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Fed’s Policy Shift from Dovish to Neutral is Clearly Visible – May 27-31

May 27, 2013
 
It was FED FOMC minutes, followed by FED Chairman’s testimony that gave better understating about Fed’s intention towards its loose monetary policy stance, which should be more dependent on US economic recovery. But last week’s unusual behavior happened in the Japanese market, as Japan’s stock market fell like nine-pin, which was most after last major Tsunami. Offloading of stocks created demand for Yen that skyrocketed.
Though European economy is struggling to recover, it is encouraging to note that good part of economic indicators that were released last week from USA showed healthy growth. However, stronger growth did not help US Dollar to rise sharply nor gold prices eased. This is because of fall in US equity and bond market prices that helped 10-year yield to rise holding crucial 2 pct level since last 2-working days.
Both, US stocks and US Treasury bonds are important future guidance for the financial market, but both are showing uneasiness after Fed Chairman’s clear signal that shifts in Fed’s easing monetary policy stance is now a good possibility attaching few strings before it act. Since, through Fed’s QE asset purchase policy program, liquidity injection is guaranteed, but by adding clause in MPS that both side is a possibility is clear warning by FED that it can halt injection or even withdraw funds, which ids possible at the time of maturity.
As I have frequently pointed out that the real test for the market would be if the economy maintains its current growth pace and if the labor market continues to grow at an average of over 200.000 jobs per month. This may be the comforting factor for FED to respond to the Hawkish members demand to refrain from further easing and tapering could be easier proposition for the FED to implement, as policy has certainly shifted from Dovish to neutral.              
Meanwhile, after reasonably acceptable economic numbers last week, release of European economic data this week will once again be the dominating factor that will reflect true picture of economy in the Euro-zone regain. It remains a challenging and daunting task for the fiscal and monetary authorities to strike a balance because of many financial and administrative risks. However, improved economic numbers may provide a breathing space, which will be temporary unless challenges are met.
 
GOLD $ 1386.57 = Gold could be tricky this week, as all eyes will be glued to the global stock market and US bond market too could be provide a guideline. Japanese stock market will be keenly watched for clues. But Fed Chairman’s testimony should be taken a serious warning as growth could upset all the odds. Since I remain bearish for gold. I will try to pick the top as I see risk for sharp slide as policy shift from Dovish to to neutral is clearly visible. 
Although initially bias could be mildly on the upside, break of $ 1398-00 is required for a test of $ 1410-12 zones. A below $ 1368-70 will pave way or a test of $ 1350 levels. Test of $ 1333 is still a possibility.
EURO @ 1.2927 = I can still see upside momentum and expect Euro to find support around 1.2810. A break of 1.3025 will pave for 1.3080-90. But upside beyond 1.3150 could be a tough ask. Range for the week 1.2750 – 1.3180.
GBP @ 1.5122 = Cable has strong support around 1.5010-20 levels, which may not be easy to surrender. Needs to push beyond 1.5180-90 for a test of 1.5255-60 or else 1.4955. Range for the week 1.4955- 1.5290.
JPY @ 101.22 = Japanese Yen needs to break 102.25 for 103. However, a push beyond 100.10 could ring the alarm bell for deeper correction as 99.60-70 will be tested and Yen Bulls could make all out effort to test and break 99.20-40 zones. Range for the week 99.20 – 103.50.
AUD @ 0.9642 = Aussie still faces risk of further drop as odds does not favour the Australian currency and hence, could be sold on the rise. But suspect that currency has the ability to make big corrective up move.AUD needs to move beyond 0.9750-60 levels or else see risk for a test of 0.9520-40 zones on break of 0.9780. However, I would not recommend selling around 0.95 level if seen, as see risk for sharp bounce. Range for the week 0.9510 – 0.9880. 
 
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