The S&P 500, the Dollar, the EURUSD, the USDCAD, and the AUDNZD are all examples of currency pairs. Points to Consider: China’s GDP and Other Growth-Oriented Data The previous session did little to energise the financial system, as risk assets fell in general. The most tapped-in basic subject remains monetary policy, but the risk of a major event overriding complacency is substantially thinning. The University of Michigan’s retail sales and consumer confidence report is the top scheduled event risk for Friday, as consumption and inflation expectations are expected to rise. The most powerful fundamental influence is still monetary policy, but the winds are dying down. A broad drop is clouding the outlook for global equities and other risk-sensitive assets as we move into Friday. Nonetheless, as broad as the ‘risk off’ effect may be, it remains a cautious step. So far this week, I’ve noticed an unmistakable ‘hawkish’ shift in monetary policy, which poses an existential threat to speculative assets that have taken advantage of easy capital and an exceptionally supportive cabal of central banks to build up massive exposure to compensate for the lack of yield. When panic peaked Tuesday and Wednesday, benchmarks like the S&P 500 and Dow were able to ride it out, but the ebb of the underlying tide hasn’t yet released the bulls. Complacency has both positive and negative consequences. Volume (from the SPY ETF) and volatility (VIX) were under rigorous control this past session, according to risk patterns to carry on to Friday analysis. Furthermore, there was a clear contrast between the ‘growth’ Nasdaq 100 and the ‘value’ Dow, with the ratio retreating significantly on the -0.7 percent NDX dip. What’s the best place to look for the next risk charge? The next source of volatility for me will be US retail sales and consumer confidence. S&P 500 chart with 20 and 100-day moving averages and 3-day range (Daily) Tradingview platform was used to create this chart. Regular Reinforcement of Monetary Policy is Required While my attention for the remaining 24 hours of trading this week will turn back to localized economic data, I believe monetary policy will continue to be the most capable issue for moving the market on a full-scale trend. However, we are at the start of a normalization process, with central bankers around the world claiming that “interest rates will remain unusually low for an extended period.” Technically, it would be true even if benchmark rates had increased by 100 basis points, given the existing level of yields. Despite this, market participants are happy to take the guarantees. Despite the varied faces and questions, Fed Chairman Jerome Powell gave his second day of evidence before Congress (the Senate) this past session; nonetheless, the content of his statements did not vary much. He reaffirmed his ‘transitory’ inflation forecast and stated that interest rates are still a long way off, but he did hint that the Fed would discuss the taper schedule at its next meeting (July 27-28) and that the markets were showing signs of “froth.” The dollar rose briefly before testing the 20-day moving average, but suggested Fed Funds rates remained unchanged at 20 basis points of rises until 2022. DXY Dollar 20-Day Correl (Daily)Chart created using Tradingview Platform with 20, 100-DMAs, Implied Fed Hikes Through 2022, 20-Day Correl (Daily)Chart While the market chewed on the Fed Chairman’s typical dovish comments, some of the US bank’s European bloc peers have made recent tangible hawkish actions. The Bank of Canada (BOC) tapered for the second time this year on Wednesday, giving it a formidable weapon against the US dollar. Instead, the Canadian Dollar fell against the majority of its peers over the previous session, resulting in a few notable bearish breaks for the currency. Given the fundamental divide, the USDCAD was the more prominent, rising beyond the midpoint of the 2002-2008 historical range at 1.2585. The 200-day moving average, which is around 1.2625, is the next crucial juncture. The USDCAD chart with the 200-day moving average (daily) was created on the Tradingview platform. The statement by the Reserve Bank of New Zealand (RBNZ) that it was completing its stimulus program had the greatest overall impact from a monetary policy standpoint this week. The New Zealand dollar jumped on the day of the change, but then halted. There was a disappointing reversal across the board, even excluding the check from the US counterpart on NZDUSD. Despite the overall benign risk environment, the NZDJPY would witness a decline. AUDNZD was perhaps the most impartial of the Kiwi crosses for reference. This couple has strong economic relationships and is known for balancing risk. As a result, it is a far more consistent relative monetary policy indicator for either. The market’s current state is reflected in the market’s ability to hold a greater range. AUDNZD Chart with 100-Day Moving Average (Daily) Created using Tradingview Platform Friday’s Top Event Risk and Effective Monetary Policy Motivations It’s easy to assume from the price action of the Dollar, Loonie, and Kiwi during the last few days that monetary policy doesn’t matter to the markets. I’m not sure I’d go that far. Given the projection of relative returns it represents between two distinct countries, the relative elements of monetary policy are a major market mover in the FX market. What, therefore, is the contrast when the collective appears to be gradually tightening the reins in lockstep? While the BOC and RBNZ tapered informally, the Fed’s rate projection reflects its own hawkish influence. Relative appeal may be stifled in the medium term, but consider the ramifications of the developed world’s monetary policy changing in favor of the hawks. The generosity of deep-pocketed central banks is extremely reliant. The suffering could be exaggerated if and when markets begin to focus on the course of external support. Relative Monetary Policy Chart The Position of the World’s Major Central Banks John Kicklighter designed the graph. When themes are activated, they have a lot of power, but due to a lack of liquidity, the energy is mostly potential. I’ll be looking for catalysts in the economic calendar on Friday for a more real impact. In the Asian session, the New Zealand 2Q CPI, Australia consumer inflation expectations, and the Bank of Japan rate decision (BOJ) are all expected to be heavily mixed; however, despite the attention paid to monetary policy, these are unlikely to spark imagination where taper and US inflation have failed. I’ll pay more attention to retail sales in the United States and the consumer confidence poll conducted by the University of Michigan. These could be viewed as central bank fodder, but I feel that a direct look at the purchase habits of US consumers is more tangible in economic terms. A substantial surprise may earn a technical break, which would pave the way for a larger commitment the following week. I’m keeping a careful eye on EURUSD for guidance, since the pair has carved out its smallest 10-day (2-week) trading range since January 2020, and its 10-day ATR reflects relative volatility. A market that is busy and has a variety of limited boundaries is a good mix for breakout potential. Chart of the EURUSD with 20 and 100-Day Moving Averages (Daily) on Tradingview Platform./n
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