Sentiment Improves Ahead of Fed Powell’s Testimony

The US dollar pulled back, while equities rebounded yesterday and today in Asia, perhaps due to remarks by ECB President Lagarde, who said that she and her colleagues will maintain an accommodative monetary policy, and after New York Fed President John Williams noted that the economy is improving at a rapid rate, but the data and conditions have not progressed enough for the FOMC to shift its monetary policy stance.

EQUITIES REBOUND, USD PULLS BACK AHEAD OF POWELL’S TESTIMONY

The US dollar pulled back against all but one of the other major currencies on Monday and during the Asian session Tuesday. It lost the most ground against CAD, GBP, AUD, and NZD in that order, while it eked out gains only against JPY.

The weakening of the US dollar and the Japanese yen, combined with the strengthening of the commodity-linked Loonie, Aussie and Kiwi, suggests that financial markets turned to risk on yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major EU bourses finished their sessions in positive territory, with appetite improving even further during the US session. Sentiment was upbeat today in Asia as well. Japan’s Nikkei 225, China’s Shanghai Composite and South Korea’s KOSPI traded in the green, with the only exception being Hong Kong’s Hang Seng, which slid somewhat.

European shares rose on Monday, perhaps due to remarks by ECB President Lagarde who said that the Euro-area economic growth could rebound quicker than expected as consumers begin to spend again. She also reiterated that she and her colleagues will maintain an accommodative monetary policy, confirming the view that officials of this Bank have not started considering withdrawing support any time soon.

Sentiment was boosted even more during the US trading, perhaps after New York Fed President John Williams said that the economy is improving at a rapid rate, but the data and conditions have not progressed enough for the FOMC to shift its monetary policy stance. Dallas Fed President Robert Kaplan and St. Luis President James Bullard expressed support for an earlier policy withdrawal, but this was mainly expected following the hawkish signals by the Committee as a whole at last week’s gathering. The dollar was drifting north since the Fed published its decision and projections, while equities traded on the back foot. With that in mind, investors may have now been looking for just a clue pointing in the opposite direction in order to increase their risk exposure again, and this came from New York President Williams.

Today, the spotlight is likely to fall on Fed Chair Powell’s testimony before the House Select Subcommittee on the Fed’s emergency lending programs and current policies to fight the coronavirus crisis. His prepared remarks are already released, revealing that Powell’s view is that the US economy continues to show “sustained improvement” from the impact of the pandemic, accompanied with ongoing job market gains. He also noted that inflation has “increased notably in recent months”, but that the current jump is likely to fade. He did not provide any clues with regards to QE tapering, but market participants will still monitor his testimony to see whether he will express any opinion on the matter at the Q&A session.

If Powell is among the members believing that monetary policy normalization should start in the months to come, equities and other risk-linked assets are likely to pull back again, while the US dollar and other safe havens are likely to rebound. The opposite may be true if he echoes John Williams’s opinion. At this point, we have to note that we see the case for the FX market to react more strongly than the equity world on any comments by Powell over QE. After all, this was the case in the aftermath of last week’s Fed decision.

EURO STOXX 50 — TECHNICAL OUTLOOK

Euro Stoxx 50 opened with a negative gap on Monday, but hit support at 4037 early in the session, and rebounded strongly. Overall, the index continues to trade above the upside support line drawn from the low of January 29th, and thus, we would treat the Fed-related pullback as a corrective move of the broader uptrend.

If the bulls are willing to stay in the driver’s seat, we could see them overcoming the 4126 barrier soon, which is marked by the inside swing low of last Thursday. If so, the next stop may be the all-time high, at 4168.10, hit on Wednesday. A break above that record will take the index into uncharted territory, with the next territories to consider as potential resistances perhaps being at 4200 and 4250.

Now, in order to abandon the bullish case, we would like to see a dip below 4037 and the aforementioned upside line. This will confirm a forthcoming lower low on the daily chart and may initially pave the way towards the 3965 zone, defined as a support by the inside swing high of May 12th. If that barrier does not hold and breaks, the next stop might be at 3890, marked by the low of May 19th.

EUR/USD — TECHNICAL OUTLOOK

EUR/USD rebounded as well yesterday, after hitting support at 1.1847. That said, the recovery stayed limited at 1.1922, and then, the rate retreated somewhat. Overall, the pair remains well below the downside resistance lines drawn from the highs of May 25th and June 9th. Thus, we believe that the near-term outlook is still negative.

If the bears are willing to take charge again from near the 1.1922 area, we could see them aiming for another test at 1.1847 soon. A break below that level would confirm a forthcoming lower low and may open the path towards the 1.1788 level, marked by the inside swing high of April 2nd. Another break, below 1.1788, could see scope for extensions towards the low of April 5th, at around 1.1738.

On the other hand, a break above 1.1950 could signal a larger correction to the upside, with the next stop perhaps being the psychological zone of 1.2000, which provided strong support from April 21st until May 6th. If the bulls ignore that key zone on their way north, they may put the 1.2053 zone on their radars, or the downside resistance line drawn from the high of June 9th.

AS FOR THE REST OF TODAY’S EVENTS

The calendar appears light in terms of data releases, with the ones worth mentioning being the US existing home sales for May, which are expected to have declined somewhat, and the API (American Petroleum Institute) report on crude oil inventories for last week, for which no forecast is available.

As for the speakers, apart from Fed Chair Powell, we will also get to hear from San Francisco Fed President Mary Daly, ECB Chief Economist Philip Lane, and ECB Executive Board member Isabel Schnabel.

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