Source: Wikimedia Commons

July 29, 2021

Fed tip-toes toward tapering, but not soon enough for USD bulls

US Q2 GDP not so hot

US dollar opens lower across the board

USDCAD open 1.2466-1.2470, Overnight range, 1.2454-1.2528  Previous close 1.2522

FX at a Glance

Source: IFXA/RP

FX Recap and outlook

US Q2 GDP was supposed to prove the economy is running hot.  It didn’t.  But it was still a tad better than Q1, and the US dollar bulls kept running.  Weekly jobless claims also missed the forecast.  They dropped 24,000 to 400,000, but analysts were expecting 380,000.

The FOMC statement was not hawkish.  That was all that was needed to stampede US dollar bulls over a cliff. 

AUD and NZD led the greenback lower, getting a big assist from Chinese regulators trying to staunch the equity market bleeding from their earlier actions.  After nearly wiping out a couple of tech and education companies, the regulators said Chinese companies could still go public, and yuan-denominated assets will become more attractive as the strengthening Chinese economy provides a foundation for capital markets.

Fed Chair Jerome Powell tap-danced around inflation questions, especially one asking if “the rise in inflation this year met the threshold of moderately exceeding 2% for some time?”  Powell responded that it was a question for the Committee, conveniently forgetting that at the press conference, he is the Committee.

FX traders concluded that although tapering is coming down the pipe, it is not happening anytime soon and bailed on long US dollar positions.  The US dollar selling was exacerbated by early portfolio rebalancing flows, suggested by the 2.2%  MTD rise in the S&P 500.

EURUSD extended yesterday’s gains, climbing from 1.1842 to 1.1883.  The gains were fueled by short EURUSD position unwinding, following the dovish Fed meeting, and better than expected Eurozone data today.  The European commission’s Eurozone Economic Sentiment Index was at an all-time high of 119.00, indicating the Eurozone economy is rebounding strongly. German HICP inflation jumped to 2.9% y/y from 2.1%.  However, gains may be limited due to the ECB’s dovish outlook.

The intraday EURUSD technicals are bullish above 1.1750, supported by the break above 1.1850, which targets 1.1940

GBPUSD is on a tear, rising from 1.3768 on Tuesday to 1.3972overnight.  Sterling is benefiting from yesterday’s news that the IMF raised their forecast for 2021 UK growth from 5.3% to 7.0% and plunging COVID -19 cases.  The break above 1.3870 targets 1.4020 and then 1.4230.

USDJPY spiked to 110.27 around the release of the FOMC statement, then dropped to 109.68 overnight.   The benign Fed outlook and a drop in US 10-year Treasury yields from 1.2966% to 1.228% weighed on prices.  Yields have recovered to 1.275% in NY, and USDJPY has bounced to 109.88.

USDCAD shrugged off a tame inflation reading yesterday (actual 0.3% m/m  vs forecast 0.4%, and May 0.5% m/m) with traders focused on the FOMC meeting.  Broad-based US dollar selling pressure following the FOMC statement combined with higher WTI oil prices drove USDCAD below 1.2500 and triggered stop-loss selling.

USDCAD may see further selling due to month-end portfolio rebalancing.

US Q2 GDP is expected to rise 8.6% annualized, which could give the US dollar a bid.  Weekly jobless claims are expected at 380,000.  Other data includes PCE Prices, and Pending Home Sales.

USDCAD technical outlook

The intraday USDCAD technicals are bearish following the break below 1.2510, targeting 1.2405, then 1.2310, the 61.8% Fibonacci retracement level of the June -July range.  For today, USDCAD support is at 1.2440 and 1.2405.  Resistance is at 1.2510 and 1.2550.   Today’s range 1.2410-1.2510

Chart USDCAD  daily

Source: Saxo Bank

FX open, high, low, previous close

Source: Saxo Bank