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22/08/2014: Trading outlook ahead of Yellen’s speech at Jackson Hole


On low newsflow days markets can drift slightly. This is especially in the summer with low trading volumes. This seems to be what investors are facing today as investors enter a wait and see mode of trading. There is a reluctance to take a view ahead of what may be a leading speech from Janet Yellen at Jackson Hole.

However in the past few minutes there has been a slight fall away in European assets on news that part of the Russian aid convoy have moved into Ukraine without Ukrainian agreement or a Red Cross accompaniment. This could result in a slight elevation of caution amongst investors and indeed there has been a slight up-tick in safe haven assets such as gold pushes back above $1280 and the yen sees some slight strength. Meanwhile, the yield on the German 10 year Bund (see below) is now trading consistently below 1.0%. European equities are also trading at day lows with the DAX and CAC down around half a percent. S&P 500 futures have turned from slight gains to around 1 point loss at the open.

Bund   22082014

There is very little economic data for traders to get worked up about, only really with Loonie traders looking at the Canadian CPI data at 13:30BST which is expected to show a slight increase to 1.9%.

Traders will be looking at Janet Yellen for a steer on US monetary policy. While she is likely to acknowledge the improvement in the US economic data recently, she will try to keep expectations of a rate hike under control for now. Fed officials such as Charles Plosser have been providing hawkish commentary when interviewed at Jackson Hole but there is still much uncertainty in the outlook and she likely to play a balancing force. If this is to be the case, there could be a slight dollar net correction this afternoon.

Expect volatility to be high during the speech with traders leaping on every word, however the ultimate move could be for a small retracement of the recent dollar strength. However the move higher in the dollar recent suggests that the marekt believes that there is a sea change underway. Yellen’s speech today could produce a few ripples but ultimately the Fed is starting to get more serious on tightening. This should continue to drive dollar strength moving forward.

I will therefore be looking for any dollar weakness in the forex pairs as a chance to trade. I see a jump in EUR/USD towards $1.3330 as a chance to sell. I think that if GBP/USD gains towards $1.6650 this is also a selling opportunity. I would also look to buy Dollar/Yen on support above 103.00.

The gold price should also be driven lower by ongoing dollar strength and I see $1240 in the coming weeks. However, once again any dovish comments from Janet Yellen should see a near term rally in gold. There is resistance around $1290 which would be a chance to sell again.

Very interestingly, the DAX has found resistance at 9400 which I said yesterday is a long term historic pivot level. This could now mean this is the limit to this near term rally. I will be interested to see how the DAX reacts at the support around 9250 if a correction sets in. I continue to remain concerned about the upside momentum which has been lost out of the FTSE 100 rally. The intraday chart shows a bearish divergence on the 14 hour RSI and the index has also hit the buffers around 6785. The support at 6740 is now key to the near term recovery.


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