The Daily Edge

Fed Minutes Fall On Deaf Ears, USD Demand Prevails

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you’d like to interact with Ivan and other like-minded traders. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army. 

Quick Take

The Fed minutes dominated the proceedings in the US session, with a message largely in line with the ambiguous/conditional dovish expectations they aimed for back in July. However, the minutes no longer reflects the new lay of the land as vol picked up aggressively in August, which is why to really get a more accurate picture of where the Fed’s thinking process stance, the market needs Fed’s Chair Powell to disentangle this horrendous low vol activity we’ve had this week. On aggregate, the USD trades firmer, as does the Aussie and the Canadian Dollar, the latter boosted by an inflation report that overwhelmed expectations. The safe-haven currencies keep edging lower, more so the Swissy, as the bid tone in equities and the pause of the bloodbath in fixed-income allows for the pullback to stay its course. Out of all the currencies, the pinnacle of tranquility could be found in the Euro, which attracted very little interest to move in either direction as we await today’s ECB minutes and a bunch of European PMIs. Lastly, the Sterling gave up part of Tuesday’s gains as the market re-adjusts expectations about the impossibility of the Brexit backstop renegotiated following the latest comments by Merkel and Macron. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime’s Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Fed sees cut as part of mid-cycle adjustment: Judging by the lackluster price action, the FOMC minutes failed to provide enough clues for the market to gain a much-renewed conviction on the rate cut path by the Fed. As part of the minutes, it was revealed that most officials viewed the cut as mid-cycle adjustment, which on its own should be a supporting factor for the USD as it implies a temporary rate adjustment rather than a protracted rate-cutting cycle. However, they stated that the cut was ‘part of’ the adjustment, which means further cuts should be in store. It’s worth noting that the last FOMC meeting occurred before Trump broke the truce with China on trade by announcing further tariffs, meaning that the stance by the Fed has probably grown slightly more pessimistic since then.

Fed emphasizes flexibility as a central theme: Also, the minutes disclosed that a couple of policymakers would have preferred a 50 bp cut to address low inflation, with the rationale to defend the rate-cutting position being a decelerating economy, elevated risks on the global economy and inflation, which are all familiar themes. The Minutes also stressed the need to be flexible given “the nature of the risks weighing on the economy “and “the absence of clarity regarding when those risks might be resolved”.

Fed’s plan B in the works? An important passage of the minutes included “members said forward guidance and QE might not be enough to eliminate protracted risks at lower bound”, which somehow vindicates the idea that the Fed is probably considering new options as part of its toolkit in case the economy decelerates rapidly, which may include negative rates, purchases of equities or direct money to targeted sectors, a term also known as helicopter money.

UK’s Corbyn on a fight against time to block a hard-Brexit: UK’s Labour leader Corbyn continues on a mission to galvanize the British political circles in order to block an eventual no-deal Brexit. In his attempts to gather the most support, the politician sent invites to all leaders of other parties to meet on tactics to stop the no-deal. The meeting to discuss the possible options will take place on August 27.

UK PM’s backstop demands fall on deaf ears: UK PM Johnson met with Germany’s Merkel, who did not sound as conciliatory in her comments as 24h ago when she implied that other backstop options may be on the table. Understandably, the market is suspecting that Germany will not let the UK get away with the upper hand by renegotiating the terms of the Brexit backstop issue. German President Steinmeier was also quite direct by stating that it is not likely that negotiations on backstop will get going again as all scenarios have already been discussed. What’s more, French President Macron stated on Wed that Boris Johnson’s Brexit terms are not workable, essentially shutting the door for any prospects of the UK being led to believe a workaround the backstop is possible. Macron added that he can’t see a reason to grant a Brexit delay unless there is a commitment for a big change in the political situation like an election or referendum.

Canadian inflation comes hot: Canada’s July CPI came significantly hotter-than-expected at 2.0% vs +1.7% y/y expected, while the monthly change stood at +0.5% vs +0.2% expected. In terms of core measures, the median CPI was unchanged at 2.1% (in line with expectations), while the trimmed came a tad higher at 2.1% vs 2.0% exp. The spike in price pressures came due to a major rise in digital devices (cell phones and tablets). The data makes a BoC rate cut in Sept a no go even if the stance by the Central Bank should still err on the side of caution given the bleak global outlook.

WH drawing contingency plans: According to Politico, the White House chief of staff Mulvaney did acknowledge, at a fundraising luncheon this week in Jackson, that the US faces the risk of a ‘short and moderate’ recession, which has prompted the White House to study different possibilities to cushion the economy if the economic downtu were to accelerate. Politico notes that the White House officials are engaged in talks for a broader package of measures, which would include further marginal cuts in the corporate tax rate, a payroll tax cut and/or a move to index the capital gains rate relative to the inflation metrics in the country.

Appetite towards negative yields waning? An auction of a German 30-year 0% bond, the first under an across-the-board negative yield curve, failed to draw enough buying interest to meet the €2bn target, selling €824m bonds at an average yield of -0.11%. The soft auction, at a time when the risk dynamics have improved a tad, could be an early red flag that the appetite for negative yields may be pulling back.

Low vol FX signals Fed’s Chair Powell speech badly awaited: The key event this week comes on Friday at 14:00 GMT, when Fed Chair Powell is scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech titled “Challenges for Monetary Policy”. It’s likely to be a major market mover as the market will have an opportunity to re-adjust its outlook towards the Fed’s Sept policy decision. For now, there is a 100% chance for a 25bp rate cut, while a 50 bps rate cut has been priced out. If Powell does not create a sense of urgency to lower rates in order to adjust to weaker global growth and trade uncertainty but instead sounds prudent to overly commit to further easing as domestic conditions are yet to tighten materially, the market will read that as a disappointment this week (higher USD). The notion that Powell will still remain conditional and ambiguous in his message in order to strike a balanced message that causes no major market disruptions is still the main view. This means Powell could stick to the script the market is supporting by hinting at another 25bps cut in September while stressing that the committee bias is now back in accommodation mode.

Recent Economic Indicators & Events Ahead

With the Canada CPI, US Existing Home Sales, and the US FOMC meeting minutes out of the way, traders will now face a raft of Eurozone PMIs on Thursday, including Germany, France, and the EU flash manufacturing/service PMI, while also the ECB minutes as well as the US flash manufacturing PMI. On Friday, the New Zealand and Canadian retail sales are due, alongside the speech by Fed’s Chair Powell at the mentioned Jackson Hole economic policy symposium.

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime’s Research section.

The US Dollar: The uninspiring moves in the forex market extended as the large capital remains sidelined until the intervention by Fed’s Chair Powell at this week’s Jackson Hole economic policy symposium. The USD index (weight equally distributed across G8 FX) remains steady with a bullish outlook and catching a bid in the last 24h. 

The Euro: The single-currency index is capped below its baseline, which makes its outlook more negative. Note, the index has attracted sufficient demand to see a 5-day correction off the origin of a daily demand area as pointed out in last week’s note. 

The Sterling: The index is struggling out of a predictable level of resistance, even if the outlook is still neutral to bullish. The neutrality comes by the validation of a range formed after a second rejection of a key resistance, while the bullishness is still retained on the basis that the Sterling trades above its baseline. 

The Canadian Dollar: The CAD, emboldened by an upbeat inflation report, has respected its patte of bouncing off a key support. Way ahead of the CAD CPI, I did wa that the index had reached a level that had seen multiple times in the past buying emerge off it. One must pay close attention to these clues. 

The Australian Dollar: The AUD index has finally recovered the upside of its baseline for the first time since July 23, even if the lack of participation as per tick volume below the average does not offer a signal to calibrate one’s bullish outlook too aggressively. 

The New Zealand Dollar: The Kiwi remains bearish and offered, with the prospects of further downside still in store. 

The Yen: The index is behaving quite stubbo despite the recovery in risk dynamics, which allows the positive trend to still be in place. The index in the Japanese currency signals that the market is still quite happy diversifying into JPYs as a way to express the uncertainty of all the global risks. 

The Swiss Franc: The index looks weaker on aggregate, signaling that the outlook is now bearish, although as in the case of the Aussie, the breakout of the baseline has occurred in low tick volume, which to me reads until proven wrong, that this retracement is still part of a clear bullish trend.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection


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