Investors Await Fed Chair Powell’s Testimony

Most equity indices slid yesterday and today in Asia, perhaps as rising inflation expectations continued driving government bond yields to the upside. With that in mind, today, investors may lock their gaze on Fed Chair Powell’s semi-annual testimony before the Senate Banking Committee. They could be looking for clues as to when the Fed is considering to begin scaling back its QE purchases.

Rising Yields Push Equities Down Ahead of Powell’s Testimony

The US dollar traded lower against all but one of the other G10 currencies on Monday and during the Asian session Tuesday. It lost the most ground versus JPY, AUD, GBP, and EUR in that order, while it gained slightly only versus NOK.

The strengthening of the Japanese yen suggests that markets traded in a risk-off fashion yesterday and today in Asia, but the strengthening of the Aussie points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU and US indices closed their trading in the red, with the only exception being the Dow Jones Industrial Average which gained fractionally. The negative investor morale rolled somewhat over into the Asian session today as well. Although Hong Kong’s Hang Seng gained 1.10%, China’s Shanghai Composite and South Korea’s KOSPI slid 0.17% and 0.31% respectively. Japanese markets stayed closed in celebration of the Emperor’s Birthday.

Equities slid perhaps as rising inflation expectations continued driving government bond yields to the upside. Since the beginning of February, US 10-year Treasury yields have risen approximately 28 basis points, headed for their largest monthly gain in three years. As for the US dollar, it failed to capitalize on the rising-yields environment, perhaps as its traders stayed cautious ahead of Fed Chair Powell’s semi-annual testimony before Congress today and tomorrow. In our view, rising yields suggest that there is some sort of speculation that major central banks may begin normalizing monetary policy soon.

So, with that in mind, investors may lock their gaze on Powell’s testimony before the Senate Banking Committee today, looking for clues as to when the Fed is considering to begin scaling back its QE purchases. However, we don’t expect Powell to add fuel to tapering expectations. At the press conference following the latest FOMC decision, he clearly stated that it’s too early to focus on tapering dates, while in a more recent speech, he stayed on the dovish side. He noted that the improvement in the labor market has stalled in recent months, and even if we do see a strong labor market soon, they will not tighten monetary policy solely in response to that. He affirmed that they will keep interest rates at current levels until the economy has reached maximum employment and inflation stayed above 2% for some time, something that, according to the minutes of the latest meeting, is expected to happen in the years after 2023.

Therefore, a reiteration of his dovish stance may be the base case scenario, and thus, if this is the case, we are unlikely to see a huge market reaction. Equities may trade somewhat higher, while the dollar is likely to slide slightly. The risk to this event is for Powell to sound more hawkish and start hinting when tapering may start. This is likely to trigger a tumble in equities and a strong rebound in the US dollar.

DJIA — Technical Outlook

The DJIA index continues to moves sideways, roughly between the 31245 and 31722 levels. After yesterday’s rebound from the lower side of that range, the price is now closer to the upper one, which is keeping the bulls interested. However, in order to get a bit more excited with the upside, a break of that 31722 barrier is required, hence our cautiously-bullish stance for now.

If DJIA makes a move above the 31722 hurdle, which is also the current all-time high, that will confirm a forthcoming higher high and place the index into the uncharted territory. That’s when we will start aiming for the psychological 32000 area.

As long as the price trades inside that range, it could continue moving sideways. But if suddenly the index drops below the 31245 hurdle, which is the lower side of the aforementioned range, that could attract more sellers into the game. We will then target the 31105 zone, marked by an intraday swing low of February 5th. If the slide doesn’t stop there, DJIA might end up falling to the 30941 obstacle, or even to the 30836 level, marked by the high of February 2nd.

USD/CAD — Technical Outlook

USD/CAD continues to drift lower, while trading below a short-term downside resistance line taken from the high of February 2nd. The pair is currently resting near its key support area, at 1.2580, which is the current lowest point of February. Although the trend remains to the downside, to get a bit more comfortable with lower levels, a break of that support area is needed. For now, we will take a somewhat bearish approach.

If, eventually, the pair does make a run below the 1.2580 hurdle, this will confirm a forthcoming lower low, potentially setting the stage for a move further south, as more bears might join in. That’s when USD/CAD may travel to the 1.2527 zone, marked by the lowest point of April 2018. Initially, the rate could stall there for a bit, however, if the sellers are still in control, they may overcome that zone and start targeting the 1.2450 level, marked by the low of February 16th, 2018.

In order to start examining higher areas, we would prefer to wait for a break of the previously-mentioned downside line. Also, a push above the 1.2713 barrier, marked by the high of February 19th, could strengthen the bullish case. USD/CAD may rise to the 1.2746 obstacle, or to the 1.2782 hurdle, marked by the high of February 8th, where the uprise might get halted for a bit. That said, if the bulls continue to press on, the pair could make its way to its next possible resistance area, at 1.2845, marked by the high of February 4th.

As for the Rest of Today’s Events

During the early European morning, we already got the UK employment data for December. The unemployment rate ticked up to 5.1% from 5.0% as expected, while the employment change revealed a 114k jobs loss. The forecast was for the economy to have lost 30k jobs. That said, following last week’s better than expected CPI data for January, this is unlikely to add to speculation for more easing by the BoE. At its latest gathering, the BoE pushed back the idea of negative interest rates, which combined with the fact that the UK is going further ahead in the covid vaccination race, encouraged GBP-traders to buy more of the British currency. In our view, the same catalysts are likely to continue supporting the pound.

We also get Eurozone’s final CPIs for January, which are expected to confirm their preliminary estimates, as well as the US Conference Board consumer confidence index for February, which is forecast to have risen to 90.0 from 89.3. The API (American Petroleum Institute) report on crude oil inventories for last week is also coming out, but, as it is always the case, no forecast is available.

As for tonight, during the Asian session Wednesday, the RBNZ decides on monetary policy. Back in November, this Bank decided to keep its official cash rate and its Large-Scale Asset Purchase program unchanged, with Governor Adrian Orr saying that domestic activity since August has been more resilient than previously assumed.

Q4 inflation stayed unchanged at +1.4% yoy, within the Bank’s target range of 1–3%, while the employment data for the quarter showed that the unemployment rate dropped to 4.9% from 5.3% and that the employment change rebounded 0.6% qoq after falling 0.8% in Q3. In our view, this data diminishes further the probability for negative interest rates, and it even increases the chances for policymakers to sound more sanguine than they did in November. A more optimistic language is likely to prove positive for the Kiwi, which we also expect to stay supported by an improved broader market sentiment.

As for the speakers, besides Fed Chair Powell and RBNZ Governor Adrian Orr, we also have BoC Governor Tiff Macklem on the agenda.

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