Headlines

*Dollar holds firm and consolidates near its highs, euro below parity

*Hottest Tokyo prices since 1992 ramp up heat on BoJ messaging

*Gold eases as investors brace for Powell’s speech

*Wall Street ends sharply up fuelled by tech sector, Asia in the green

US equities posted a second day of gains as the S&P 500 rose 1.41% and the Dow jumped by 300 points. The tech-heavy Nasdaq was the outperformer, advancing 1.75%. After hitting a two-month high, a slight pullback in yields on the US 10-year Treasury benefitted tech stocks. The yield had climbed above 3% for the first time in a month earlier in the week. Australian shares lead the way in Asia. US futures are modestly lower.

USD is contained on a 108 handle on the DXY. Yesterday saw lacklustre trading despite better-than-expected US data and a slew of hawkish Fedspeak. EUR popped higher above parity before pulling back. ECB sources noted it is unlikely to decide on ending the reinvestment programme in September. GBP is also tracking sideways around 1.18. USD/JPY resumed its choppy price action driven by fluctuating yields differentials. AUD is stuck below 0.70. USD/CAD traded between the 50-day SMA as support and the 100-day SMA as resistance.

Day Ahead – Powell’s speech finally upon us…

The waiting is nearly over. Fed Chair Powell is expected to outline the path for monetary policy this afternoon. FX majors have been tracking sideways this week ahead of the keynote speech. There’s been a bid to stocks while bond yields have poked above the psychological 3% level. The September FOMC meeting currently has 64bps priced in. We had a chorus of hawkish Fed rhetoric yesterday.

It’s kind of a fair bet that Fed Chair Powell’s speech will take a similar line. If that happens, then the market reaction will see a further rise in yields. This should push the dollar higher, and stocks lower. Markets have been positioning themselves for a hawkish message amid still substantial inflation pressures. But the US economy is witnessing a considerable growth slowdown. Any mention of this will definitely turn some of the recent moves.

Chart of the Day – DXY bullish consolidation(?)

The dollar is deep in the throes of its strongest annual gain since 1984. It seems there are few alternatives to the greenback. Europe is mired in an energy shock and China is battling with an imploding real estate sector. The Bank of Japan’s refusal to tighten policy is crippling the yen. In the near-term and ahead of Powell’s speech, we get US PCE inflation data for July. The core measure is the key number and the one the Fed takes most interest in. This is expected to fall 0.1% from its current annual rate of 4.8%.

The DXY got close to a fresh 20-year high earlier this week hitting 109.27. Remember the dollar index is heavily weighted towards the euro (>57%). The mid-July top is 109.29. Prices have been tracking sideways this week. It looks like a bullish flag-type formation before it tries to break higher. Surely the Fed won’t blink now as it faces up to red hot inflation, way above target? Support is 107.99 and then 107.32. The 50-day SMA is 106.44.