Financial market research and analysis

The FX markets are lacking a clear direction, as European traders remain shy of turning long in the US dollar before the Fed minutes.

The pound cleared resistance at 1.30 against the US dollar following yesterday’s solid inflation data. The GBPUSD gained further momentum after the jobless claimant count unexpectedly fell by 8’600 in July. The unemployment rate remained unchanged at 4.9%, while the average weekly earnings' growth matched the 2.4% year-on-year expected.

Cable is now set for a further recovery both against the US dollar and the euro. There is good potential for an upside correction in the pound market, which has been under heavy selling pressure following the Brexit vote.

The FTSE broke the 6900 support and the second attempt could be successful in encouraging a deeper downside correction.

The Bank of England (BoE) could comfortably buy £1.17 billion worth of gilts yesterday, versus £3 billion offered by the market. The UK’s gilt market took a breather, as well as the BoE. Yet the rally in the gilts market is certainly not out of steam.

Surprising the market is not Fed’s cup of tea

The US dollar gained broadly in Asia before the release of the Federal Reserve (Fed) minutes due later in the day. Yet European traders were less enthusiastic vis-à-vis their long USD positions.

At the latest FOMC meeting, the Fed kept the possibility of a September hike on the table. Yet the market gives no more than a meagre 22% chance for a rate hike to happen next month. Fed Dudley’s comments earlier in the week revived some Fed hawks and reversed the negative course in the US dollar. Nevertheless, the content of the Fed minutes may remain too blurry to keep the Fed-hawks in charge of the game. Therefore, the positive vibe in the US dollar could remain short-lived. Traders should be prepared for a pullback in the US dollar following the Fed minutes.

In fact, the Fed has preferred teaming up with the market rather than playing against it so far. Surprising the market is not the Fed’s cup of tea. It is certainly too early for many to digest potentially higher US rates and the Fed is aware of the sentiment cross-markets.

According to the activity in the US sovereigns, the probability of a December hike is currently being priced in at 51%.

Yen retreats

The yen bounced higher against the US dollar and gained back the 100 level. Given the little enthusiasm vis-à-vis Japan’s fiscal and monetary stimulus plans, the yen market could have some difficulties to gather a sufficient, and maintainable bid to trigger a mid-term bullish reversal in the yen crosses. The US yields remain at depressed levels for the moment. Unless we see a sustainable recovery in the US yields, the upside in the USDJPY will remain limited. The US 10-year sovereign yields are slightly below 1.60%.