2nd day of Testimony! FOMC VS S&P 500 and US Dollar

There is no question that global growth slowed in the first half of 2019 amid heightened trade uncertainties, Brexit, and geopolitics. And while economic activity will remain sluggish as those elements remain in place, the strong US jobs report and the truce with China should calm worries over a deeper pullback Adding to the less dire outlook are the accommodative policy stances from the key central banks, with the focus mainly on the FOMC so far in July and more precisely on Chair Powell’s testimony.

Expectations for an aggressive 50 bp easing were initially dashed by the Jobs report on Friday, however, Fed Chair Powell’s semi-annual Monetary Policy Report yesterday did not strike down rate cut expectations, in his prepared statement and during his testimony in Congress.

In his statement, he highlighted that despite the healthy labor market, the uncertainties since the last FOMC meeting continue to pressure the US economy as inflation weakens below the Committee’s 2 percent objective, and it is likely to insist on this decline. In his testimony meanwhile, he reiterated the most important factors weighing on the outlook are the crosscurrents of trade tensions and slowing growth, which are interrelated, and are manifesting in weakness in manufacturing and investment. He put those at the top of the worry list, but also mentioned low inflation. Fortunately, he added, the consumer sector is doing well.

Additionally, he did not try to disabuse the markets of their expectations, suggesting more accommodation is a fait accompli. He did not really suggest a bigger 50 bp rate reduction was in the offing, though he did say the Fed has the tools needed and could use them “aggressively” if necessary.

Therefore, the projections have strengthened for a 25 bp easing at the July 30-31 FOMC. According to the CME Fedwatch tool, investors are now fully pricing a 25 basis point cut in July, while the probability of the Fed making another 25 basis points rate cut by September is at 61.8%.

The big question now is: Should we expect a single cut or a series of cuts from the Fed?

Today we have the 2^nd part of Powell’s Congressional testimony, which is expected to be in the spotlight once again along with the US inflation data which is expected to confirm the “muted” inflation that Powel stated yesterday.

Powell VS Markets

Equity Markets

Yesterday, the far more dovish Powell supported bond and stock markets, but added further pressure on short yields and the US Dollar. As Wall Street rallied yesterday, the S&P500 posted a record high as it was seen reaching the 3,000 level. The index didn’t manage to hold these levels as stocks generally came off highs, however so far today it seems that bulls are on the alert, sustaining the asset above the 2,990 level.

Momentum indicators are configured positively, however the 3000 barrier is a strong Resistance area which has not been overcome yet. RSI is at 67, with 70 being a very strong point as it hasn’t been broken since January 2018. MACD lines are in line with red signal line suggesting limited bullish bias for now. However, if the price manages to spike and sustain a move above 3,000, with momentum indicators turning higher as well, then the next level to be watched is the 3,100, which is the 161.8% Fib. extension level of May’s decline.

On the flipside, a pullback could be seen as a correction of the 5-week rally, as long as the asset remains above the 50-day SMA and the round 2,900 level. Immediate Support, meanwhile, could be seen between the latest low, which coincides with April’s peak and the 100% Fibonacci, at 2,959, and the 20-day SMA at 2,952.

Summing up, the S&P500 outlook remains positive in the near term and medium term as well, however profit takings on the peak levels could result to a potential swing lower.

Currency Markets:

So far today, the USD has posted fresh lows during the Europe session as markets continue to readjust Fed easing expectations in the wake of Chairman Powell’s testimony yesterday.

It has been a very interesting period of trading Loonie crosses. As a consequence of the downwardly shifting US currency since post-Powell testimony adjustment in Fed expectations, USDCAD has been seen moving lower for a 2nd consecutive day. Today the asset printed a 1-week low at 1.3042, thus retesting last week’s low. The asset has been following a bear market since May, however, it is sustaining a move within a 2-year up channel.

The daily technical indicators are weak, as RSI and MACD have been configuring below neutral. However, both look to hold a support above the oversold barrier, as RSI has retested the 30 level 4 times since June, but without posting a successful breakout, while MACD lines flipped above signal line in the negative area, something that implies that recovery is still possible.

However the key level in USDCAD is last week’s low at 1.3036, which is also its 8-month low. Hence a decisive close at or below this level could open the doors towards September-October 2018 lows, at the 1.2800-1.2915 area. Additionally, near-term Resistance holds at 1.3080 and at 1.3145 (2-week high). In the medium term Resistance is set at the 50-week SMA (and 38.2% Fib. since May 31), at 1.3236.