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Tapering debate shifts towards Jackson Hole as Fed sees some progress

Federal Reserve chair Jerome Powell gives a speech, with the US flag behind him

European markets enjoyed a welcome midweek respite yesterday, after two days of losses, closing higher as a consequence of some decent company updates, and optimism over an easing of some travel restrictions next week.

US markets finished the day mixed, with the Nasdaq outperforming after the latest Fed decision moved the bond tapering argument onto Jackson Hole next month, while markets in Asia rebounded strongly on reports that Chinese regulators told firms that Chinese firms would be allowed to list in the US as long as they met listing requirements. The rebound in Asia doesn’t appear to be translating into a rebound in Europe with shares here set to open slightly lower.

Last night’s Federal Reserve rate meeting saw the US central bank keep monetary policy unchanged, keeping, the level of bond buying at $120bn a month. The Fed did acknowledge that the economy had progress towards the goals need to look at tapering but there was still some way to go. The decision was unanimous.

On the question of what signified “substantial further progress” Powell was typically reticent declining to offer much more than various banalities on the topic. 

With US Q2 GDP set to show an improvement in data due to be released later today, The Fed couldn’t really say anything else, but markets would like them to be clearer what “substantial further progress” actually means, in terms of the data, and more specifically the labour market. It is clear that we seem a bit closer to the prospect of a paring back of purchases with FOMC members having a “range of views” on the topic.

The US economy has managed to rebound very well from last year’s sharp -31.4% fall in GDP. Since that huge contraction the economy has managed to post three consecutive quarters of expansion, and today’s initial Q2 numbers are set to make it a fourth. In Q1 the economy expanded by 6.4%, driven largely by two big stimulus interventions by the US government at the end of last year, as well as in March. The spillover effects of this are set to ripple over into Q2 with the various fiscal interventions set to continue until September. Manufacturing has been particularly strong in Q2, while the slow recovery in the services sector, along with the return of theme parks is likely to give a boost to economic output.

Expectations are for the US economy to expand by an annualised 8.5%, with personal consumption once again set to be a key driver of the recovery, with a rise of 10.5%. prices are also expected to be keenly monitored with quarterly core PCE set to rise from 2.5% in Q1 to 6.4%. The big question is how much of this is likely to be transitory, and how much will be stickier?

Last week we unexpectedly saw jobless claims jump above 400,000 to 419,000. The expectation is that this will be temporary with a fall back down to 385,000, while continuing claims are forecast to continue their slow trend lower and fall below 3.2m.

Before US GDP we have the latest data on UK mortgage approvals and consumer credit for June. With the latest stamp duty holiday due to wind down at the end of the month, we could well see net lending accelerate further to £7bn from the £6.6bn in May, although it’s unlikely we’ll see a return to the huge £11.5bn we saw in March. Mortgage approvals are expected to come in at 84.5k, while net consumer credit is expected to pick up to £0.5bn from £0.3bn.

It’s also a big day for Robinhood as it gets set for its first day of trading as a public company, when the US markets open later this afternoon, in what is expected to be one of the biggest IPOs this year, after Coinbase’s direct listing. It’s a particularly challenging time for IPOs with sentiment as it is now and given how, after a lot of hype, Coinbase is now trading below its $250 indicative price after a big surge on day one.

EUR/USD – edging through the 1.1850 level with a sustained break potentially targeting a move back to the 1.1975 area. A break below support at the 1.1750 area has the potential to target the March lows at 1.1710, with last November’s low at 1 1610 the next key support.

GBP/USD – slowly edging higher towards the 1.4000 area, with a sustained break above 1.3920/30 needed to kick on. We have support at the 1.3800 area, as well as decent support above the 1.3570 level last week, which was also the February lows.   

EUR/GBP – hasn’t been able to break below the 0.8500 area. A break here targets a potential move towards the 0.8480 area, and lower towards 0.8280. Resistance now comes in at the 0.8580 area.

USD/JPY – resistance at the 110.30 area held yesterday, with a move below 109.80 potentially targeting a move towards the 109.00 area and July lows.  We need to hold below 110.30 for this move to unfold.

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