It may not have taken too many by surprise, but the Federal Reserve meeting has come and gone, largely without event. The decision over when to taper asset purchases will not come this summer and is likely to be more for the Fall in the US (i.e. autumn for the rest of us). The US dollar bulls were already beginning to lose some of their swaggers, with a reversal of previous strength now gathering pace. This is impacting across major markets.
- Little reason to get excited about a Fed taper quite yet. There was no deviation from the predicted path in yesterday’s FOMC meeting.
- US dollar (USD) has fallen out of favor in recent sessions. The traditional positive correlation between USD and “real” bond yields is re-establishing.
- Gold remains negatively correlated with bond yields
- Technically we are seeing USD selling through major pairs such as EUR/USD, GBP/USD, USD/CAD, and even AUD/USD
FOMC is steady as she goes
There were no surprises in the FOMC meeting last night. The Statement had very few changes to it, aside from the slight change to acknowledge that the economy “has made progress” towards the Fed’s dual mandate of full employment and price stability.
Fed chair Powell continues to believe that inflationary pressures are merely transitory and it seems that the committee is far more concerned with getting the labor market in a better condition before they can tighten.
We have two Employment Situation reports (Non-farm Payrolls) before the next two meetings and some sizeable jobs growth would go a long way towards setting the Fed up to guide markets in September for tapering in late 2021 or early 2022 (we are looking for a December taper).
Market reaction has been minimal. There was an initial nod towards the slightly hawkish lean in the statement (progress has been made) but that has quickly dissipated. Trends of recent days have subsequently renewed.
USD falling out of favor once more
Those trends of recent days have been for the USD to be losing ground once more. Previously in June and July, falling bond yields had been supportive for USD. This was a slight bias towards negative sentiment.
However, the past week has begun to see this relationship turn around again. We are now seeing USD under pressure as yields fall. This is far more in line with a traditionally positive correlation that the US dollar has with “real” bond yields (bond yields minus inflation).
Assets such as Gold picking up again
This is positive for gold. Gold price movements are tightly correlated with how US bond yields move and how USD moves. There was very little in the FOMC meeting that would be sustainably positive for yields, or the dollar. This should be supportive for gold.
For bond yields, gold is supported by falling yields. Gold is a zero yielding asset, so when bond yields fall, it means that the opportunity cost of owning gold is lower. Gold has a strong negative correlation with the US 10 year Treasury yield. The correlation averages -0.34 in 2021.
However, also we see that Gold performs well when the USD is weakening. This is because gold is priced in dollars. We can see below that gold has a strong negative average correlation of -0.6 since the start of 2021 with USD. A falling USD is positive for gold.
Technicals show USD slipping on major forex pairsk
We can also see this USD selling pressure impacting through forex major pairs.
EUR/USD is starting to pick up decisively now. A move above 1.1890 would be a real sign of intent for recovery.
GBP/USD has been improving sharply already as UK COVID infection rates seem to have topped out again. A test of 1.4000 beckons once more.
USD/CAD finally seems to be breaking the move higher. A decisive breach of the uptrend has been seen today. A move below 1.2425 would be a key in the development of a new negative trend, with RSI momentum already breaking below 50.
Finally, we are even seeing AUD/USD picking up, with a broken downtrend today. However, there still needs to be more to point for sustainable recovery on the Aussie. Watch for the RSI holding above 50, and a decisive move above the falling 21 day moving average. Resistance at 0.7410 is being tested, but above 0.7500 would be the key signal.
Conclusion
The FOMC meeting has come and gone with little fanfare. This has subsequently done nothing to change what has been a developing shift in USD outlook in recent sessions. Near term selling pressure is taking hold for USD and this is impacting across asset classes.
