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Treasury Yields React Negatively To FOMC's "Relatively Soon" Comment

Published 27/07/2017, 06:10
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Unanimously, the FOMC members have taken a decision to keep the Fed fund rate unchanged between 1% and 1.25% referring to a reduction of the Fed's balance sheet, which will happen 'relatively soon'

Nearly all of the markets pundits have seen in this signal paving the way for the decision of unwinding in the next meeting on September 19-20 to be enacted, starting from the third quarter of this year

The Fed which refrained from giving a clearer message about its $4.5 trillion balance sheet has mentioned in its statement following last June 15 meeting that it is currently expecting to begin implementing a balance sheet normalisation program this year, as the economy evolves broadly as anticipated.

The unwinding plan will start by $10 billion a month cap "$6 billion from Treasuries and $4 billion from mortgage-backed securities", before rising every 3 months by this same scale, until the caps amount reach $30 billion of US treasuries and $20 billion of MBS.

The FOMC stressed that the current low inflation pressure, which is why it is in no rush to raise rates, and is giving further boost to the labour market which did not aggregate enough wage inflationary pressure.

The FOMC has mentioned this time that it will be monitor inflation developments closely.

After The FOMC underscored its appreciation of the current inflation pressure easing down in its released assessment following last June meeting, when it expected the inflation rate to continue to be in the short run below its 2% yearly inflation target, before stabilising around this rate over the medium term as it targets.

Last June the committee expected the inflation rate to be at 1.6% this year down from 1.9% it's expected in March, but it kept its forecast for 2018 and 2019 at 2% yearly.

May US PCE broad figure and also core figure rose by only 1.4% year on year, while the Fed's target over the medium term is 2% yearly.

The PCE is the Fed's favourite inflation barometer and it is to be released about June next Tuesday.

While the markets focusing will be next Friday on the release of Q2 GDP which is expected to show annualized growth by 2.6% after 1.4% expansion in the first quarter.

The FOMC expected last June 2.2% annualized GDP growth rate this year from 2.1% it expected in March.

U.S. 10-Year yield retreated again below 2.30%, after rising last Tuesday to 2.35% level, as The US treasuries yields have reacted negatively to this new reference by the FOMC which pushed the greenback down across the broad raising the gold again above 1260$.

While Dow Jones and S&P 500 could keep their existence close to their all time highs, after higher than expected earnings reports of the second quarter and amid energy prices rebounding could be extended to the beginning of last June levels.

After deeper than expected falling of US EIA crude oil inventory in the week ending on Jul. 21 by 7.208m barrels to 498.142m suggesting that OPEC cut could start to take its toll on the inventories.

After the downside wave from $1296.16 engulfed the previous falling from $1292.76 to $1214.28, gold could rebound from its higher low at $1204.85 which came above last March 10 bottom at $1194.98.

Gold could gather momentum to extend its creeping up to be traded now close to $1265, after getting over its daily SMA50, its daily SMA100 and daily SMA200, however it is still exposed to forming a lower high below $1296.16.

XAUUSD daily Parabolic SAR (step 0.02, maximum 0.2) is reading today $1236.92 in its 12th day of being below the trading rate.

XAUUSD daily RSI-14 is now referring to existence at a higher place inside its neutral area reading 63.941.

XAUUSD daily Stochastic Oscillator (5, 3, 3) which is more sensitive to the volatility is having now its main line in its overbought region at 82.636 leading to the upside its signal line which is in the same territory at 81.225.

XAU/USD Chart

Important levels: Daily SMA50 @ $1250.19, Daily SMA100 @ $1248.69 and Daily SMA200 @ $1229.92

S&R:

S1: $1204.85

S2: $1194.98

S3: $1180.75

R1: $1296.16

R2: $1337.31

R3: $1367.25

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