The Fed saved Equities last week – again – how often will this work?
Source: Economic Events Calendar June 22 – 26, 2020 - Admiral Markets' Forex Calendar
While the start into the week of trading looked very weak with the DAX30 opening significantly below 12,000 points, it took the bulls only till the evening to push the German index back above the 12,000 point mark.
The driver was the announcement that the Fed will begin buying a broad portfolio of US corporate bonds, narrowing the gap in the US central bank buying, as Equities further underlines once again why traders shouldn't "fight the Fed".
Still, it needs to be seen whether Equities can continue to trade higher given the fact that the only bullish driver remains central bank liquidity.
And with rising fears around a second Corona-wave (Beijing started to close schools last Tuesday again, while City Government raised their COVID-19 Emergency Response Level from III to II), markets could be hit by broader selling pressure again in the coming days.
That said, the technical main focus will be on the region around 11,800 points, a break lower makes a deeper correction possible and could see a re-test of the region around 11,450/500.
On the other hand: if the bulls can avoid another push back below 12,000 points (thanks to the help from the Fed), another stint as high as 12,900 points, probably even back above 13,000 points stays an option:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between March 6, 2019, to June 19, 2020). Accessed: June 19, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.
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After the US Dollar Index Future dropped below 100.00 points, the Greenback could reduce its bearish momentum a little.
Still, the picture for the US dollar does not look very promising in our opinion: 10-year US yields focussed again on the region around 0.60%, even though a break lower wasn't seen, probably due to some solid US economic projections or Fed chairman Powell not going uber-dovish in his semi-annual testimony at the US congress last Wednesday.
Nevertheless, in our opinion it is only a question of time until the Fed increased the pace of its QE again, most likely driven by rising volatility in Equity and/or bond markets and thus a break lower in US yields.
That in mind leaves the mode in the US dollar currently neutral, technically between 94.00 and 104.00 points, but chances of a near-term break below 94.00 points stay elevated, activating 93.00 points a first target on the downside.
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between July 2017 to June 2020). Accessed: June 19, 2020, at 10:00pm GMT
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The Euro lost some of its bullish momentum in recent days, failing to break above 1.1400.
But as we wrote in our last weekly market outlook […]short-term corrective moves down to 1.1150/1200, a little lower towards 1.1000 should be bought[…] and thus the current corrective move might be the beginning of an aggressive attack to break above 1.1400/50.
The reason for our Euro optimism can be found in the fact that the overall picture in the Euro against the US dollar hasn't changed over the last days.
While the monetary and fiscal stimulus in the Euro-Zone should result in European yields to rise while US yields are expected to drop (while the Fed should be expected to balloon its balance sheet even further, it seems unlikely that more fiscal stimulus from the US government should be expected, given the US presidential election later this year), the yield differential between European and US yields should be expected to drop, favouring gains in the EUR/USD.
That in mind, 10-year US yields holding above 0.60 over the last week was mainly seen due to some solid US economic projections and Fed chairman Powell not going uber-dovish in his semi-annual testimony at the US congress last Wednesday and a break lower stays on our agenda sooner rather than later.
A break above 1.1400/50 leaves the EUR/USD bullish potential up to the region around 1.1700/1.1800, while a drop below 1.1200 could trigger a deeper correction with a target around 1.1000:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between April 22, 2019, to June 19, 2020). Accessed: June 19, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the EUR/USD fell by 10.2%, in 2016 it fell by 3.2%, in 2017 it increased by 13.92%, 2018 it fell by 4.4%, 2019 it fell by 2.2%, meaning that after five years, it was down by 7.3%.
While the picture in USD/JPY darkened and the currency pair has an elevated chance to rather sooner than later see a test (and probably break even below) of the region around 105.00, the picture hasn't at least changed over the last days.
While we made the sharper drop after the Fed rate decision on June 10, a topic in our last weekly market outlook, the main reason for the stabilisation above 106.80/107.00 seems to be found in the stable performance in 10-year US yields, most likely due to all in all solid US economic projections (which seems not that surprising after US data hit rock bottom since the Corona lockdown over April and May), but also Fed chairman Powell not being uber-dovish in his semi-annual testimony in front of the US congress last Wednesday.
Due to the yield-sensitivity of the JPY it may not come as a surprise that we consider a break lower in US yields a bearish driver in USDJPY and expect the already mentioned, sustainable break below 106.80/107.00 with a resulting test of the region around 105.00.
This bearish expectation stays true as long as the currency pair does not sustainably recapture 109.00/50:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between April 22, 2019, to June 19, 2020). Accessed: June 19, 2020, at 10:00pm GMT
In 2015, the value of the USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.
After the Fed reinforced its dovish stance with the Fed dot plot suggesting that she will keep interest rates at 0% at least till the end of 2022 and continue to buy USTs and MBS at least at the current pace the picture for Gold brightened again.
Still, bulls failed to gain bullish momentum over the last days, probably a result out of the stabilisation of 10-year US yields above 0.60% after some solid US economic projections or Fed chairman Powell not going uber-dovish in his semi-annual testimony at the US congress last Wednesday.
In our opinion, Gold's current mixed to choppy performance results also out of the signs of the short-term taper from the Fed, too: in the week of the Fed rate decision, it's balance sheet only increased by 4 billion USD, pointing to the, by far, the smallest increase since February 2020.
But after Equities saw heavier volatility as a result after the Fed, it should be only a question of time to see the Fed increasing the pace of its QE again which should then act as a very bullish driver for Gold, especially as long as the yellow metal trades above 1,660 USD, levelling the path rather sooner than later up to the current all-time high of around 1,920 USD.
On the other hand: a drop below 1,660 USD could trigger a deeper correction, driving Gold below 1,600 USD, even though such a move should be considered only short-term:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between March 14, 2019, to June 19, 2020). Accessed: June 19, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.
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