Daily Market Outlook, July 28, 2021

Overnight Headlines

This evening’s monetary policy update from the US Federal Reserve will be the key event of the day, and probably the week, for markets. Ahead of that announcement a sparse data calendar will not provide much of interest. However, the US June advanced international trade report will be watched for clues on whether international shipments will provide a significant positive contribution to GDP.

The Fed’s last policy meeting in June produced some changes to its messaging. The ongoing rise in inflationary pressures was still seen as probably a ‘transitory’ impact resulting from the restarting of the economy as restrictions eased but nevertheless upside risks were acknowledged. Fed Chair Powell also said it might soon be time to start talking about tapering the Fed’s asset purchase programme. Finally Fed policymakers’ interest rate projections (the so called ‘dot plot’) suggested that a majority expected two interest rises by the end of 2023 and a sizeable minority thought they may even need to rise in 2022. Those messages were initially perceived as more ‘hawkish’ than expected by markets. However, as has been noted earlier longer-dated Treasury yields have fallen back.

The present meeting takes place against a background of ongoing uncertainty. On the one hand, inflation indicators have continued to go up. But on the other, rising Covid-19 cases globally, and to a lesser extent in the US, are raising concerns that the economy’s recovery may yet falter. Against that background, the majority of Fed policymakers will probably not want to do anything new. However, as annual CPI inflation has recently hit a 30-year high it seems unlikely that the Fed will backtrack on what was said last time even if most still believe that the pressures are temporary.

So the key message is likely to be that they are in wait-and-see mode as they monitor developments and that in the meantime monetary policy will remain highly accommodative. This is not one of the meetings when the Fed issues new forecasts so there will also be no new ‘dot plot’. However, Fed Chair Powell will as usual hold a press conference. He may use that to say that the Committee has now started to talk about when they should taper QE but seems unlikely to provide further detail at this point.

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

EUR/USD: 1.1785-90 (900M), 1.1800 (1.1BLN), 1.1820 (1BLN), 1.1825-30 (675M),
1.1835-40 (675M), 1.1850-60 (2.1BLN)
USD/CHF: 0.9100 (315M), 0.9200 (340M). AUD/USD: 0.7390 (711M)
GBP/USD: 1.3685-1.3700 (486M), 1.3775 (421M), 1.3800 (203M), 1.3925-35 (845M)
USD/CAD: 1.2550-60 (757M). AUD/JPY: 80.97 (525M)
USD/JPY: 110.00-15 (657M), 110.25-40 (646M), 110.65-70 (910M)

EURUSD Bias: Bearish below 1.1950 Bullish above

GBPUSD Bias: Bearish below 1.40 Bullish above.

USDJPY Bias: Bullish above 109 Bearish below

AUDUSD Bias: Bearish below .76 Bullish above

AUD/USD opened 0.30% lower at 0.7360 after EM selloff weighed on risk currencies...
It traded to 0.7375 just before the release of the Aus Q2 CPI
It came out as expected, but below some of the whisper numbers...
AUD/USD eased back to 0.7353 as longs pared back after the data
Buyers returned and the AUD/USD settled around 0.7360 into the afternoon
AUD/USD upside limited by Sydney lockdown and wobbly emerging markets
Sellers are tipped around 0.7400 and resistance is at 21-day MA at 0.7430
Support has formed 0.7330/40 where buyers are tipped
A break below 0.7430 targets the trend low at 0.7289
Key later today will be the broad USD reaction to the FOMC