No-surprise in Fed Chair’s tone saw equities higher overnight: US dollar, AUD/USD, Gold

Market Recap

Despite the recent blockbuster US job report paving the way for more hawkishness, Federal Reserve (Fed) Chair Jerome Powell continued to feed markets with a somewhat dovish rhetoric yesterday, which saw major US indices ending sharply higher after a period of whipsaw. The Fed Chair largely stuck to his previous tone of acknowledging the ‘disinflationary process’ and at some point, addressed the recent strong job gains with slowing wage growth. It seems that more follow-up economic data may have to reflect continued strength, in order to further convince the Fed’s peak interest rate to be revised higher. For now, markets are relieved that a more hawkish recalibration in rate expectations is not needed, with broad consensus for rates to peak at the 5%-5.25% range.

The reaction in Treasury yields were more measured however, with the two-year yields hovering around its one-month high while the ten-year yields rose around 4 basis-point (bp) to 3.67%. That aided in supporting the US dollar, which saw a more limited decline as compared to moves in the recent Federal Open Market Committee (FOMC) meeting. The index continues to hover at an upper channel resistance, in line with a horizontal support-turned-resistance at the 103.20 level. A further break above the 103.20 level could still be on watch to pave the way towards the 105.00 level next. On the other hand, equity markets seem detached from the resilience in yields, tapping on the no-surprise in the Fed Chair’s tone to run higher in line with the broader upward trend.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.60%, ASX +0.24% and KOSPI +0.97% at the time of writing. The Nasdaq Golden Dragon China Index is up 2.4% overnight, which could set the stage for some resilience in Chinese equities in today’s session. That said, whether upside can be sustained is still up in the air for now, especially with the China A50 index and Hang Seng Index breaking below their respective upward trendline this week. Any formation of a higher low will still be on the lookout, with the 20,900 level as near term support for a start. US-China relations remain on the radar. While there are risks that the incident could be used as justification for US to further impose export controls on China, the intention for further escalation may still seem more limited for now. This comes as both countries are struggling with their domestic economic issues, while the tone from both parties are softer compared to previous round of conflicts.

At yesterday’s Reserve Bank of Australia (RBA) meeting, the central bank raised rates by 25 basis-point, which is in line with what markets have been pricing for. However, the RBA’s rate outlook came with a hawkish takeaway, suggesting that recent stickiness in inflation readings are putting some doubts of any rate pause from the central bank anytime soon. Three more rate hikes are now the broad consensus, with the central bank’s Consumer Price Index (CPI) projections not providing strong conviction of a significant moderation this year. The AUD/USD is currently back to reclaim an upward trendline after a brief breakdown this week. One to watch if recent upside may be sustained, especially with some resilience in the US dollar not providing the go-ahead. Failure to hold above the trendline could still prompt further move to the 0.673 level next, where a Fibonacci confluence zone resides.

On the watchlist: Gold prices still attempting to reclaim upward trendline

Despite the dovish rhetoric perceived from Fed Chair Jerome Powell’s comments, resilience in the US dollar has kept upside in gold prices in check overnight. Prices are attempting to hang onto an upward trendline as support for now, but the potential risks run in the formation of a bearish flag pattern. Any subsequent break below last Friday’s close at the US$1,860 could be on watch to prompt further downside for the yellow metal. Near term resistance to overcome may stand at the US$1,900 level, where a 61.8% Fibonacci retracement level resides.

Tuesday: DJIA +0.78%; S&P 500 +1.29%; Nasdaq +1.90%, DAX -0.16%, FTSE +0.36%