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Andreas Zanin
Analysis | September 1, 2020

KTM FX Daily: Focus on FX and Gold post Powell’s speech

Clouds remain over average 2% inflation target

Thursday was all about the Fed Chair Jay Powell’s speech at the Kansas City Fed’s Economic Policy Forum on August 27-28. The outcome from Powell was not disappointing; in fact, the address was in line with what market participants had hoped for. 

Average inflation target: The Fed highlighted, “The FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time”. At the virtual Jackson Hole Symposium, Powell has signaled a significant shift in its approach to managing inflation. Now the Fed targets an average of 2% inflation, rather than making a 2% target. This means lower rates will stay longer. The Fed hasn’t been able to reach the 2% target point for the last ten years. 

Labor market: Powell says its “assessments will inform the policy decision of the shortfalls of employment from its maximum level.” The original document referred to “deviations from its maximum level.”

Full text read here

Post this announcement, financial markets raise the volatility with an initial uptick in Gold prices along with the G10 currencies, and the US dollar fell across the board.  

FX review: Gold rallied to $1977, AUD to 0.7290, EUR to 1.1900, GBP to 1.3285, and NZD to 0.6675. However, after an initial spike (nearly 10-15mins), the whole mood changed to upside down, with yields rising. The UST 10y yield closed at 0.74%, the highest level since 17 June 2020. Rising yields are providing support to the US dollar in the near term. How long it will last is the key concern. The improving risk sentiment support the AUD and EUR against the dollar. 

Moody’s Analytics: As long as the global economy operates below trend, 1.00% will serve as the upper bound for the 10-year Treasury yield. Until COVID-19 risks fade, substantially wider credit spreads are possible.

Allison Boxer and Joachim Fels at Pimco says, “The timing of the framework review was earlier than we expected, the evolution of the Fed’s monetary policy framework to prefer an inflation overshoot and asymmetric labor market objective were not. With slack in the economy weighing on inflation and markets already pricing in highly accommodative policy, Fed officials will need help from fiscal policymakers to achieve the average inflation goal outlined in their new framework.”

The day ahead: Bank of England Governor Andrew Bailey speaks to the virtual Jackson Hole Symposium. 

USDJPY: The pair manages to keep overnight’s gains, but facing stiff resistance at 50MA coincides with the 107 level. 

Gold: In commodities, Gold and Silver manages to hold the key support level of $1906-1900 and $26. As long as these are supports, we expect a bullish reaction towards $1960, $1975 in Gold, and $27.90 in Silver. 

Crypto: Bitcoin is trading at $11350 in today’s Asia session. The key support level is $11,000 and $11,750 if the price is moving higher to watch out for resistances at $11580 and $11900-12k. 

Interest rates: Interest rates have generally been high and rising during periods of rapid economic expansion and have been low and declining during economic contraction periods. Exceptions have occurred, such as the unusually high rates during the first year of the 1920-21 economic contraction, the sharp upward movement of rates during the depression in 1931, and the comparatively low rates during heavy demand for goods and services during and immediately following World War II. Source: Fred

Also read USD pairs technical overview

EZ’s rebound hit a ceiling, so as EURUSD

 It is important to always keep in mind the risks involved in trading with leveraged instruments.

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