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KCM Trade’s Tim Waterer: Markets Are Positioning Ahead of Powell Testimony

June 21, 2023

Right now, it’s all about positioning in financial markets before Jerome Powell faces the music on Capitol Hill. Investors are taking some risk off the table as a precaution in case the Fed Chairman has his hawkish hat on (figuratively speaking) when testifying before Congress. If Powell’s remarks remind traders that two more rate hikes are expected by the Fed, this could sour the mood of the market. Much like what happened after the initial FOMC decision and press conference by the Fed Chairman last week. But regardless of whether we hear a hawkish or dovish tone from the Fed Chairman this week, the mantra of the FOMC will likely remain one of data-dependence when it comes to future policy decisions

The USD received a boost courtesy of stronger housing data. As a result, the DXY index moved higher, while the euro and sterling were in retreat mode against the greenback. But moves to the downside were limited ahead of the Powell testimony. Elsewhere, the AUD has been on the slide after the RBA minutes showed that last week’s rate rise was a close call by the central bank board. But while the decision last week to move the benchmark rate to above the 4%level may have been a tight call, there is no evidence yet to suggest that the RBA is near the peak rate setting, particularly with labour market still hotting up

Financial markets had been expecting stimulus moves by the PBOC, but the measures delivered so far seem tepid at best and unlikely to provide the necessary jolt required to reinvigorate the world’s second largest economy. Moves to loosen the MLF (Medium Lending Facility) and LPR (Loan Prime Rate) have underwhelmed expectations and have left financial markets wanting more when it comes to PBOC measures, hence the muted response by risk-assets.

Gold is again on the backfoot due to the absence of fresh drivers of demand for the precious metal. Traders have been looking else wherefor yield in the current environment, which combined with a lack of safe-haven demand has gold again edging lower. Spot gold currently sits below a former support level around US$1942 which has since turned into an area of resistance. The prospect of any short-term recovery in the gold price could be contingent on signs of dovishness in the Fed Chairman’s upcoming testimony.

Meanwhile, the oil price remains pressured after recent moves by the PBOC failed to shore-up demand expectations. However, oil prices did manage to move off the lows during Asian trading hours, with the WTI spot price recovering ground to trade at US$71.40. Gains of any significance to the upside could be hard to come by in the short term unless something happens to improve the demand outlook for the backend of 2023. Which is why traders will be keenly waiting to see if the PBOC has any more moves to make with regards to generating faster Chinese growth.

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