US30 – Risk appetite improves amid more balanced Fed commentary Somoybulletin

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  • Fed pares back hawkish commentary
  • Risk appetite improves for now
  • US30 faces major tests of resistance

Equity markets are bouncing back on Tuesday after a risk-averse start to the week, buoyed perhaps by some promising Fed commentary on Monday.

It would appear the recent surge in bond yields hasn’t gone unnoticed at the central bank, to the extent that Fed officials are coming across as less hawkish in their views. Higher yields have been cited by various policymakers in what appears to be a sign that they are a little uneasy about how much influence recent commentary has had.

While the Fed has previously signalled that another rate hike is likely in the tightening cycle, the central bank is ultimately data-dependent and won’t want markets getting too carried away. It’s a tough balancing act and inflation data will be released on Thursday which should provide further clarity again after Friday’s mixed jobs report.

It is perhaps a little surprising that markets have bounced back as quickly and strongly as they have given the clear risk aversion we saw at the start of the week. Hamas attacks in Israel created uncertainty around the Middle East and investors will no doubt continue to monitor the situation very closely.

In light of the Fed commentary on Monday and how it’s contributed to the turnaround in the markets, there’ll be a lot of focus on further appearances today including Raphael Bostic, Christopher Waller, Neel Kashkari, and Mary Daly from the Fed and Christine Lagarde, President of the ECB.

Correction yet to be tested

The US30 is on course for a fifth consecutive session in the green but it’s yet to face a significant test following the sharp decline over the couple of weeks that preceded it.

US30 Daily

Source – OANDA on Trading View

We could now be reaching the point at which the pullback is tested, with the initial one potentially coming around the 200/233-day simple moving average band. There appears to be decent momentum in the recovery which is promising but it will be interesting now to see whether that can be sustained the close it gets to that level.

Just above here is also the 38.2% Fibonacci retracement level and the prior support from August which could reinforce that resistance level. Further major resistance lies just ahead too so this will be a very interesting test for the index, the likes of which we haven’t seen so far over the last week.

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