The story of this week will be perfect for traders looking for confirmation of signs that the Fed is starting in a tightening cycle. This is because the story is to be centered on the US dollar, and the Federal Reserve Open Market Committee (FOMC) minutes to be released this Wednesday.
Caution is needed, however, as the minutes are being released three weeks after the actual meeting took place. So from this point of view, they are considered as lagging the market. If you look at what happened last week with the Chinese Yuan devaluation, you have a new variable that was not on the table when the Fed met last time & these minutes will not reveal anything on this subject.
It is still a moving event in the sense that we will have an idea how many doves and hawks are in the FOMC, and traders can form an educated guess regarding the timing of the upcoming rate hike.
My take is that the Fed has tough times ahead as deflationary, and not inflationary signs are visible all over the place. Consider gold for example, as it is trading from $1300 to $1100, and you have just one side of the story.
Last week’s PPI (Producer Price Index) showed no change in inflation on the producer’s side, and there is virtually no way inflation can be passed to consumers if there is nothing to pass. Moreover, the US dollar has been rallying on the back of a possible Fed rate hike for quite some time now, but history shows us that these kinds of reactions are actually followed by fading when the hike finally comes in, in a classic “buy the rumor sell the fact” strategy.
Last week’s retails sales showed a strong number, but even stronger was the previous release that was revised higher from negative territory to positive. That June release revision made the US dollar jump.
The EURUSD fell from the 1.12 established earlier last week to 1.11 for the week, while USDJPY is in a range with 124 level acting as a pivotal one and as strong support as well.
I would say this week is key for positioning for the second half of August’s trading, and clues regarding the September NFP number (a decisive one) should come if USDJPY breaks below 124 and stays there and EURUSD flies higher.
There is still a bearish US dollar feeling in the currency pairs, with or without the upcoming hike.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
