The June 16 Fed meeting seemingly marked a turning point in the Fx and metals markets. The USD soared while precious metals dumped as the prospects of higher interest rates in the US reversed the complacent trends that lasted for much of the past 12-15 months.

 

As we suggested in our weekly analysis this Monday, the markets were to remain range-bound as traders awaited the release of the all-important Nonfarm payrolls report today. The NFP report is important not only because of the plentiful attention it usually gets but also because of the context in which it comes currently. Namely, the Fed has said, “we are going to raise rates if inflation doesn’t come back down and we are waiting for further progress in the labor market”. The markets wanted to see if NFP and the other jobs reports will confirm the Fed’s slightly shift to the hawkish side. It didn’t. At least not entirely, hence we are seeing the dollar correcting.

 

 

The actual numbers of today’s Nonfarm payrolls are good and beat the expectations. 850K jobs were created in June versus the 720K consensus forecast by economists. But the initial reaction is dollar negative, likely because the numbers are not as “good” as USD bulls hoped. Particularly, the other pieces of data are not as bullish as needed to make the Fed more hawkish. Namely, average hourly earnings (wage growth) came slightly below expectations and the unemployment rate rose to 5.9% instead of falling to 5.7%. 

 

The slower wage increase vindicates the Fed’s view that inflation is transitory, while the increase in unemployment means there is still a long way before the labor market fully heals. There is nothing in today’s data that will make the Fed more hawkish, and in fact, the overall takeaway is that the Fed will remain comfortable with its current stance that “inflation is transitory”. This is why the dollar is lower today.

 

We look at today's USD reaction in the broader context on the chart below (EURUSD is chosen because it's the currency pair that most closely represents broad USD trends).

 

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Still, it’s unlikely that this negative USD reaction will extend much next week. In fact, it’s more likely that this is just a retracement within a new bull dollar leg that started with the June 16 Fed meeting. That’s because the Fed is still ahead of other central banks, particularly the ECB when it comes to reaching its inflation and full employment goals. The Fed is now a central bank that is looking for reasons to be hawkish rather than one that seeks to pump as much liquidity as possible as part of a policy to support the economy in a crisis. 

 

On the contrary, the ECB is still far behind in achieving its inflation and growth goals compared to the Fed. This divergence between the world’s two largest central banks should keep the EURUSD pair pressured to the downside over the coming weeks and months.

 

 

With a broadly stronger dollar likely to be the name of the game for the summer, the probabilities are that gold weakness will take over strength. Indeed, the charts have turned bearish across several timeframes. Most importantly, the monthly chart has recorded an ugly bearish candle that foretells risks of the price falling below the March/April lows around 1675.

 

The technical situation and key S/R zones are shown on the chart below.

 

 

The tall red June candle comes as a rejection of the green May candle of the same size. Moreover, it comes at a point (the break above the 1870 - 1900 resistance) that many viewed as a bullish breakout. This is a significant bearish shift on the charts. 

 

The attempt to break higher has clearly been rejected, and the price has returned inside of the previous range. Fake breakouts like this one often result in continuation in the opposite direction of the attempted breakout. From a technical perspective, further downside price action is very likely in this context.

 

The first support lower is at the March/April lows around 1675. The technicals are saying the probabilities are very high that this zone will be at least reached and tested. What happens will give important clues as to where gold will be headed next. A break below these lows will clear the road to lower gold price. The next important support zones lower are 1600 and 1550.

 

• June 25, 2021 - Short GBPUSD from 1.39, 1st target reached (trade in progress to 2nd target toward 1.37; stop moved to around 1.38, price should stay below 1.38 zone)

 

 

 

Best Regards,
Philip
Senior Forex Manager
FX Trading Revolution
w: www.fxtradingrevolution.com 

e: philip@fxtradingrevolution.com

 

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