S&P 500, Consumer Price Index, Dollar, EURUSD, and NZDCAD Points to Consider: The Dollar’s post-CPI rise was cut short by Fed Chairman Powell’s otherwise routine statements…the same type of remarks that fueled Fitch’s downgrade warnings. Because global central banks are stepping away from stimulus, monetary policy is a more global worry for those overconfident in the S&P 500’s sustained rally. The top event risk in the coming months will revolve around event risk such as Chinese GDP and US earnings, but my focus will be on the crucial risk-influence of stimulus. Central banks are attempting to exit a critical support role while avoiding a structural collapse. The most worrisome systemic subject on my radar is monetary policy, and the most at-risk markets are the leading speculative benchmarks, such as the US indices. While traders and the media may have focused on individual wording changes from specific updates – such as Fed Chairman Powell’s hymn-like promise that inflation is temporary – there was a substantial movement away from sustained, extreme accommodation this past session. While the markets may be underestimating the possibility of central banks withdrawing their punchbowl support, any introspective understanding of this dependency could prove to be an overwhelming collapse for overblown risk benchmarks. In practice, it appears that the S&P 500 will either continue to increase at a steady pace or will experience an accelerated decline. Select an approach that fits your needs. S&P 500 chart with 20 and 100-day moving averages and 3-day range (Daily) Tradingview platform was used to create this chart. While it’s easy to get caught up in the sharp response of relative monetary policy directions via pairs like EURUSD or NZDCAD, the systemic sway of a movement in global monetary policy can go unnoticed until it’s too late. There has been a noticeable shift away from the overly accommodating position maintained in the immediate aftermath of the outbreak, as evidenced by central bank policy actions, predictions, and member remarks over the last few months. The Bank of Canada and the Reserve Bank of New Zealand have both tapered their asset purchases, while the Reserve Bank of Australia and the Bank of England have both issued statements implying that a reduction in asset purchases is not far off, and the Federal Reserve’s interest rate forecast predicts a first hike before the end of 2022. While these rate hikes do not constitute a global trend, they represent a significant shift in the methods that have been employed to implement monetary policy in recent years. For the time being, the capital markets appear capable of overlooking this danger, although acknowledgement is unavoidable depending on the conditions. Be wary if fear gains a footing before liquidity improves from the summer slump. Chart of Major Central Banks’ Relative Monetary Policy Positions John Kicklighter designed the graph. Apparently, boilerplate assurances still have the power to override data. The US CPI (consumer price index) release on Tuesday moved the US Dollar, Treasury rates, trash bonds, and Fed Funds futures significantly. The implications of a greater probability rate hike before the end of 2022 weighed heavily on these vulnerable markets, but the certainty of normalization didn’t seem to gain traction based on the larger financial system’s technical response. Despite its sensitivity, risk aversion did not collapse, implying that another complacent rebound was likely. Despite more confirmation from inflation statistics, we discovered that recovery this previous session. In June, the Producer Price Index (PPI) reached a new high of 7.3 percent, the highest in the modern calculation series. This means that a quick turnaround in consumer prices is unlikely, and the Fed’s action to rein in its contribution to excesses is more essential. The hawkish data, however, did not appear to gain traction. That was most likely a save by Fed Chairman Jerome Powell, who was testifying on the economy before the House of Representatives. He chanted his temporary inflation mantra again, and the markets seemed to embrace the comfort. However, his comments appeared to confound the goal of transparency in taper timing without a precise model on which to establish that timetable. I’ll point you that in its US evaluation, credit rating firm Fitch stated that “a decline in the coherence and trustworthiness of US policymaking…” could result in a downgrading of its AAA-status. Year-Over-Year Change in the CPI and PPI in the United States (Monthly) FRED Fed Economic Database Chart with Data from BLSW hile I feel the Fed’s motto is becoming increasingly optimistic rather than prescriptive, the assurances appear to have calmed the markets. Total rate hike predictions until the end of 2022 were trimmed from 23.5 basis points on Tuesday to 20 basis points on Wednesday, according to Fed Fund futures. In practice, this means that the chance of a regular 25bp rate hike by December 2022 has dropped from 94 percent to 80 percent. The Dollar definitely responded to the shift in tone, with the DXY Dollar Index suffering its worst single-day drop in three trading weeks, despite the fact that the initial stage of monetary policy change will be via a taper rather than interest rates. This results in a technically precise and well-timed range reversal. DXY Dollar Index Chart with 20 and 100-Day Moving Averages, Implied Fed Rate Hike Through 2022 (Daily)Chart created on Tradingview Platform EURUSD, GBPUSD, NZDCAD, and a Begrudging USDCNH are the majors to watch in the coming weeks. EURUSD would naturally reflect its own range reversal, given the Dollar’s swift flip following its failed breakout effort. The pair was seeking to break through 1.1800 support and break through a 12-month wedge, but its capacity to overcome market restriction failed. Trading back into established ranges, rather than charging a break with follow through, is more in line with the current market conditions. I’m keeping a wary eye on market speculation about US policy intent and the Greenback’s responsiveness; nevertheless, import/export inflation and initial jobless claims are unlikely to elicit the same market reaction as CPI or Powell day one. EURUSD Chart with 20 and 100-Day Moving Averages (Daily)Chart created on Tradingview Platform When it comes to range comfort, retail traders naturally prefer them because the boundaries are easier to detect and the implications of a swift swing are better suited to the average person’s shorter-term time frames. This previous session, the retail community at IG was actively betting against a bearish EURUSD break. In fact, the IGCS positioning data revealed that roughly 64% of traders in the measure were long, the highest level in over a year. Retail traders are frequently swayed by cognitive biases or lack of experience, but in range markets, their tastes can actually line with the winds. EURUSD Speculative Positioning Chart from IG (Daily)Chart from DailyFX with IG Data Aside from the general watch-and-wait approach to US monetary policy, there are a number of fundamental issues to consider over the next 24 hours. Alcoa and TSM will report quarterly results alongside Morgan Stanley on Thursday, extending the reach of US earnings beyond the financial sector. The British Pound, which has been rallying this session due to hot UK inflation data and BOE member language, will find employment data to support the increased interest. Although China’s GDP and June economic indicators are undoubtedly among the most important, the data’s market-moving potential has historically been limited due to the data’s relatively low surprise factor. Despite this, I’ll be keeping an eye on a pair like NZDCAD, as the potential to render more from a change in monetary policy – to be more exact here – can define the systemic perspective of risk trends. On the Tradingview Platform, a chart of the NZDCAD with a 1-Day Rate of Change (Daily)Chart was created./n
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