Don’t fight the Fed?

Overnight Headlines

*US stocks were muted and mixed, cautious trading in Asia

*USD gained for the first time in three sessions, higher yields helping

*FOMC expected to pause and be patient at today’s meeting

USD is trading just above 91 on the USDX as commodity dollars saw some profit-taking overnight after this week’s strong performance.

US equities traded in tight ranges with tech trailing and energy and financials top of the meagre leader board. European bourses are set to open unchanged to modestly in the green. Tech earnings are in focus later today as well as President Biden’s tax plans.

Market Thoughts – Fed to stay patient

The pressure is building on the FOMC to acknowledge the stream of recent decent data, with the economy reopening, jobs returning and inflation climbing. The current stance of no rate hike until 2024 has been put in the spotlight by last week’s hawkish taper by the Bank of Canada, with rates markets now signalling a first Fed hike in March 2023.

That appears about right if the Fed need to signal and taper bond buys first. But consensus seems fairly convinced that Powell will stay far away from even any hint of reining in QE. The well-worn phrase “Don’t fight the Fed” may be relevant then, and yet the FOMC will need to yield at some point to normalisation and booming activity. Chair Powell stated earlier this month that the US economy is at an inflection point, so any suggestion of movement in policy will inject substantial volatility into markets. For now, standing pat means a softer dollar and stock markets grinding higher (with tax hikes worth watching as a headwind).

Chart of the Day – EUR/JPY breaks higher

Good news on the continent has been thin on the ground over the last few months as Europe has battled with poor vaccine rollout and prolonged lockdowns in many countries. However, that has changed over the last week or so with concrete targets set for immunisations and the EU fiscal stimulus plan back on track after the backing of the German constitutional court.

One pair on our radar has been EUR/JPY which has finally broken higher after much consolidation at the highs. With tight ranges and resistance holding for an extended period, the breakout when it comes should be strong and lasting. Targets for bulls include the May 2018 highs above 133 with the 200-month moving average offering support around 130.40. The top of the breakout acts as further support which comes in around 130.60. Only below here negates the bullish momentum.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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