Monetary policy is the systemic theme most ominous on my radar and the most as-risk markets are the lead speculative benchmarks like the US indices. While traders and the headlines may have gotten wrapped up in specific changes in language from specific updates – like Fed Chairman Powells hymn-like reassurance that inflation is transitory – their was a significant shift away from persistent, extreme accommodation this past session. Speculative comfort in the markets now is built upon years of exceptional support issued by central banks the year over; so while the markets may be discounting the risk of pulling back the punchbowl, any introspective recognition of this dependency could prove an overwhelming collapse for exaggerated risk benchmarks. In practical terms, we seem either destined to maintain a measured pace of climb or face an expediated tumble for the likes of the S&P 500. Choose your strategy accordingly.To get more news about forex trading, you can visit wikifx.com official website.
　　While it is easy to get caught up in the sharp response of relative monetary policy bearings through pairs like EURUSD or NZDCAD, the systemic sway of a shift in global monetary policy can be an overlooked threat until it is too late. If we look back over the past few months of central bank policy decisions, forecasts and member statements; there has been a tangible shift away from the bottomless accommodative stance taken in the immediate aftermath of the pandemic. Both the Bank of Canada and Reserve Bank of New Zealand have tapered, the Reserve Bank of Australia and Bank of England have emanated some commentary to suggest a reduction in asset purchases is not far out, and the Federal Reserves interest rate forecast is projecting a first hike perhaps before the end of 2022. While these may not register a global run of rate hikes, they are a critical reversal in the tools most heavily used over the past years of monetary policy. The capital markets obviously seem capable of overlooking this risk for now, but recognition is inevitable depending on circumstances. If fear can gain a foothold before liquidity recovers after the summer doldrums, beware.
The US CPI (consumer price index) update on Tuesday was a strong market mover for the likes of the US Dollar, Treasury yields, junk bonds and Fed Funds futures. The implications of a higher probability rate hike before the end of 2022 took its toll on these sensitive markets, but the inevitability of normalization didn‘t seem to truly take traction according to the technical response of the broader financial system. Risk aversion, despite its sensitivity, didn’t collapse; so the probability of another complacent bounce was high. We found that recovery this past session despite further reinforcement from inflation data. The Producer Price Index (PPI) for June hit a modern calculation series high of 7.3 percent. That suggests an imminent reversal in consumer costs is unlikely and action from the Fed to curb its contribution to excesses is more pressing. Yet, the hawkish data didn‘t seem to gain serious traction. That was likely a save by Fed Chairman Jerome Powell who was testifying to the House of Representatives on the economy. He repeated his transitory inflation chant and the markets seem to accept the succor. That said, his remarks seemed to confuse an aim for transparency on the timing of taper without having a clear model to base that timetable. I’ll point out that credit rating agency Fitch remarked in its US evaluation that the risk of a downgrade in its AAA-status could result from “a decline in the coherence and credibility of US policymaking…
　　While I believe the Feds mantra sounds more and more hopeful rather than prescriptive, the markets seem nevertheless soothed by the assurances. Interest rate forecasts measured by Fed Fund futures cut projections of total rate hikes through the end of 2022 from 23.5 basis points Tuesday to 20 basis points through Wednesday. In practical terms, that is reducing the probability of a standard 25bp rate hike by December 2022 from a 94 percent to 80 percent probability. Even though the first stage of monetary policy change will be via a taper rather than interest rates, the Dollar clearly responded to the shift in mood with the DXY Dollar Index suffering its biggest single-day drop in three trading weeks. That makes for a well-timed and technically-precise range reversal.
　　With the Dollar‘s quick turn from its failed breakout attempt, EURUSD would naturally reflect its own range reversal. The pair was attempting to clear 1.1800 support and clear a 12-month wedge, but the ability to override market restraint didn’t prove fruitful. Trading back into established ranges is more aligned to the market conditions we are currently facing versus charging a break with follow through. I am keeping a weathered eye on speculation around US policy intent and the Greenbacks responsiveness; but Powell day two, import/export inflation and initial jobless claims are likely to struggle to urge the same kind of market response as CPI or Powell day one.