WEEK AHEAD: MAY 24

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The Fed has started to talk about simply talking about tapering so I talk about what it means for the dollar, the gold price and for the EUR/USD chart. I will also preview the economic calendar for this week. Thanks! Rich

Video Script

Fed Tapering, Forex & Gold | WEEK AHEAD 

 

Hi everyone, for my preview of the week ahead in forex and financial markets this week I’m paying particular attention to the US dollar – including a look at the EUR/USD currency pair and gold. That’s because the Fed just hinted for the first time that it is thinking about the need to taper its quantitate easing- which we all know means slowing down the printing press! So, I’ll look at some charts and go over the tapering story – as well as preview highlights from the economic calendar this week.

Now let’s take a quick look at the euro and gold charts to see what we are dealing with here. You can see that on these daily charts, gold and the euro have been in an uptrend and both just bumped into resistance and pulled back after those FOMC minutes. Whether this resistance holds in the coming days will be key.

Switching over to the economic calendar. Take note it could be a slightly slower start to the week in Europe where many countries are on holiday for Whit Monday. GDP data from Germany and the US will make for interesting comparisons when it comes to trading the respective currencies in the EUR/USD pair. Remember you can’t compare GDP as like-for-like because one is quarter over quarter and one is year-over-year BUT the picture we expect to see is one of much stronger growth in the US than Europe in Q1. Housing demand has come down a bit in New Zealand so there is less pressure on the RBNZ to talk about rate hikes at its meeting. Finally, keeping up the inflation theme –core PCE is released Friday and expected to come in well over the Fed’s target of 2%.

Turning back to our favourite conversation in forex trading – what is the Federal Reserve going to do next? The reason I’m asking this time is because the FOMC minutes that came out last week were a bit of a shocker. The minutes said: ‘some policymakers said it would be appropriate to start discussing a plan for adjusting asset purchases in the upcoming meetings if the economy continued to make rapid progress.’ Then going beyond that they said ‘some policymakers were worried the inflation increase could reach "unwelcome levels" before providing sufficient evidence for a policy reaction.’

So translating all that –the minutes are preparing markets for QE tapering in the next few meetings but they are also warning that they may even have to act early before CPI data shows a sustained trend higher. Pretty much all of that is theoretically bullish for the US dollar and bearish for gold because it implies a US rate hike is coming sooner.

However, these minutes are 2 weeks old – and almost every Fed policymaker has said, since they came out, that they think inflation is ‘transitory’ and that there is no need to over-react. That kind of commentary has been bearish for the dollar – and explains why the dollar index snapped a 4-day losing streak after the minutes. 

So, let’s see how this resistance in euro and gold works, because if it gives way and prices move higher – it shows the markets are brushing off the Fed minutes and suggests more dollar weakness to come. If the resistance holds, the Fed may have turned the trend lower.

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.