end to a period of bearish consolidation and suggests the market is in the process of carving out a more significant longer-term base. Next key resistance now comes in up into the 1.3500 area. Setbacks should be very well supported down into the 1.2500 area.USDCAD – fundamental overview
The Canadian Dollar has been sold of late, with economic data coming in on the softer side out of Canada, all while the market is reconsidering more dovish leaning Fed bets, in light of all the hawkish Fed speak. Thursday's recovery in the price of oil did however help to mitigate some of the setbacks in the Loonie. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.NZDUSD – technical overview
Overall pressure remains on the downside despite the recent recovery and conditions remain quite choppy. A break back above 0.6469 would be required to take the pressure off the downside. Until then, scope exists for a lower top below 0.6577 and deeper setbacks below 0.6000.NZDUSD – fundamental overview
RBNZ Governor Orr was recently on the wires apologizing for higher inflation and leaving policy too loose for too long. The New Zealand Dollar has come back under pressure in recent sessions mostly on the back of a repricing of Fed bets, with the market now leaning back towards hawkish expectations. Key standouts on Friday’s calendar come in the form of German producer prices, UK retail sales, the Eurozone current account, Canada retail sales, and a speech from Fed Barkin.US SPX 500 – technical overview
Longer-term technical studies are in the process of unwinding from extended readings off record highs. Look for rallies to be well capped in favor of lower tops and lower lows. Back above 4,500 will be required at a minimum to take the immediate pressure off the downside. Next major support comes in around 3,400.US SPX 500 – fundamental overview
We've finally reached a point in the cycle where the Fed recognizes unanchored inflation expectations pose a greater downside risk than over-tightening. This is significant, as it means less investor friendly monetary policy that risks potential recession in the months ahead. We have seen an attempt at recovery in recent weeks, with softer CPI reads helping. But overall, we expect inflation to continue to be a problem that results in renewed downside pressure into rallies.GOLD (SPOT) – technical overview
The 2019 breakout above the 2016 high at 1375 was a significant development, opening the door for fresh record highs. Setbacks should now be well supported above 1700 on a monthly close basis.GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about inflation risk and a less upbeat global growth outlook. All of this should keep the commodity well supported, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax.