Overnight Headlines

*USD sank back below the 90 level, reversing all its FOMC minutes gains

*US equities rose broadly as tech led the comeback

*Intraday volatility eased though the Vix remains above 20

US equities rebounded strongly ending three straight days of losses with most sectors apart from energy in the green. Growth and large cap stocks were the leaders as the Nasdaq eked out a small gain for the week and closed above its 100-day SMA. European markets are set to open modestly higher.

USD retreated as concerns faded over the taper hint from the Fed minutes with the DXY dropping to the lowest level since early January 2021. The euro and pound closed strongly and both look good for more upside, with PMI data released this morning.

Market Thoughts – Fed timeline

Bond yields, the key indicator for any Fed moves, have reversed all their gains from the post-minutes increase. They are now back near to the lows of the week as the market comes to terms with the FOMC’s thinking in the near-term. A taper hint by some Fed participants was inevitable but any more forewarning about tapering will need a series of strong jobs reports.

Some in the market are targeting the Jackson Hole Symposium in late August as a potential place for more Fed hinting. That will mean the three monthly job reports will need to be firmly on an upward trend of 750k+ prints at a minimum. After this, it is expected to take three quarters to slow its bond buying and add to that probably the same time frame again before a first rate hike and we are into the first half of 2023 – which is when the market is actually pricing it in. In the meantime, the dollar could struggle as the global recovery continues.

Chart of the Day – GBP/AUD new cycle highs

UK retail sales have just been released and there were big beats across the board amid the reopening of non-essential stores and huge pent-up demand. The headline came in at +9.2% versus the expected 4.5% m/m, although food sales fell and there were lower revisions to the prior reading. The data confirms the UK is on the path to normalisation as the relaxation of virus measures continues as planned even with the Indian variant grabbing the headlines. We highlighted at the start of the week how positive data would help GBP and this has certainly been the case! The report bodes well for second quarter growth and confirms the belief that consumers are well placed to lead the recovery. Pressure on the Bank of England to taper will no doubt now increase as well, amid inflation and the bouncing economy.

Cable looks to be making new highs and GBP/AUD is breaking north having made a series of higher highs and lows this week. Bulls have got past the March peak at 1.8265 so the November high is the next target at 1.8317 in the near-term ahead of the October highs towards 1.85. Use the March high as support with this week’s low at 1.8115.