- FOMC minutes failed to rattle US stock markets, ending in the green.
- All eyes are now on Powell at the Jackson Hole and EZ PMIS.
US stock markets were firm into the close overnight in anticipation, or the hope, of a rate cut as soon as September following a set of minutes that had something for everyone. This enabled USD/JPY to drift higher.
USD/JPY has been cruising to the upside since mid-month lows and that spike to test the 107 handle. The Dollar maintains a bullish bias and the yen is floundering, unable to gain upside traction the absence of panic-mode markets. We are indeed in a market lull and until there is some fresh confirmation of sentiment, one way or the other, there is no direction in the pair over the medium term. However, we now enter the remaining days of the week where there could be a gust of wind to kick up some dust from the eurozone PMIs and, not least, the Jackson Hole.
The Eurozone PMIs have the potential to really stir up a risk-off scene in markets should they come in markedly lower than expected, reminding markets of the potential for a global recession.
"We look for Germany's manufacturing PMI to fall another 1pt lower in August to 42.2 (mkt 43.0), which would be a new post-GFC low, as the trough during the Eurozone crisis was 43.0 in July 2012 (the month of Draghi's "whatever it takes" moment)," analysts at TD Securities warned.
"The services sector in general should hold up better, as it's less exposed to the downside from global trade tensions. We look for the French services PMI to slip to 51.8 (mkt 52.5). We also have the ECB minutes at 12:30pm BST today, which may give us some further colour around the ECB's policy discussions at last month's meeting. However, in the July Q&A, Draghi did say that the Governing Council did not discuss rate cuts or other specifics (size of rate cut, PSPP limits) at that meeting, so we're unlikely to get as much detail as we would like."
Powell to perturb markets unintentionally?
As for the Jackson Hole, Federal Reserve chairman, Powell, could be a major catalyst for markets. From the minutes overnight, we now know that there was a bit more disagreement among FOMC members than the two dissents suggested - But what we don't know is what side of the fence Powell is on. Should he rinse and repeat that the Fed only cut as in a "midcycle adjustment", expecting the consumer, jobs and the US economy to continue to grow, then the markets might respond in kind and turn risk-off, in anticipation of an imported recession which should be supportive of the Yen and weigh on US stocks - many to the despair of President Trump.
Valeria Bednarik, the Chief Analyst at FXStreet, explained that the USD/JPY pair maintains the neutral stance, trading below the 38.2% retracement of its latest daily decline at around 106.65:
"In the 4 hours chart, the pair has spent the day trapped between the 20 and 100 SMA, with the largest maintaining its downward slope around the current level. Technical indicators in the mentioned chart hover just above their midlines, lacking directional strength. The 23.6% retracement of the same slide comes at 106.05, providing a relevant support, as a break below it should trigger a more relevant slide."
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