In August, FX markets remain in the shadow of high payrolls data and Jackson Hole expectations. High payrolls data cause the dollar index to rise but after the first impact volatility remains low except for gold. After Powell’s Jackson Hole speech Dollar return to month near %0 and so will gold and EURUSD. S&P 500 finish the month with a %2.63 return.
The Month of Central Banks
After the Jackson Hole relief, the world economy is bracing for another key month for central banks. This week ECB and at the end of the month, FED will decide what to do about asset purchases. A lot of ECB board members talked about inflation risks and better than expected recovery. EU is still slower than the US in terms of inflation but the recent surge put CPI to the highest level since 2011. Vice president of the ECB De Guindos talked about inflation, “We have to check that there are no second-round effects because that would mean this temporary impact would become structural”. Some members of both FED and ECB are worried about the inflation may not be temporary as expected, at least some of it. But will they act on it? That will be the question in September.
ECB will revise their forecast in this week’s meeting. Short-term up revisions for both GDP and CPI are highly likely and maybe some for the medium-term as well. PEPP will be discussed whether to keep high-level purchasing or slow and spread more equally. Long-term refinancing operations are expected to remain unchanged.
FED will too revise their forecast but whether or not to set a date for tapering will be the key topic at the September meeting. Powell’s remarks at the Jackson Hole and weak August jobs report are signaling that FED may pass this meeting too. Bullish pressures may remain low for the dollar index in the first half of the month unless ECB makes a dovish surprise.
The Markets Expects Slower PEPP
According to economists who participated in Bloomberg’s survey, ECB will slow the PEPP purchases in the fourth quarter and end the program as planned in March.
One of the key events in September will be the German elections. After many years, Germany is preparing for an election without Merkel. Merkel’s party CDU/CSU is carrying the weight of years of administration. Recent polls show Social Democrats has taken the lead. Whoever wins though, a coalition will be needed. An SPD-led coalition may be slightly positive for the EUR.
You can check the interactive poll results at politico.eu.
Chinese economic recovery slowed significantly in August. After rising cases started from mid-July, China implements some restrictions to contain the wave, including partial closing of some major ports. This weakens the already shaky consumer recovery. CPI, retail sales, industrial production, export suffer a setback. The latest signal of slowing down is the PMI numbers. Manufacturing and Services PMI both fall below the growth line, 50. Impact on services was especially hard.
The US Jobs Report
US Jobs Report came weak for August. A lot of economic data were worse than expected throughout August and finally, payrolls data too announced weakly. Citi’s economic surprise index fall below zero for the first time since the pandemic crash and pandemic programs’ jobless claims rose two weeks in a row when the end of the program is just so close. Delta was the main villain that causes the weak month. Nonfarm payroll change announced 235k vs 733k expected, unemployment fall to %5.2 from %5.4 but participation rate did not increase. Average hourly earnings rose to %4.3 on a yearly basis which is maybe the best part of the report.
In September, the jobs market may pick up the slack. Pandemic unemployment help will end this month which may be the necessary incentive to looking for jobs. There are more than 10 million open jobs according to JOLTS businesses ready to pay more for labor according to hourly earnings. These three factors may increase the recovery speed starting September.
Gold fundamentals have been giving mixed signals in August. Inflation expectations drop slightly, bond rates remain subdued, ETFs’ gold holdings decreased. According to our model, gold’s expected price is 1856, close to the spot price. 1M implied volatility of gold is at its lowest since July, which means markets expect a calm month.
One other thing to consider in September is Gold’s seasonality. For the last 10 years, Gold’s worst month was September by far. Gold price increased only 3 times in previous years and the 10-year average of Gold returns was -%2.97.
233-day moving average always has been key support or resistance for gold. Since mid-July, the moving average has been denying the upside moves. The price was denied 8 times from the moving average but after the weak jobs report gold has finally closed the day and the week above this key resistance. But for more up moves, gold must hold above the MA and break the 1830-1834 resistance zone. If that happens, the recent surge may extend to 1850-1863.
For down moves, 1803-1790-1765 are the key support levels. For longer-term 1675 is the main support.
EURUSD has entered a key month. ECB’s decisions will be important for Euro for the next few months as well as the FED’s. After Eurozone CPI reached %3, some of the ECB members start to raise their voices against loose policies.
The downtrend channel was broken and EURUSD is testing the Fibonacci %38.2 retracement level. RMI’s buy signal indicates more upside for Euro is possible. RMI’s buy signals usually end with a little correction or a new bullish trend. Which one of those is happening right now may be determined by key resistance levels. 1.1894-1.1920 resistance zone will be the first one. 1.1965 and 1.20 will be next if EURUSD is able to pass this resistance zone. As for support levels, 1.1806-1.17 can be followed.
Brent is testing the 13-year trend line for 3 months but cannot break it. As long as this trend holds, bullish waves remain short and downward pressures accumulate. For more details please check our previous post about Brent.
A possible correction is due for S&P 500 but as long as the uptrend continues there is no reason to assume the correction may begin anytime. The 55-day moving average is the first major support. Since the pandemic shock, the price test and bounce back from this MA 6 times. The other 3 times when the price fell below this MA, the 100-day moving average gave to support the bullish trend. As long as these moving averages hold, the bullish trend may continue.
A possible correction is due for S&P 500 but as long as the uptrend continues there is no reason to assume the correction may begin anytime. The 55-day moving average is the first major support. Since the pandemic shock, the price test and bounce back from this MA 6 times. The other 3 times when the price fell below this MA, the 100-day moving average gave to support to the bullish trend. As long as these moving averages hold, the bullish trend may continue.
For our silver analysis, you can check our “Silver Outlook” post.