*USD surged back to recent highs amid Covid concerns and mixed data
*US stocks fell by the most in a month on dour risk sentiment
*NZD hits nine-month low before rebounding on RBNZ hawkish hold
*UK CPI headline misses (2% vs 2.2% expected) but reflects base effects
USD gained against most of its G10 peers on a safe haven bid amid mid-month rebalancing flows. DXY jumped the most in a week with CHF and JPY also closing modestly lower versus the greenback. NZD fell as much as 1.7% following the country-wide lockdown. The RBNZ decision to hold rates then saw the major fall to a low of 0.6868. But buyers have stepped in as Governor Orr struck a confident tone. Risk currencies like AUD also suffered with the aussie breaking down over 1% to the lowest level since last November. EUR is challenging key support above 1.17 while GBP slumped 0.8% and is holding near its lows.
US equities all closed lower with the S&P500 and Dow ending their five-day win streak. The Nasdaq was hit the hardest, down over 0.9% as defensive sectors outperformed for a fourth straight day. Asian markets are broadly higher this morning and both US and European futures are also pointing to better opens.
Market Thoughts – Data turns, FOMC minutes in focus
US retail sales came in weaker than expected as risk aversion weighed on stocks too. A shortage of goods and shifting demand to services saw US consumers, a key driver of the economy, hitting the brakes. Chair Powell kept his cards close to chest last night only saying that it’s not yet clear if the Delta strain will have important effects on economic activity.
Covid developments prevented the RBNZ from hiking today. That said, the bank clearly revised their rate path higher, forecasting the first hike later this year and four more in 2022. The minutes of the July Fed meeting are released this evening. All eyes are on the talk of the need to start tapering. We note the meeting was held before the strong July jobs data.
Chart of the Day – EUR/USD to finally break on hawkish Fed hints?
Tonight’s FOMC minutes are expected to give us a roadmap out of extraordinary stimulus. An increasing amount of Fed officials want to taper, indicating that substantial further progress has been made in reaching their goals. That means the 2% average inflation target while we’re only one or two strong jobs reports away in employment. The fact that the economy is actually suffering from supply issues as opposed to any lack of demand is an increasingly important issue, calling for a much faster taper.
The dollar (DXY) is delicately poised near its highs with the safe haven bid supporting in recent sessions. EUR/USD has retraced back off the 21-day SMA after Friday’s jump with bears targeting a breakdown through 1.1704. This level is looking more and more fragile with the dollar’s momentum increasing the chances of a move lower towards 1.1640 and then the November low at 1.1602. Strong resistance lies around 1.18.
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