The minutes from the European Central Bank’s July monetary policy session showed that the central bank remained relatively uncertain over the trading bloc’s economic outlook, as committee members agreed that “at its September meeting the Governing Council would be in a better position to reassess the monetary policy stance and its policy tools”.
Opting to wait for “additional information, including more hard data releases, new staff projections and news on fiscal measures” suggests that the ECB is extremely cognizant of rolling back stimulus measures prematurely, despite Chief Economist Philip Lane’s assessment that “incoming data and survey results suggest that economic activity had improved significantly in May and June”.
In fact, Lane emphasized that “although economic activity was gaining momentum, there was no room for complacency” as he warned that “any premature tightening of financial conditions could put the ongoing recovery at risk”.
Therefore, the central bank’s commitment to “do everything necessary within its mandate [and] adjust all of its instruments as appropriate” should underpin regional equity markets moving forward.
However, the suggestion by some committee members that “the flexibility of the pandemic emergency purchase programme suggested that the net purchase envelope should be considered a ceiling rather than a target” could stoke concerns that the ECB won’t fully deploy the €1.35 trillion.
This seems highly unlikely however, considering consumer prices in the Euro-zone fell 0.4% month-over-month in July – the largest drop since January – and a ‘second wave’ of Covid-19 infections in Germany, France, Spain and Italy, threatens to derail the EU's nascent economic recovery. High-frequency data displays a notable drop off in activity during August, reflecting the impact of the recent surge in case numbers.
Nevertheless, the absence of more aggressive forward guidance may weigh on regional asset prices ahead of the ECB’s monetary policy meeting in September, as investors’ mull upcoming economic data to determine the central bank’s next steps.
The minutes of the Federal Open Market Committee’s (FOMC) July 28-29 meeting temporarily boosted the under-fire US Dollar, as the central bank subtly backed away from “providing greater clarity regarding the likely path of the target range for the federal funds rate”.
In the previous month’s minutes policymakers specified that the Federal Reserve’s future monetary policy decisions would be clarified “at upcoming meetings”, slightly different to the language used in the recent release in which greater clarity would be appropriate “at some point”.
The central bank also appeared to rule out the implementation of yield curve control (YCC) stating that “of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment”.
Unsurprisingly, yields on US 10-year Treasuries jumped almost 3-basis points alongside longer-dating 30-year yields, which nudged up to 1.435% in the wake of the release.
However, the Greenback’s recovery may be limited by the Fed’s commitment to “use it tools and act as appropriate to support the economy”, given the world’s largest economy is still hampered by just under 50,000 new coronavirus infections a day and ideological differences continue to prolong addition fiscal stimulus talks.
From a technical perspective, the US Dollar index appears poised for further losses, as it carves out a Bear Flag continuation pattern after collapsing through the 2011 uptrend at the end of last month.
That being said, price may rally back to test the September 2018 low before its resumes the primary downtrend, if it can breach resistance at the 21-day moving average (93.37).
A daily close above the psychologically pivotal 94 level needed to invalidate the bearish continuation pattern and may carve a path back to the trend-defining 50-DMA (95.34)
However, a break higher seems relatively unlikely given the RSI remains confined by the downtrend extending from the February extremes, hinting at a lack of bullish momentum.
To that end, a daily close below the monthly low would probably intensify selling pressure and could see price collapse towards the 90 level.
Gold is off to a strong start this week as bulls have seemingly returned to the precious metal following a drastic decline last week. Alongside an immediate hit to price, the selloff sparked worries for the longer-term outlook of the commodity. That said, many of the conditions that have allowed gold to soar in 2020 remain and could continue to fuel price gains, despite recent jitters.
As an investment, gold is often viewed as a potential hedge against inflation, while simultaneously providing safety in times of volatility. Therefore, the conditions that have been brought about by covid – volatility, low interest rates and expanding central bank balance sheets – should translate into higher demand for the precious metal and consequently, higher prices. Many analysts and commentators have attributed the 2020 gold price rally to these themes and, luckily for bulls, the same tailwinds remain despite recent declines.
Technically speaking, XAU/USD may enjoy support from the areas around $1,985, $1,920 and $1,861 on the shorter time frames if selling pressure returns. In the broader view, I suspect $1,800 may hold some psychological influence that could allow selling to accelerate if pierced, but it seems possible that gold could continue higher unless such a move is attempted.
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The theme of US Dollar remains intact, particularly in USD/CAD with the persistent downtrend hitting fresh post COVID lows following a break below support at 1.3170. In turn, given that there is little in the way of notable support, USD/CAD raises the risk of accelerating losses towards the 1.3000 handle. Alongside this, the latest CFTC data highlights that speculators remain short on the Canadian Dollar and thus an unwind of bearish bets provides scope for USD/CAD to fall further. On the topside, resistance is situated at 1.3200, whereby below this level maintains the bearish bias in USD/CAD.
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The Euro has been struggling to find further upside momentum against some of its G10 counterparts.
EUR/USD has been in a consolidation setting with prices ranging between 1.1916 and 1.1696 for most of this month so far. Prices stalled after the emergence of a Doji candlestick, which is a sign of indecision. Downside confirmation has been somewhat lacking, but a close under the lower bound of the Euro’s consolidation could open the door to a reversal. However, rising support from May could maintain the dominant uptrend in the event of short term gains. A push above 1.1916 exposes the 126.60% Fibonacci extension at 1.2028.