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Sentiment weaker post Fed minutes

Sentiment weaker post Fed minutes

It was a mixed day for equities yesterday as benchmarks in Europe posted gains, while their US counterparts mostly ended in the red. 

Modest gains were recorded in Europe as traders were slightly more hopeful about the possibility of US lawmakers making a compromise in relation to the coronavirus stimulus package. It was suggested by the House speaker, Nancy Pelosi, the Democrats might drop some of their demands in the near term in a bid to broker a deal.

US equity markets got off to a good start and the S&P 500 set a new intraday record high. The cautious tone of the Fed minutes chipped away at sentiment and the major indices closed a little lower. The update showed that the health emergency could have a ‘considerable’ impact on the nation’s economic outlook in the medium term. The central bank reiterated the need for fiscal stimulus too. In light of the announcement, traders are less hopeful the Fed will introduce bond yield control as a way to manage borrowing costs.

James Bullard of the Federal Reserve, said that rates will remain low for a ‘very long time’ and in addition to that, he said there was no need to offer further guidance yet.

Stocks in Asia are in the red. The South Korean market is underperforming on renewed health concerns. European indices are called lower.    

The US dollar rebounded yesterday as hopes had ticked up a little in regards to the prospect of US politicians agreeing on a coronavirus relief package. The greenback was coming from a low base as it fell to a fresh 27 month low on Tuesday. In the past three weeks, the dollar has made a couple of attempts to shake off the wider bearish trend, but the attempts failed. 

The positive move in the dollar hurt gold as the inverse relationship between the two markets worked against the commodity. The broader optimistic mood in the markets – the upward move in stocks – added to the fall in gold, as dealers typically dump it when they want to seek out riskier assets. Gold enjoyed a push higher from the middle of last week until Tuesday, so a pullback was not a big surprise.

Copper rallied for the fourth day in a row and it hit its highest level since June 2018. The price action in the red metal is often considered to be a good indication of what traders think about the economy, and perceptions about demand. Even though there are ongoing concerns about the health crisis, the copper market points to an optimistic outlook.

OPEC+ expressed concerns that a second wave of Covid-19 could pose a threat to oil’s recovery.      

The pound saw a lot of volatility versus the US dollar yesterday. The stronger-than-expected inflation figures from the UK assisted sterling. The CPI rate jumped to 1% from 0.6% in June. The core reading, which strips out commodity prices, came in at 1.8%, up from the 1.4% posted in June. Both readings comfortably exceeded forecasts. The finer details of the updates, showed there were large price increases in ice-cream, haircuts and DIY items. The CPI reports helped the pound, but the turnaround in the greenback pushed sterling into the red.              

At 7am (UK time), the German PPI report for July will be posted and economists are expecting the reading to hold steady at -1.8%. The PPI is typically is seen as a front runner for inflation, as price changes at the factory level will probably be passed onto the consumer. The metric acts as a good indicator for demand.

The US jobless claims reading is expected to fall to 925,000 from 963,000, and the continuing claims reading is tipped to fall to 15 million from 15.48 million. The labour market has been improving as states reopen their economies. Traders will be watching out to see the number of people returning to the jobs market.  The Philly Fed manufacturing index for August is expected to be 21, and that would be a drop from the 24.1 posted in July. Earlier in the week, the New York Fed manufacturing reading cooled significantly from the July update, which might be a sign the rebound in activity is tapering off.        

EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000. A pullback might find support at 1.1696 or at the 1.1600 zone.

GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3284. A move back below 1.3000, could see it target the 1.2800 zone. 

EUR/GBP – it has been largely range bound in August, but while it holds above the 0.9000 mark, the bias should remain to the upside. Resistance might be found at 0.9157. The mid-July low of 0.8938 might act as support.

USD/JPY – the rebound from late July to mid-August seems to be turning over on itself and while it remains below the 50-day moving average at 106.67, it is likely to lose further ground. 105.30 or 104.18 might act as support. A rally might encounter resistance at 108.06, the 200 day moving average.         

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