Fed Powell Brought Risk Aversion Back, Dollar Ready for More Upside

Market overviews

In terms of prompting market volatility, Fed Chair Jerome Powell didn’t disappoint. Stocks suffered steep selloff after his Jackson Speech. While Australian Dollar was still at top of the chart, most of its earlier gains evaded on Friday, and looks set to weaken further in the near term. Dollar was the second strongest. But it has yet risen through the highs set earlier in the week. The greenback is staying bullish, but more fuel is needed for the rally.

Meanwhile, European majors were the clear losers for the week. Energy crunch, persistently high inflation, and recessions risks are clouding the outlook of Europe. Swiss Franc is having a slight upper hand over Euro and Sterling but recent declines in EUR/CHF and GBP/CHF look a bit exhausted. Yen ended mixed with countering forces of resilient treasury yields and risk off sentiment.

Investors reacted rather negatively to Fed Powell

Investors have clearly reacted very negatively to Fed Chair Jerome Powell’s Jackson Hole speech. In short, Powell showed strong commitment to fight inflation, with willingness to tolerate pain in the economy, while hold interest rates high for a period of time until the job is done.

“Reducing inflation is likely to require a sustained period of below-trend growth. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” he said, adding, “but a failure to restore price stability would mean far greater pain.”

Additionally, Powell emphasized, “the historical record cautions strongly against prematurely loosening policy. We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay.”

There was not clear indication on whether he preferred a 50bps or 75bps hike at the September FOMC meeting. The decision would depend on the “totality” of data by that time.

All three major US stock indexes tumbled sharply on Friday, with DOW down -3.03%, S&P 500 down -3.37%. NASDAQ down -3.94%. All closed below their 55 day EMAs.

Development in DOW now argues that rebound from 29653.29 has completed at 34281.36 already. Deeper fall is expected in the near term as long as 33364.70 resistance holds, towards 61.8% retracement of 29653.29 to 34281.36 at 31421.21.

Reaction from 31421.21 would unveil the larger picture. That is, sustained break there will raise the chance of extending the correction from 36952.63 through 26953.29, towards 100% projection of 35952.65 to 29653.29 from 34281.36 at 26982.00.

10-year yield capped by 3.1 by calm bond traders

Bond traders were relatively calm, on the other hand. 10-year yield breached 3.101 resistance last week but failed to sustain above there. Overall outlook is unchanged that corrective pattern from 3.483, which is now in the second leg, is going to extend for a while. In case of further rally, upside should be limited by 3.483 to bring the third leg.

On the downside, sustained trading below 55 day EMA (now at 2.894) will suggest that the third leg has started towards 2.525. But in this case, downside should be contained by 50% retracement of 1.343 to 3.483 at 2.413 to complete the correction.

Dollar index supported by risk aversion, further up trend to follow

Dollar had some jittery on Friday but was eventually lifted by risk aversion. As long as Friday’s low at 107.58 holds, further rally is in favor in Dollar index. Sustained break of 109.29 will resume larger up trend to 61.8% projection of 101.29 to 109.29 from 104.63 at 112.63. Such move, if happens, should mainly be driven by extended down trend in EUR/USD away from parity.

Bitcoin ready to resume down trend

Talking about risk aversion, Bitcoin’s break of 20708. support should confirm that corrective recovery from 17575 has completed at 25198. BTC is also kept well inside medium term falling channel, and back staying below 55 day EMA. Retest of 17575 support should be seen soon . Firm break there will target 13855 (2019 high) next.

Gold might revisit 1680.83 key support as rebound finished

Gold’s deeper than expected decline last week dampened the original bullish view that it has bottomed at 1680.83 already. The rejections by 55 day EMA, and below 55 week EMA are also bearish signals.

While a temporary low was formed at 1727.56, deeper decline will remain in favor as long as 1772.19 resistance holds. Break of 1727.56 will target important support level at 1680.83.

Firm break of 1680.83 cluster support will complete a medium term double top pattern (2074.84, 2070.06). That could prompt deeper selloff to 61.8% retracement of 1046.27 to 2074.84 at 1439.18. If that happens, it would likely be accompanied by some upside acceleration in Dollar. On the other hand, if Gold can hold above 1680, Dollar’s upside moment should be relatively capped.

AUD/JPY rally cut short by risk reversal

After climbing to 95.75, AUD/JPY was hammered by risk reversal towards the end of the week. Near term upside momentum started diminishing as seen in 4 hour MACD. The once promising rally now looks rather shaky.

Immediate focus is back on 94.18 support. Break there will argue that rebound form 90.51 has completed. Corrective pattern from 96.86 is going to extend with another falling leg through 93.05, towards 90.51 support. If happens, that would be a confirmation signal for broad based risk-off sentiment.

USD/CAD Weekly Outlook

Some volatility was seen in USD/CAD last week but outlook is unchanged. Corrective decline from 1.3222 could have completed with three waves down to 1.2726. Initial bias remains neutral this week first and further rise is in favor. On the upside, break of 1.3062 will resume the rally from 1.2726 to retest 1.3222 high next. However, break of 1.2893 minor support will dampen this view and turn bias back to the downside for 1.2726 and possibly below.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern only. That is, up trend from 0.9506 (2007 low) is still expected to resume at a later stage. This will remain the favored case as long as 1.2061 support holds, which is close to 50% retracement of 0.9406 to 1.4689 at 1.2048.

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