U.S. stocks declined and Treasury yields turned lower again as Fed Chair Jerome Powell’s persistent dovishness raises concern about the sustainability of the economic recovery

16 July 2021, 05:58

Market Focus

U.S. stocks declined and Treasury yields turned lower again as Fed Chair Jerome Powell’s persistent dovishness raises concern about the sustainability of the economic recovery. Communication services, energy, and technology shares weighed on the benchmark S&P 500. Growth favorites that led the recent rally such as Amazon.com and Google parent Alphabet dropped from recent all-time highs, sending the Nasdaq 100 lower (-0.70%, or -101.82). Dow Jones plummeted intraday but rebounded and closed the day with mild gains (+0.15%, or +53.79).

For a second day, Federal Reserve Chairman Jerome Powell defended the central bank’s stance to keep providing support to the U.S. economy even as inflation runs at uncomfortable levels. “This is a shock going through the system associated with the reopening of the economy and it’s driven inflation well above 2%, and of course we’re not comfortable with that,” Powell told the Senate Banking Committee Thursday.

The Fed chair called the price developments “unique” in history and said the central bank is closely watching to see whether its forecast that the high inflation will prove temporary is correct, or whether it threatens to be long lasting. “So we’re trying to understand the base case and also the risks,” he said.

This was Powell’s second round of testimony this week on Capitol Hill. On Wednesday, he was peppered with questions about surging prices from lawmakers serving on the House Financial Services Committee. Powell said the surge in inflation so far had been concentrated in a limited number of areas, such as used car prices, and reiterated that he expects those increases to be transitory.

Jerome Powell speaks during a Senate Banking Committee hearing in Washington on July 15.” To the extent that it’s temporary it wouldn’t make sense to react to it,” he said, though officials don’t know how much longer price pressures from these sources would remain elevated. “We also don’t know whether there are other things that will come forward and take their place,” he said.

The Fed is currently buying $120 billion of assets per month — $80 billion of Treasury securities and $40 billion of mortgage-backed debt – and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2% inflation.

Main Pairs Movement

Lower than expected Chinese growth undermined the market’s sentiment at the beginning of the day. The sour mood extended during US trading hours, with the dollar making the most out of it, gaining ground against most of its major rivals.

US Federal Reserve chief Jerome Powell testified for a second consecutive day on monetary policy before Congress. His dovish stance added to the dismal sentiment, alongside mostly soft US data.

The euro pair hovers around 1.1800 while Cable approaches 1.3800, after flirting with 1.3900 earlier in the day. Michael Saunders, a policymaker from the Bank of England said that during the upcoming months, they would discuss whether to curtail the current assets purchase program and/or take further policy action next year. He clarified that if the “bank rate does rise in the next year or so, it is likely that any rise would be relatively limited.”

Commodity-linked currencies also edged lower, with both antipodean pairs dropped around 0.75%, and CAD being the worst performer against the greenback amid persistent oil weakness. WTI extended its slide and finished the day around $71.50 a barrel, while Brent dropped around 1.72% in the previous day and trades at 73.24 as of writing.

Gold prices consolidated weekly gains, ending the day at $1,828.50 a troy ounce. US 10-year Treasury Bond yield proceeded yesterday’s decline, plummeting near the 1.30 level.

Technical Analysis

XAUUSD (Daily Chart)

Gold remains positive after benefiting from the Fed’s dovish monetary policy. Gold extends its bullish tone toward 1830, the highest since June. From the technical aspect, as gold continues to trade above the 20 simple moving average, its near-term trend is bullish. To the upside, if a break of 1829 is successful, then the upside momentum is expected to extend further north toward 1876 since the RSI is far away from the 70 reading; at the same time, the upside momentum is supported by a strongly positive MACD. On the other hand, gold will become a negative tone if it falls below the 20 SMA, around the 1790 level.

Resistance: 1829, 1876

Support: 1770, 1676

EURUSD (4- Hour Chart)

EURUSD remains pressured around 1.1800 level as the Fed Powell maintains a dovish stance. The pair holds near its daily lows, turning its near-term momentum into a negative tone on the 4- hour chart. After declining below the 20 and 50 simple moving averages, the pair fails to attempt running above them. EURUSD remains bearish as the RSI has not yet reached the oversold territory, providing rooms to extend further south. If the selling interests continue, then the pair has some potential to head toward the support at 1.1704. On the other hand, the pair needs to climb above the simple moving averages first to reclaim its bullish tone.

Resistance: 1.1837, 1.1919, 1.1985

Support: 1.1704

GBPUSD (4- Hour Chart)

GBPUSD trades below 1.3850 after the Bank of England urges cutting some supports to the UK economy. From the technical perspective, after trading in between the resistance of 1.3926 and the support at 1.38, GBPUSD looks to consolidate this week so far. The short-term momentum turns bearish as the pair trades below the 20 simple moving averages and the midline of the Bollinger band on the 4- hour chart. On the downside, the pair is expected to head toward the immediate support level at 1.38; if a break of the hurdle occurs, then the pair will have some potential to move further south, contesting 1.3744.

Resistance: 1.3926, 1.4000

Support: 1.38, 1.3744, 1.3675