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US30 - Drops to One Month Low near 27000 as Fed Locked in with Low Rates



US30 - Drops to One Month Low near 27000 as Fed Locked in with Low Rates
In the last week or so, the US30 index has dropped sharply from its six month higher above 29000 back to a one month low near 27000. Any support received at 28000 was convincingly broken after having provided some support for a few days. It had previously broke through the key 28000 level which provided stiff resistance for more than one week, on its way to the high, and this level may provide some resistance again should the US30 index rally. In the two weeks leading up to the resistance at 28000, the US30 index moved steadily higher reaching a then six month high just above 28000.

For a few weeks in July the US30 index meet resistance at another key level of 27000 whilst bouncing off support at 26000, and the 27000 level is highly likely to offer some support to the index if needed. For the most part of the last two months, the US30 index has traded in a range between support at 25000 and resistance at 28000, with the 27000 level also playing a key role in more recent weeks.

Throughout June, the index enjoyed solid support from another key level at 25000, while receiving some resistance from 26000 remaining in a range between these levels, up until the break a few weeks ago. Throughout April and May 25000 level had turned away the index on several occasions, reinforcing how significant the 25000 level had become in this period, and it has been able to provide some strong support to the index in the last month or so. Should the index decline further, the 25000 level will be expected to continue to offer support.

Throughout April, the US30 index rallied higher to a one month high near 25000, while the key level of 22500 supported the index. During this period, the US30 index settled right down content to trade right around the 24000 level, with the 25000 level looming above and continuing to offer resistance whenever the index rallied. The US30 index is also likely to receive some support from 22500 should it break back lower through 25000. Since mid-March the US30 index has done very well to regain most of the lost ground, after the significant drop where it moved from all time highs above 29000 down to a three year low near 18000.

At their last meeting, the U.S. Federal Reserve (Fed) decided to keep short-term interest rates anchored near zero, citing an economy that was falling short of its pre-pandemic levels.  Two weeks ago the Fed announced a major policy shift, saying that it is willing to allow inflation to run higher than normal to support the broader economy and labor market.  Fed officials have outlined a revised policy in which it now will target “average inflation,” meaning a higher tolerance for inflation above 2% before even thinking about raising rates from current levels.  Previously, the central bank would look to cut rates when unemployment began to fall as a sign that inflation would not be far behind.In an appearance earlier this week, Fed Vice Chairman Richard Clarida explained the policy further.  Mr Clarida said the Fed won’t be raising rates just because unemployment drops to a certain level, and he emphasized that hitting the inflation target in a sustainable manner would require an “asymmetric” policy response, a distinct difference to the goal of hitting inflation in a “symmetric” manner.  Mr Clarida added that the central bank is more committed to make sure its goals are hit and will be using aggressive policy to get there.  “We’re willing to allow the economy to operate at full strength even if it means a modest overshoot of the inflation objective,” Mr Clarida said.

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This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.