UPDATE: Is the Worst Really Over for US Stocks?

Last month, we posed the question: “Is the worst over for US stocks?”

Answer: apparently not.

A week after that August 10th article, the S&P 500 did climb higher, only to be resisted by its 200-day simple moving average.

The blue-chip stock index even closed above the 50% Fibonacci retracement level, which was the key criteria for suggesting that the worst is over for the 2022 rout in US stocks.

As cited in the August article, according to data by the CFRA and S&P Global, in 18 of the 19 ‘bear markets’ seen since World War II, the S&P 500 then went on to a fresh bull run after closing above its 50% Fib retracement line.

But as the saying goes across financial markets “Past performance is no guarantee of future results.”

And that track record (stated above) now needs to be updated to “18 out of the past 20 bear markets …”.

Since that August article, the S&P 500 has unwound all of its summer gains, even printing intraday prices not seen since end-November 2020.

In essence, we have seen “worse” levels this week for the S&P 500 compared to those June lows.

Why Did the S&P 500 Erase Its Summer Gains?

Recall the premise for the S&P 500’s summer rally, as stated in last month’s article:

“Arguably, the primary reason is that markets believe that the Fed has done the largest chunks of its rate hikes already.”

Additionally, the S&P 500’s summer gains was based on the idea of a “dovish pivot” by the Fed.

That’s to say that markets had expected the Fed to be less courageous about sending US interest rates higher, for fear of triggering an economic recession.

But now we know better.

Since then, we have seen the US inflation data stubbornly printing near its highest levels in around 40 years.

Hence, many Fed officials, including Fed Chair Jerome Powell himself, have since sent a strong message to the markets:

The US central bank is hell bent on taming multi-decade high inflation by sending US interest rates even higher, and is willing to tolerate economic pain along the way.

Markets duly paid heed and raised their forecasted peak for this ongoing Fed rate hike cycle by about 90 basis points!

  • Back in August, markets expected that US rates won’t go higher than 3.6% in March 2023.
  • Today, that forecasted peak is now expected to reach nearly 4.5% by March.

What Do Higher Us Interest Rates Mean for the Us Economy?

Essentially, the Fed wants to see some “demand destruction”.

Policymakers want to see less money in an economy chasing after scarce goods and services.

That should, in theory, discourage businesses from ramping up their selling prices, hopefully resulting in slower inflation.

However, more economic pain could also bring about a shrinking economy i.e. a recession.

What Do Higher US Interest Rates Mean for the US Economy?

More downside likely.

With the US unemployment rate forecasted by the Fed to rise to 4.4% by end-2023, significantly higher from the 3.7% figure from last month, more jobless Americans should translate into less demand/spending in the US economy, which should also mean less earnings for companies.

Lower earnings due to such “economic pain” should also lead to lower share prices, with such a narrative already dragging on the S&P 500.

Tech Not Spared

Also, higher interest rates mean its tougher for so-called “growth companies” to continue borrowing cheap loans to fund its expansion plans while forsaking profitability.

Hence, as higher interest rates chock some of the potential growth (and earnings potential) for these growth companies, that has led to lower stock valuations as well.

Keep in mind that, with many of these growth stocks concentrated in the tech sector, no surprise then that the tech-heavy Nasdaq 100 has a year-to-date decline of almost 30%, falling deeper than the S&P 500’s 22% year-to-date decline.

However, the Nasdaq 100 is still managing to not surpass its June lows … for now.

Also, note that tech-led declines would only exert more downward pressure on the S&P 500.

This is because IT stocks (think Apple, Microsoft, Nvidia, etc.) account for over a quarter (26.6%) of the S&P 500.

So, if you couple the S&P 500’s exposure to tech stocks with the weightage of consumer discretionary stocks (e.g. Amazon, Tesla, McDonald’s, etc. – which tend to take an earnings hit when customers have less disposable income during times of economic pain), then a US recession that’s triggered by higher US rates would only exert more downward pressure on the S&P 500.

NOTE: The S&P 500 index is widely used as the benchmark to gauge how overall US stocks are performing.

So What’s Next for the S&P 500?

Brace for the low-3000s.

In market fears surrounding a US recession continue ramping up, that may send the S&P 500 to as low as:

  • 3400: around the pre-pandemic peak set in Feb 2020
  • 3200: double-bottom from Sept/Oct 2020

Though for more immediate consideration, the S&P 500 is testing a crucial support level – its 200-week simple moving average.

This technical indicator has supported the S&P 500 in recent years, with such an episode last occurring at end-2018.

Athough the Fed was also busy raising interest rates back in 2018, those benchmark rates today have already surpassed those levels and are now standing at its highest since 2008 at 3.25%.

And US inflation is still around its highest levels since the early 1980s.

So if this 200-week SMA doesn’t hold, the S&P 500 is likely to then set course for the low-3000 region, dragged down by heightened  fears over a potential US recession and higher-for-longer US interest rates.

For more information visit FXTM.

Week Ahead: Hawkish “Fed speak” May Lift USD Index to Fresh Two-Year High

Economic Calendar for Next Week

Traders and investors worldwide will be closely monitoring the slew of speeches by officials out of the world’s most influential central bank, amid these other major economic data releases and events in the final days of Q3 2022:

Monday, September 26

  • EUR: Germany September IFO business climate and expectations
  • EUR: ECB President Christine Lagarde speech
  • USD: Speeches by Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Loretta Mester

Tuesday, September 27

  • CNH: China August industrial profits
  • USD: Speeches by Fed Chair Jerome Powell, Chicago Fed President Charles Evans, St. Louis Fed President James Bullard
  • Brent: OPEC to publish World Oil Outlook

Wednesday, September 28

  • AUD: Australia August retail sales
  • EUR: ECB President Christine Lagarde speech
  • US crude: EIA weekly oil inventory report
  • USD: Speeches by San Francisco Fed President Mary Daly, Atlanta Fed President Rafael Bostic, Chicago Fed President Charles Evans

Thursday, September 29

  • NZD: New Zealand September consumer confidence
  • AUD: Australia August job vacancies
  • EUR: Germany September CPI, Eurozone September economic confidence
  • USD: US weekly initial jobless claims, 2Q GDP (final)
  • USD: Speeches by Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly
  • Nike quarterly earnings

Friday, September 30

  • NZD: New Zealand September consumer confidence
  • JPY: Japan August jobless rate, retail sales, industrial production
  • CNH: China September PMIs
  • EUR: Eurozone August unemployment rate, September inflation
  • GBP: UK 2Q GDP (final)
  • USD: Speeches by Fed Vice Chair Lael Brainard and New York Fed President John Williams
  • Tesla’s AI day

Earlier this week, the US Federal Reserve signalled its intent to send US interest rates even higher than expected.

Such policy signals then spurred the US dollar onto greater heights, while dragging many of its major peers to fresh lows, including:

  • EURUSD: trading below parity, lowest since 2002
  • GBPUSD: trading below 1.13, lowest since 1985
  • USDJPY: spiked briefly above 145, Yen’s weakest against US dollar since 1998 (before USDJPY eased back lower due to currency intervention by Japan’s Ministry of Finance).

READ MORE: Why FX markets react to central banks?

There’s Still Room for the Us Dollar to Climb Even Higher

This is because, somewhat oddly, markets have yet to fully price in another 75-basis point hike for the next FOMC meeting in early November. And that’s despite the hawkish signals out of the just-concluded FOMC meeting earlier this week.

The odds for a fourth consecutive 75bps hike (at November FOMC meeting) currently stand at 85.6% at the time of writing.

And if those odds are ramped up closer to 100%, encouraged by Fed officials who continue banging on the same hawkish drums in the coming week in drilling home the message that US interest rates will continue to push higher and stay elevated for longer in the central bank’s quest to quash stubbornly-high inflation, that may well push the equally-weighted USD index to the 1.25 mark, levels not seen since the onset of the global pandemic in 2020.

Furthermore, if there’s also a ramping up of geopolitical tensions in the days ahead, that should spur more demand for the greenback as a safe haven asset.

But first, we could see an immediate pullback for this USD index, seeing as its relative strength index is on the cusp of breaking into overbought territory.

For more information visit FXTM.

Mid-Week Technical Outlook: G10 Currencies

This negative development hit stocks as investors rushed to safe-haven destinations like the dollar, gold, and government bonds. With tensions likely to escalate between Russia and Ukraine following the latest news, risk-off may remain the name of the game ahead of the Federal Reserve rate decision this evening.

We have a couple of potential trading opportunities on our radar that could be triggered by not only the Fed but BoE and key economic reports this week. Our focus will fall on G10 currencies and our tool of choice will be none other than technical analysis.

DXY Gearing For a Breakout?

Heightened geopolitical tensions injected dollar bulls with fresh inspiration this morning. A hawkish Federal Reserve could feed the beast, pushing the Dollar Index (DXY) beyond 110.78 before the end of today! Such a development could encourage a further incline towards 111.00 and 112.50, respectively. A move back below 109.14 may result in a selloff back to 107.75.

EUR/USD Slams Into 0.9900

Bears are knocking on 0.9900’s door and may force their way through this support if the dollar continues to appreciate. The EURUSD is under a lot of pressure with bears enjoying the ride downhill. A solid breakdown below 0.9900 could encourage a selloff towards 0.9700.

GBP/USD Builds Downside Momentum

The BoE decision ON Thursday will heavily influence the GBPUSD near-term outlook. A hawkish central bank that moves ahead with a jumbo rate hike could throw pound bulls a lifeline. However, upside gains are likely to be capped by growth fears. Prices have the potential to sink lower if a daily close below 1.1350 is secured.

USD/JPY Trapped Within Range

Over the past few days, the USDJPY has been trapped within a 300-pip range with support at 142.00 and resistance at 145.00. The trend is bullish with prices trading above the 50, 100, and 200 SMA. A solid breakout above 145.00 could inspire a move towards 146.00 and higher. If prices sink back towards 142.00, we can see the USDJPY challenge at 139.50.

AUD/USD Breaks Below 0.6700

A stronger dollar continues to drag the AUDUSD lower. Should prices descend below 0.6650, this could trigger a selloff to 0.6520. For bulls to jump back in, prices need to trade back above 0.6700 with 0.6850 acting as a key level of interest.

Bonus: S&P 500

Appetite for riskier assets has been hit by mounting geopolitical tensions. This may translate to more losses on the S&P 500 which remains bearish on the daily charts. A strong move below 3810 could result in a selloff towards 3700 and 3636. If bulls can push prices back above 3905, expect a potential incline towards 3945 and the 100-day SMA at 4000.

Bonus: Gold

How gold performs this week will be heavily influenced by the Fed meeting on Wednesday evening. As highlighted earlier, the precious metal remains under pressure and could be in store for more punishment if the dollar and Treasury yields jump. A move below $1655 could swing open the floodgates, dragging prices towards $1600 and lower.

For more information visit FXTM.

Week Ahead: Fed to Fan Red-Hot US Dollar?

Take your pick: the US Federal Reserve, the Bank of England (meeting delayed from last week), the Bank of Japan, and Norges Bank (the central bank of Norway) are all set to hold their respective policy meetings.

Though of course, the Fed surely takes centre stage considering that it’s the most powerful central bank in the world and holds so much sway across global financial markets.

Calendar for Next Week

Here’s what to expect for the coming week:

Monday, September 19

  • UK markets closed for funeral of Queen Elizabeth II

Tuesday, September 20

  • JPY: Japan August CPI
  • CNH: China loan prime rates
  • AUD: RBA September meeting minutes
  • CAD: Canada August CPI

Wednesday, September 21

  • USD: Fed rate decision
  • US crude: EIA weekly oil inventory report

Thursday, September 22

  • NZD: New Zealand 3Q consumer confidence, August external trade
  • JPY: Bank of Japan policy decision
  • NOK: Central Bank of Norway rate decision
  • GBP: Bank of England rate decision
  • USD: US weekly initial jobless claims
  • EUR: Eurozone September consumer confidence

Friday, September 23

  • AUD: Australia September PMIs
  • EUR: Eurozone September PMIs
  • GBP: UK September PMIs and consumer confidence
  • CAD: Canada July retail sales

Hawkish Expectations

Here’s what markets are forecasting for the upcoming Fed decision due mid-week:

  • 75 basis point hike fully priced in.
  • 25% chance of a 100bps hike.
  • US interest rates to peak around 4.5% by March 2023 (from the current 2.5%, before the September FOMC meeting next week).
    That’s an extra 50 basis points on top of the 4% peak forecasted just this time last week (before the latest US CPI was released – more on that in a bit).

Such hawkish expectations (that the Fed would have to trigger more of these outsized rate hikes to combat stubbornly elevated inflation) has restored this equally-weighted US dollar index back to its recent peak, trading around levels not seen since the onset of the global pandemic.

The ramp-up in expectations for a more aggressive Fed came in the wake of the US August consumer price index (CPI) released on September 13th.

We learned that inflation rose by a higher-than-expected 8.3% in August, compared to the 8.1% figure forecasted by economists.

The core CPI print (excluding more volatile items such as food and energy prices) also came in 0.2 percentage points above the forecasted 6.1% figure.

In other words, US inflation remains stubbornly elevated, despite the Fed having already hiked by 225 basis points since March.

Recall how before this week’s US CPI release, some segments of the markets believed that the Fed may just be contented with a 50bps hike at the September FOMC meeting.

Such expectations have been dashed by the hotter-than-expected August CPI that was unveiled earlier this week.

The higher-than-expected inflation numbers are set to frame the Fed’s upcoming pivotal decision.

  • Should the Fed indeed trigger that gargantuan 100bps hike, that may send this equally-weighted USD index up to 1.23, a fresh 2-year high.That 1.23 region may offer initial resistance for this USD index, as it did back in May 2020. Stronger resistance is set to arrive around 1.25, as was the case back in early April 2020.
  • However, should the Fed unexpectedly deliver a dovish shocker, perhaps by triggering only a 50bps hike or suggesting that most of its intended rate hikes are already in the past, that could see this USD index swiftly unwinding recent gains.A moderating greenback would in turn allow the rest of the FX space room to breath a massive sigh of relief.

For more information visit FXTM.

Mid-Week Technical Outlook: Indices

The hotter-than-expected US inflation report detonated explosive levels of volatility across the board as fears intensified over the Fed triggering a recession to control inflation. US consumer prices rose 8.3% in the year to August, down from July’s 8.5% number but higher than the 8.1% market forecast. Traders have priced in the chance for a 75 basis point US rate hike in September and November following the smoking hot inflation figures. This development reinvigorated dollar bulls, sending the Dollar Index (DXY) back above 109.50 while gold prices smashed into the $1700 psychological support.

This afternoon our focus falls on the global equity space, especially US indices which remain highly sensitive to inflation data and Fed rate hike expectations.

S&P 500 Smashes Into Support Zone

The S&P 500 smashed into the 3945 level with the destructive force of a wreaking ball.  Prices cut through the 50-day and 100-day Simple Moving Averages, erasing three days of gains. It is safe to say that bears are back in control with a strong break below 3945 opening a path towards 3905. A strong decline below this point could open a path towards 3810. Further weakness below this point may trigger a selloff towards 3700.

Nasdaq Wobbles Above 12000

Just like the S&P 500, the Nasdaq tumbled like a house of cards yesterday. Prices created a heavily bearish candle on the daily charts with 12000 acting as a key point of interest. A solid breakdown below 12000 could open the doors towards 11500 and 11208, respectively. Should 12000 prove to be reliable support, an incline back towards 12300 and the 50/100 Simple Moving Averages.

FTSE 100 Signals Further Downside

After cutting through the 50, 100, and 200-day Simple Moving Averages – bears could step into higher gear on the FTSE100. The trend is turning bearish with the recent break below 7300 suggesting a steeper decline towards 7150. If this level is unable to contain bears, prices have the potential to retest the 7000 level. Alternatively, a move back above 7300 could signal a rebound that takes prices back towards the 200-day SMA and 7400, respectively.

EURO STOXX 50 Back Within Range

This index remains trapped within a range with resistance at 3650 and support around 3450. After prices failed to break above 3650, bears seized the driving seat – taking the Euro Stoxx 50 back towards 3550. Given how recession fears continue to gnaw at risk sentiment, this may cap gains across the equity space. The negative momentum may take prices back towards 3450 and 3400, respectively.

Nifty 50 Pushes Against Resistance

The Nifty 50 remains bullish on the daily charts as there have been consistently higher highs and higher lows. The MACD is trading above zero with bulls currently eyeing the 18050-resistance level. A strong breakout above this point could encourage a further incline towards 18500. Should 18050 prove to be reliable resistance, a decline back towards 17700 and lower could be on the cards.

For more information visit FXTM.

Trade Of The Week: Are USD Bulls Throwing In The Towel?

The mighty dollar has been an unstoppable force in 2022, flattening everything in its path.

But back in August, we questioned whether the king of the currency markets was losing its grip on the FX throne after the Dollar Index (DXY) punched above 109.14. Our argument was based on reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures.

We were thoroughly humbled after USD bull’s stepped into higher gear, pushing the DXY to a fresh 20-year high beyond 110.00

There was also some action on the equally weighted dollar index which respected a bullish trend, pushing prices above the previous 2022 high of 1.21840.

Fast forward to today, king dollar looks shaky.

It is safe to say that it lost momentum last week and has stumbled into the new week under selling pressure. The greenback has weakened against most G10 currencies month-to-date and could extend losses despite the recent hawkish comments from Fed officials including Jerome Powell.

With inflation cooling in the US economy, this could encourage the Fed to drop its aggressive stance toward higher rates. If such becomes reality, dollar bears may receive the thumps up to enter the scene – dragging both the DXY and equally weighted USD index lower.

As we questioned roughly back in August, are dollar bulls throwing in the towel or just taking another break before ramping up the momentum in Q4? Some clues may be offered this week in the form of the US inflation figures among other key reports.

The Low Down…

Traders are predicting an 88% probability of a 75-basis point rate hike in September.

These expectations were reinforced by comments from Federal Reserve Chairman Jerome Powell who reaffirmed the need to fight soaring inflation. Hawkish comments by Fed officials last Friday also boosted Fed hike bet, making the jumbo rate hike this month almost a done deal.

Interestingly, the greenback has tumbled despite the Fed expected to hike rates by 75 basis points for the third time in a row. Fed hawks are clearly in the building while strong US economic data initially supported expectations that the US central bank would not be slowing the pace of hike anytime soon. However, US inflation likely slowed for a second month in August thanks to falling gas prices. While this may not be enough to derail the Fed from firing another monetary bazooka this month, it may impact the central bank’s decision in November and December.

The Week Ahead…

This could be another wild week for the dollar due to the pending US economic reports.

On Tuesday, the latest inflation figures will be published which are expected to show consumer prices cooling 8.1% year-on-year in August. This would be lower than July 8.5% print and would mark two straight months of easing in the headline annual print. Should the report match expectations, this could allow the Fed to drop its aggressive approach toward rate hikes – resulting in a weaker dollar.

It will be wise to keep an eye on the core CPI annual print which is expected to rise 6.1% – which will be the highest level since April. The core inflation does not include food and energy prices in the calculation because of volatility.

Much attention will be directed towards the weekly initial jobless claims, August retail sales, and industrial production figures on Thursday which could provide further insight into the health of the US economy. A strong set of reports may reinforce rate hike bets which is dollar positive, while a negative set of reports could dampen aggressive rate hike expectations – dragging the dollar lower.

Friday offers the US consumer sentiment for September. Consumer sentiment was revised higher to 58.2 back in August and is expected to hit 60 this month. A positive figure could provide USD bulls a helping hand before the week comes to an end.

Time For Dollar to Tumble?

After failing to secure a weekly close above 1.2184, the equally weighted dollar index could be preparing to tumble lower.

Prices remain under pressure on the weekly charts with a solid breakdown below 1.1900 opening a path toward 1.1700 and 1.1600, respectively. Should 1.1700 prove to be reliable support, a rebound back towards 1.1900 could be a possibility.

For more information visit FXTM.

Trade Of The Week: Can ECB Hawks Rescue Euro Bulls?

Our focus falls on the European Central Bank (ECB) which is expected to unleash a monetary bazooka in the form of a 75-basis point rate increase! Such a move will place the ECB among the ranks of 40+ central banks that have increased rates by 75bp or more in one go this year in the face of soaring inflation.

Before we take a deep dive into what to expect from the ECB meeting on Thursday, it is worth keeping in mind that the Eurozone economy remains vulnerable and faces the growing risk of recession. The unsavoury combination of ongoing geopolitical tensions, untamed inflation, and energy crisis continues to darken the outlook for Europe with the latest development revolving around Russia’s Gazprom dumping salt into the wound.

Interestingly the euro was able to hold its ground versus most G10 currencies in August excluding the dollar. However, things are not looking too pretty quarter-to-date with the euro down roughly 5.7% against the king of the currency space.

Since the EURUSD secured a solid daily close below parity back in late August, prices have struggled to push higher thanks to technical and fundamental factors.

The outlook for the EURUSD remains bearish on the daily, weekly, and monthly timeframe with prices wobbling above 0.9900 as of writing. Given how the ECB is expected to join the jumbo hike club, could this be enough to cushion the downside and rescue euro bulls?

The Low Down…

Eurozone inflation hit a new record high in August at 9.1%.

This was higher than the 8.9% witnessed in July and above the 9% market forecast. With inflation hitting such lofty and uncomfortable levels, market expectations intensified over the ECB adopting an aggressive approach toward rates in an effort to cap inflation. According to Bloomberg, traders and predicting a 66% probability of a 75 bp rate hike in September. It does not end here.

Last Friday, Gazprom made a last-minute decision to suspend natural gas flows through the Nord Stream 1 pipeline – ultimately worsening the squeeze on Europe’s energy supplies. This move is likely to expose the economy to downside shocks and create more uncertainty and fuel inflationary pressures as gas prices soar.

What to Expect From ECB?

Before thinking about what to expect from the ECB on Thursday, there are a couple of things to keep in mind before the big day. ECB hawks are certainly in the building but the question is how much resolve they have to tame inflation. It’s worth keeping in mind that the latest ECB economic forecasts could offer fresh insight into inflation expectations. It will be interesting to see what the central bank has to say about the energy crises and whether this will push the Eurozone into recession. Let’s not forget about the depreciating euro and how it could impact the central bank’s policy outlook.

Possible Outcomes on Thursday

  • ECB hikes rates by 75 basis points and strikes hawkish tone opening doors to further jumbo hikes. This move may inject euro bulls with fresh inspiration, pushing the EURUSD back above parity towards 1.0100. However, upside gains may be capped by the gloomy outlook for the Eurozone.
  • ECB hikes rates by 75 bp but expresses concern over the economic outlook, reducing bets of more aggressive hikes down the road. Euro pops higher but bears seize control – limiting gains below parity
  • ECB surprises markets with a 50 bp hike and strikes dovish tone, this could excite euro bears – triggering a selloff that breaches the 0.9900 floor.

EUR/USD: The Path of Least Resistance South…

As the subtitle says, the path of least resistance for the EURUSD points south.

Earlier we identified how the currency pair was bearish on the daily, weekly and monthly timeframe. Looking at the weekly timeframe, prices are respecting a bearish channel and trading well below the 50-, 100- and 200-week Simple Moving Average. Sustained weakness below parity could trigger a selloff towards 0.9700 and 0.9600, respectively. A strong weekly move back above 1.1000 may suggest an incline towards 1.0200.

Zooming in on the daily, prices remain bearish but there could be a period of consolidation if 0.9900 proves to be reliable support. A solid daily close below this level could trigger a selloff towards 0.9700. Should 0.9900 prove to be reliable support, a rebound towards parity and potentially higher could be on the cards before bears re-enter the scene.

For more information visit FXTM.

How Does the US Dollar Typically Fare in September?

DXY Historical Performance in September

Since 2017, this month has seen an average monthly gain of 0.9% for DXY, second only to February’s 0.99% average climb.

Here’s how the greenback has fared historically against its major peers over the past five Septembers (2017-2021):

  • USDJPY: The Japanese Yen is typically the worst-performing DXY constituent for the month.
    JPY sees its largest monthly drop against the US dollar for the year in September, at a whopping average of 1.43%!
    That’s far higher than second-placed June’s 0.86% monthly decline
  • EURUSD: Euro typically weakens against the US dollar this month by 1.06% on average.
    The shared currency’s woes in recent years are in stark contrast to the longer-term context, with the world’s most-traded currency pair enjoying an average September gain of 0.60% over the past 30 years.
  • GBPUSD: The Pound has had mixed fortunes, with a negligible drop of just -0.03% on average.
    The Septembers of 2017-2019 registering monthly gains that offset the monthly declines over the past two straight Septembers.

Note that EUR and JPY are the two largest constituents of the benchmark Dollar index, making up a combined 71.2% of the DXY.

Here are the weightings of the currencies that make up the benchmark DXY:

  1. Euro (EUR) = 57.6%
  2. Japanese Yen (JPY) = 13.6%
  3. British Pound (GBP) = 11.9%
  4. Canadian Dollar (CAD) = 9.1%
  5. Swedish Krona (SEK) = 4.2%
  6. Swiss Franc (CHF) = 3.6%

Hence, the seasonal declines for EUR and JPY are enough to offset Sterling’s relatively resolute performance in recent Septembers, pushing the DXY up higher.

US Dollar Forecast for September

Now onto a forward-looking note, this month is set to be no different from the 5-year trend.

The US dollar is expected to register further gains in September 2022, even as DXY now trades around its highest levels in 20 years.

US Dollar Index daily chart

And here’s what markets are forecasting may happen for the US dollar versus its major peers by the end of this month:

  • EURUSD: 59% chance of hitting 0.985
  • USDJPY: 70% chance of reaching 141.0
  • GBPUSD: 87% chance of touching 1.15

For brevity’s sake, we shall keep the fundamental outlooks for these respective major currencies for future articles (do keep checking our Daily Market Analysis page for the key events and reasons that move FX markets).

Suffice to say that, as we enter this new month, it’s rather evident from a fundamental perspective that the US dollar is at least set to remain well-supported in the lead up to Q4, at the expense of the rest of the FX world.

Trade of the Week: Gold to Retest $1700 Support?

And depending on how this Friday’s US nonfarm payrolls report turns out, the precious metal could retest that psychologically-important level for support.

Why Has Gold Tumbled Again?

The precious metal is clearly wilting in the wake of the scorching US dollar and the uptrend in Treasury yields.

These moves (gold down, dollar/Treasury yields up) have been fuelled by revived bets that US interest rates will move higher, and more importantly – stay elevated, for longer.

Markets have been gripped by Fed Chair Jerome Powell’s hawkish speech delivered at Jackson Hole this past Friday.

Here are the key takeaways:

  1. The Fed is set to persist with sending US interest rates higher.
  2. US interest rates are set to stay higher “for some time” (as in, the Fed isn’t likely to unwind its rate hikes in a hurry, as some segments of the markets had predicted up until recently).

In essence, the US central bank remains committed to subduing in inflationary pressures, even if it results in some pain for the economy.

Such language heralds a stronger US dollar and Treasury yields marching higher: a bad mix for bullion bulls.

What Does the Upcoming US Jobs Report Have to Do With Gold Prices?

Depending on the demonstrated strength of the US jobs market, that would inform the Fed as to how high it could send US interest rates.

  • A still-resilient US labour market would essentially give the green light for the Fed to send its benchmark rates even higher.
    In turn, that should heap more downward pressure on gold.
  • Signs that the US labour market is starting to creak under the weight of higher interest rates may force the Fed to adopt a more gradual approach with its rate hikes; thus spelling some relief for gold.

What to Look Out For in This Friday’s US Jobs Report?

As things stand, markets are forecasting the following:

  • US labour market added a further 300,000 jobs in August, judging by the headline US nonfarm payrolls (NFP figure. If so, that would mark a 20th consecutive month of job gains.However,an official print of 300k would also mark its lowest number of jobs added since December 2019.
  • The August unemployment rate would stay at 3.5% – at its pre-pandemic lows.

Overall, the US jobs market is expected to remain resilient, even though the Fed has been hiking interest rates since March.

How Might Gold React to The Upcoming NFP?

  1. If the US labour market adds more jobs than forecasted, that could lead to more declines in gold prices.

Potential support levels:

  • $1712: using the downward trendline that has gone from resistance to support level.
  • $1700: stronger support should arrive at this psychologically-important line, noting that previous dips below $1700 have proved short-lived in recent years.

Such declines would be based on the notion that still-robust hiring in the US is likely to give the green light to the Fed to continue sending interest rates higher, which in turn should heap more downward pressure on gold prices.

    1. However, if the US jobs market is starting to creak, that could force the Fed to adopt a more ‘gradual’ approach with its rate hikes.

That is to say policymakers may be more comfortable with triggering rate hikes that are relatively smaller than the 75bps hikes it has already triggered at each of its past two policy meetings. Smaller rate hikes may then be the way forward for policymakers, if they begin to fear choking the US jobs market and sending the US economy into a deep recession.

Such a narrative could then prompt a short-term rebound in spot gold.

Potential resistance levels:

  • $1764: around 50-day simple moving average (SMA)
  • $1800: stronger resistance set to arrive at psychologically-important mark

Summary

Markets are currently forecasting a slightly higher chance (21.5%) of spot gold touching $1700, rather than prices reaching its 50-day SMA (20.8%) around $1764.

Ultimately, it could all come down to whether or not this Friday’s US nonfarm payrolls reports exceeds market expectations.

For more information please visit FXTM.

What’s “Jackson Hole” and Why It Matters for the Nasdaq 100?

This annual event is held in Jackson Hole, Wyoming (hence, the name widely used by market participants to refer to such a pivotal event),which features some of the top officials from major central banks (e.g. US Federal Reserve, European Central Bank, Bank of England, etc.), as they discuss pressing issues that face the global economy.

And there’s no issue more pressing now than the red-hot inflation around the world, which has forced central bankers worldwide into aggressively raising their respective interest rates.

Why “Jackson Hole” Matters?

What’s said (or sometimes, not said) by these central bankers, especially the Fed Chair, has the potential to move markets.

For example, at the 2021 symposium, Fed Chair Jerome Powell stuck with his “transitory” view on inflation and adopted a relatively “dovish” tone. In other words, he and most of his colleagues at the US central bank thought then that consumer prices won’t keep soaring for long, and didn’t expect to trigger its first hike until 2023.

After last year’s symposium concluded (and on the back of Powell’s dovish and transitory stance), US stocks continued marching higher and notched fresh record highs.

The Nasdaq 100 went on to post an all-time peak above 16,500 back in November.

12 months on, and we’re in an entirely different world.

US inflation is at its highest since the 1980s, and the Fed has hiked by 125 basis points since March, and counting.

The Nasdaq 100 has since plummeted to sub-13,000 levels, and the tech-heavy index is still more than 20% lower so far this year despite its recent summer rally. The drop in stock markets have been predicated on the Fed’s aggressive battle against inflation.

What To Look Out For Tomorrow?

The spotlight will shine greatest on Fed Chair Powell’s speech, scheduled for 2:00 PM GMT tomorrow (Friday, August 26th).

And here’s the biggest question on everyone’s minds: how much higher will the Fed hike US interest rates?

  • Markets are forecasting a 69% chance that the Fed will press ahead with yet another 75 basis point hike at its September meeting. Those 69% odds are a far cry from the 26% chance priced in at the start of August, hence the drop by as much as 6.3% since mid-August for the Nasdaq 100.
  • Also, markets expect the Fed Funds Rate to peak out at 3.75% by March 2023, from the current 2.50%. That implies a 75bps hike in September, followed by another 50bps hike, before the Fed then has to start lowering its benchmark rates to start cushioning US economic growth.

With the above narrative in mind, should any of Powell’s comments force markets to rejig such expectations, be it for the size of the September hike or the peak for this ongoing rate hike cycle, that could prompt major moves across a multitude of asset classes.

Why Focus On the Nasdaq 100?

Notice how the tech-heavy Nasdaq 100 is sensitive to where US interest rates go.

The Nasdaq 100 began diving since the latter parts of 2021, as market began to increasingly expect that the Fed will be forced into hiking interest rates sooner than policymakers had expected.

And sure enough, the Fed triggered its first hike in March 2022, with the Nasdaq 100 falling into a bear market (20% drop from its recent peak) thereafter.

Potential Scenarios

1. The Nasdaq 100 may be coerced into unwinding more of its summer gains should Powell pave the way for a September 75bps hike and force markets to move their forecasted rate hike cycle peak higher than 3.75%.

Key support levels:

  • 12,605 (100-day simple moving average)
  • 12,395 (23.6% Fibonacci retracement level from its November through June descent)

2. However, the Nasdaq 100 may be emboldened to extend its summer rally if Powell in his Friday speech pays greater heed to the cracks that are starting to show in the US economy.

After all, US GDP has already met the criteria for a “technical recession”, while the August services PMI showed a larger-than-expected contraction. Such a cautious tone may result in less-hawkish-than-feared commentary tomorrow, potentially translating into gains for riskier assets, including tech stocks.

Key resistance levels:

  • 13,231 – 13,405 (38.2% Fib level and early-August cycle peak)
  • Around 13,500 (resistance from upper downtrend line from ATH and early-May peaks)
  • 13,730 (mid-August peak)
  • 13,900 (200-day SMA and 50% Fib line)

Judging by how the Nasdaq 100 is attempting to claw its way back above the psychologically-important 13,000 line at the time of writing, it appears that fears over the most-hawkish scenario have been overdone.

Equity bulls will be hoping that Powell will strike a tone that’s less-hawkish-than-feared, which could result in more relief for the Nasdaq 100 and other riskier assets.

Still, it remains to be seen (or rather, heard) what Powell’s policy clues will be, if any.

And any newfound resolution after such heightened uncertainty may lead to a massive move for the Nasdaq 100 in the aftermath.

For more information visit FXTM.

Week Ahead: Big Week For Gold As Jackson Hole Looms

It’s that time of the year people!

All eyes will be on the annual Jackson Hole Economic Symposium where central bankers and financial heavyweights discuss key economic issues that impact the world. Given how this major event could offer investors fresh insight into the Fed’s thinking on rates and inflation, get ready for a potentially wild week for financial markets.

Economic Calendar for Next Week

Before we take a deep dive into what to expect from Jackson Hole Symposium, here are the scheduled economic data releases/events in the coming week:

Monday, 22 August

  • CNH: China loan prime rates
  • GBP: UK Foreign Secretary Liz Truss and Rishi Sunak Campaign

Tuesday, 23 August

  • EUR: Eurozone S&P Global PMIs, consumer confidence
  • GBP: UK S&P Global/CIPS UK PMIs
  • USD: US new home sales, S&P Global PMIs, Minneapolis Fed President Neel Kashkari’s speech

Wednesday, 24 August

  • ZAR: South Africa CPI
  • USD: US durable goods, pending home sales
  • Oil: EIA oil inventory report

Thursday, 25 August

  • JPY: Japan PPI
  • Jackson Hole Economic Policy Symposium, Wyoming
  • EUR: Germany GDP, IFO business climate, ECB minutes
  • USD: US GDP, initial jobless claims

Friday, 26 August

  • NZD: New Zealand consumer confidence
  • Fed Chair Jerome Powell’s Speech at Jackson Hole
  • NGN: Nigeria’s GDP
  • USD: Consumer income, University of Michigan consumer sentiment

Macro Data and Jackson Hole Meeting

The main risk event and potential market shaker could be Federal Reserve Chair Jerome Powell’s speech at Jackson Hole on Friday, August 26th.

Investors have many questions for the Fed thanks to the latest developments revolving around inflation and the US labour force. According to the Fed minutes for July’s meeting, policymakers saw inflation as a significant risk to the economy and indicated they would remain aggressive until the beast was tamed.

However, inflation in the United States cooled to 8.5% in July, encouraging traders to cut bets over how aggressive the Fed will be on rates. In regards to the jobs market, it defied recession fears with NFP increasing 528k in July. This has split expectations over the size of the next rate hike in September. Market players need clarity on how big future rate hikes will be and the strength of the US economy in the face of high inflation.

What Can Happen to Gold after Jackson Hole?

We expect many assets to be influenced by the Jackson Hole but our attention falls on gold. Powell’s remarks could be the fundamental spark the precious metal has been waiting for these months. Markets are still pricing in a 52% probability of a rate hike in September but the Fed could use Jackson Hole to shift the scales.

If Powell strikes a hawkish tone and reinforces expectations around the Fed moving ahead with another jumbo 75 bps hike, this could drain appetite for zero-yielding gold. Alternatively, a cautious sounding Powell may reduce the odds of a jumbo hike, providing some support to gold.

Gold daily chart

Prices are already under pressure on the daily charts and heading for their first weekly decline in five. The precious metal could be in store for more pain ahead of Powell’s speech if the dollar continues to appreciate. Talking technicals, $1740 remains a level of interest in the short term.

Pulling our focus away from the Jackson Hole and gold, there are a couple of key economic reports from major economies to keep a close eye on. We could see some volatility across currency markets in the run-up to the Symposium due to this.

For more information visit FXTM.

Mid-Week Technical Outlook: Pound Crosses In Focus

Consumer prices rose 10.1% in July from a year ago after a 9.4% gain in June. This was the highest reading since February 1982 as prices rose for food, housing & utilities and alcoholic beverages among other products/services. Although this red-hot CPI report will reinforce expectations over the BoE aggressively raising interest rates, it will also create more uncertainty over the UK’s economic outlook.

We saw the Pound appreciate against most G10 currencies following the report as BoE rate hike bets jumped.

GBP/USD remains in wide range

The GBPUSD remains in a wide range despite the red-hot inflation figures. Support can be found at 1.2000 and resistance around 1.2155. A solid break under 1.2000 may open the doors towards 1.1900 and lower. Alternatively, a strong breakout above 1.2155 could spark a move towards 1.2250 and 1.2350.

GBP/JPY Set to Push Higher?

It has been a roller coaster ride on the GBPJPY. Prices have been volatile, choppy and all over the place. Prices are back above the 100-day Simple Moving Average and slowing approaching 164.00. A strong move above 164.00 signal an incline towards 166.00. If bears are able to pull the GBPJPY back below 162.00, the next level of interest cant be found at 160.00.

EUR/GBP in Downtrend

The EURGBP remains in a bearish trend as there have been consistently lower lows and lower highs. Prices are trading below the 50,100 and 200-day Simple Moving Average while the MACD trades below zero. Sustained weakness below 0.8440 could encourage a selloff towards 0.8340. A breakout above 0.8440 is likely to encourage bulls to target 0.8500.

GBP/AUD Heading Into Resistance?

Pound bulls seem to be gaining momentum on the GBPAUD with prices pushing towards the 50-day Simple Moving Average. There could be some resistance here as the 100-day SMA resides just above. If these two obstacles can be cleared, prices may test the 1.7650 level and 1.7800, respectively. Should bulls tire and prices sink back below 1.7300, the next key point can be found at 1.7000.

For more information visit FXTM.

Trade Of The Week: Are Dollar Bulls Running On Empty Fumes?

Dollar bulls dominated the FX space during the first half of 2022, trampling any obstacles that came their way. G10 currencies were practically flattened by the greenback’s might with the pound shedding 10% and yen over 15%.

But the scales of power seem to be veering in favour of bears in Q3 as the fundamental drivers shift. This can be reflected in the currency’s mixed performance since the start of July.

After reaching its highest level since mid-2002 back in July, the Dollar Index (DXY) has found itself vulnerable to losses thanks to profit-taking. Reduced bets over how aggressive the Fed will be on rate hikes and signs of easing inflationary pressures also capped upside gains.

Taking a quick look at the equally weighted dollar index, prices staged a rebound this morning as disappointing data from China fuelled global recession fears. Nevertheless, the trend still favours bears due to the consistently lower lows and lower highs.

With inflation cooling in the largest economy in the world and investors cutting rate hike bets, USD bulls may be in trouble. However, recession fears and geopolitical risks could send investors rushing toward the dollar which acts as a beacon of safety in times of uncertainty.

So, are dollar bulls are running on empty fumes or taking a break before switching to higher gear? While we may not get the answer this week, the pending FOMC meeting minutes, US economic data, and speeches from Fed officials could offer fresh insight.

The Low Down…

There were three major drivers behind the dollar’s appreciation this year.

  1. Interest rates
  2. Strength of the US economy
  3. Dollar’s safe-haven status

The Fed’s aggressive approach towards rising interest rates in the face of soaring inflation sent the dollar rallying as rate differentials widened against other currencies. As investors looked at the strength of the US economy, relative to others this also boosted appetite for the greenback. Lastly, geopolitical risks, global growth concerns, and overall uncertainty sent market players rushing toward the world’s reserve currency.

Fast forward to today, signs of easing inflationary pressures have prompted investors to cut bets on how aggressive the Fed will be in raising interest rates. The latest CPI figures revealed inflation cooled 8.5% in July compared to the 8.7% expected and a significant drop from the 9.1% increase in June.

In regards to the US economy, it contracted for the second straight quarter in Q2, signalling an unofficial start of recession, further dampening appetite for the dollar. Given the unfavourable macroeconomic environment and geopolitics at play, investors remain cautious and this could result in increased appetite for the safe-haven dollar. All in all, when considering how 2/3 of the major drivers powering the dollar have weakened, this could encourage bears to pounce.

The Week Ahead…

It could be a volatile week for the dollar thanks to the pending US reports and speeches from Fed officials.

However, all eyes will be on the Federal Reserve meeting minutes on Wednesday. This will be closely scrutinized by investors for any fresh clues and insight into what policymakers were thinking when rates were hiked by 75 basis points for a second straight meeting. If the minutes sound hawkish, this could offer the dollar some support.

On the flip side, any hint of doves may encourage some fresh dollar weakness. It will be wise to keep an eye on the US retail sales report for July published mid-week and speeches by Kansas City Fed President Esther George and Minneapolis Fed President Neel Kashkari on Thursday.

Dollar to Resume Decline?

After breaking out of the weekly bearish channel, the equally weighted dollar index could be gearing for steeper declines.

Prices turned bearish after securing a solid weekly close below 1.1700. Sustained weakness under this level could trigger a selloff towards 1.1380.

Should 1.1700 prove to be reliable support, a move back towards 1.1900 could be on the cards.

On the daily charts, prices punched higher this morning thanks to fundamental forces but the technical picture still favours bears. A move back below 1.1700 could suggest a decline towards 1.1630 and 1.1450. Should 1.1700 prove to be reliable support, prices may test the 50-day Simple Moving Average and 1.1950, respectively.

For more information visit FXTM.

Is The Worst Over for US Stocks?

The S&P 500 index is widely used as the benchmark to gauge how overall US stocks are performing.

And much has already been made about the selloff that had persisted through the first half of this year, driven by fears that the Fed will send US interest rates soaring (which it has, by 225 basis points since March).

Since posting a record high early this year, this blue-chip index then fell by as much as 23.55% on June 16th, crossing over into ‘bear market’ territory.

However, since mid-June, the S&P 500 has climbed by 14.8%. Yesterday (Wednesday, August 10th), this index posted its highest closing price since May.

The question now that’s being hotly debated now is whether the worst of the US stock market’s selloff is already over.

And markets are watching closely whether we’ll see a key piece of technical evidence on the S&P 500 today that could help substantially address that very question.

But first … let’s try and understand what may be contributing to the S&P 500’s gains over the past couple of months.

What’s driving this rebound in the S&P 500?

Arguably, the primary reason is that markets believe that the Fed has done the largest chunks of its rate hikes already.

Since March, the Fed has already hiked by 225 basis points. At the time of writing, markets think there are only 125 basis points in hikes left in the Fed’s tank, to be triggered between next month and March 2023.

After that, markets think the US central bank then has to start unwinding its rate hikes (i.e. lower interest rates) sometime in the middle of next year, so as to either avoid sending the US into a full-blown recession, or at least support the demand that the Fed has already gone about destroying in the name of quelling red-hot inflation.

Recall that, generally speaking, riskier assets such as stocks dislike the thought of US interest rates moving higher.

However, if the worst of those fears (markets at one point thought that the Fed would trigger a gargantuan 100 bps hike) had already been priced in, any relief from such perceived worst-case scenarios should translate into a recovery for risk assets.

Hence, investors have been emboldened by the above narrative, and have been rewarded (so far) for “buying the dip”.

Which brings us back to the main question …

Is the worst of this year’s selloff over for the S&P 500?

And here’s the important technical indicator that could confirm whether that the mid-June low of 3637.3 would be the lowest point for the S&P 500 for this latest selloff.

The S&P 500 has to close above 50% Fibonacci retracement level.

Looking back at the chart above, the S&P 500 has managed to breach the 4228.6 line, which marks the halfway point from its peak-to-trough plummet in the first half of this year.

According to data compiled by CFRA (research firm) and S&P Global (ratings, analytics, and market intelligence agency), in 18 of the 19 bear markets witnessed since World War 2 (with the exception being the bear market of 1973-1974), the S&P 500 goes on to make a recovery/mark a new bull run once it closes back above its 50% Fibonacci retracement line.

In other words, once the S&P 500 secures a daily close above 4228.6, market participants can then say with greater confidence that the market bottom is indeed in the past.

But wait, there’s more …

Also, the S&P 500 has already posted a higher-high above the late-May cycle peak of 4205.7.

Such a technical event may carry less weight compared to a daily close above the 50% Fib retracement level, but can be used as a point in deciphering whether the S&P 500’s downtrend has been broken.

But let’s be careful.

To be clear, markets never move in a single, straight line.

And that isn’t to say that the S&P 500 can’t falter back below 4228.6.

Instead, the idea is that the S&P 500 will not fall lower than the mid-June bottom of 3637.3 if the index posts a daily close above that 50% retracement level (or so suggest the proponents of such a signal).

S&P 500 still at the mercy of the Fed/US economy

Risk assets have in the past two months clearly basked in the thought that the incoming Fed rate hikes would be fewer and smaller from here on out.

Such a notion was emboldened by yesterday’s (Wednesday, August 10th) lower-than-expected headline US inflation print.

The consumer price index (CPI) “merely” rose by 8.5%. That is lower than almost all economists’ had forecasted (at least those surveyed by Bloomberg), and also lower than June’s year-on-year CPI advance of 9.1%.

Those participating in recent gains appear to harbour the belief that US inflation has peaked, which in turn may allow the Fed to step away from being so aggressive in its battle against multi-decade high inflation.

And so, it remains to be seen whether US inflation has truly peaked. Also, whether a full-blown, risk-off recession could undermine the S&P 500’s attempts at a full recovery.

More confirmation could be had at these upcoming economic events:

  • August 25-27: Fed’s Jackson Hole Symposium
    (where central bankers gather to talk about issues pertaining to the economy and monetary policy. More clues about the Fed’s view on inflation/rate hikes?)
  • September 2: US August nonfarm payrolls report
    (can the US jobs market stay resilient enough to handle US interest rates going much higher?)
  • September 13: US August CPI release
    (a print below July’s 8.5% may confirm that inflation in the world’s largest economy has indeed peaked)
  • September 21: FOMC meeting
    (Fed to hike by 75bps? Or “just” 50bps?)

So stay alert and watch this space.

For more information visit FXTM.

Markets Mixed as Spotlight Shines on US CPI

Overnight, Wall Street’s main indices were mostly flat with a sales warning from Nvidia dragging down the tech sector.

Looking at currencies, king dollar has retreated from recent highs while EUR/USD is trading around the sticky 1.02 level. Gold seems to be waiting for a fresh fundamental spark while oil prices are under pressure as OPEC’s monthly report and EIA data loom.

On the data front, Australian consumer sentiment slumped in August thanks to the horrible combination of soaring inflation, rising interest rates, and gloomy outlook on living costs. This marks the ninth consecutive month that sentiment has stayed negative.

Will US Inflation report spark fireworks?

The main risk event and potential market shaker this week will be the latest US inflation figures published on Wednesday. After accelerating by 9.1% in June, markets are forecasting a cooling in July annual inflation to 8.7%. Should expectations match reality, this could be a breath of fresh air for financial markets and fuel optimism around inflation plateauing.

Given how markets remain obsessive and incredibly reactive to any topic relating to rising prices, explosive levels of volatility could be on the cards.

If US consumer prices defy market expectations by rising again, this is likely to reinforce expectations around the Fed hiking rates by another 75 basis points in September. According to Bloomberg, traders are currently pricing in this scenario with around a 74% probability.

Alternatively, if the inflation report meets or misses expectations, this could raise hopes over consumer prices peaking. Such a development could encourage the Fed to step back from its aggressive approach toward hiking rates, which could send the dollar tumbling and Treasury yields declining.

Commodity spotlight – Gold

Gold was able to recover from last Friday’s selloff after the strong jobs report cooled recession fears and fortified expectations for more aggressive Fed rate hikes. Bulls wasted little time in clawing back the post-NFP losses yesterday with prices trading around $1785.50 as of writing.

Although buyers have been in the driving seat for the past three weeks, the pending US CPI report could shift the balance of power between bulls and bears. A strong inflation report could deal zero-yielding gold a heavy blow as aggressive rate hike bets jump. Alternatively, a weak report may provide the precious metal an opportunity to push higher.

Looking at things from a technical perspective, there are a couple of tough resistance levels that bulls may face down the road. The first one is around $1785 where the 50-day SMA resides and $1830, a key point just below the 100 and 200-day Simple Moving Average. If bears end up dominating the scene, prices may sink back towards $1752 and $1724.

For more information visit FXTM.

Week Ahead: Persistent Inflation to Revive Dollar Bulls?

Inflation angst could make its jarring presence felt once more, as the upcoming US inflation data release holds court amidst the coming week’s global economic calendar:

Monday, August 8

  • AUD: Australia July foreign reserves
  • NZD: New Zealand 3Q 2-year inflation expectation

Tuesday, August 9

  • AUD: Australia July household spending, August consumer confidence
  • Coinbase 2Q earnings

Wednesday, August 10

  • CNH: China July CPI, PPI
  • USD: US July consumer price index (CPI), speeches by Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari
  • US crude: EIA weekly oil inventory report
  • Disney 2Q earnings

Thursday, August 11

  • AUD: Australia August consumer inflation expectations
  • USD: US weekly jobless claims, July PPI, speech by San Francisco Fed President Mary Daly

Friday, August 12

  • GBP: UK June GDP, industrial production; 2Q GDP, external trade
  • EUR: Eurozone June industrial production
  • USD: US August consumer sentiment

For the US July consumer price index (CPI), the median estimate from the Bloomberg survey comes in at 8.8%.

If so, that would mark a moderation in the headline inflation print from June’s 9.1%, after four consecutive months of the headline CPI print exceeding market forecasts.

Signs of easing inflationary pressures may allow the US Federal Reserve to start backing off from its aggressive rate-hiking stance, having already raised interest rates by a cumulative 225 basis points since March.

Markets are expecting just another 100 basis points to go in this ongoing rate hike cycle, before the Fed then reversing course by mid-2023 to avoid tipping the US economy into a recession.

In other words, markets think that the “largest chunks” of the Fed’s hiking cycle are already behind us.

Such a narrative has put the US dollar in the back seat in recent weeks, in turn allowing risk assets such as stocks and cryptos to stage a recovery.

(Note that such expectations may alter significantly later today – Friday, August 5th – given that this article is being written before the release of the July US nonfarm payrolls report).

US dollar pulls away from multi-year high

Since posting a 2-year high on July 14th, the equally-weighted US dollar index has faltered back to its 50-day simple moving average (SMA).

This USD index measures the US dollar’s performance against six other major currencies, all in equal proportions:

  • NZDUSD
  • USDCAD
  • GBPUSD
  • USDCHF
  • AUDUSD
  • EURUSD

How might the upcoming US CPI print impact the dollar?

A lower-than-expected CPI print may prompt this USD index to fall below its 50-day SMA and test the 1.16832 – 1.17090, being its recent cycle low and a key Fibonacci retracement line since its ascent from early April.

Otherwise, a fifth-consecutive upside surprise in the official CPI data, that forces markets to restore their bets for more larger-than-usual Fed rate hikes in the pipeline, may see the USD index climbing back above its 50-day SMA.

Immediate resistance can be seen around the 1.18913 Fibonacci level, with stronger resistance set to arrive at the “twin peaks” around 1.195.

Pay attention also to the roster of Fed speak in the coming week, which may offer greater insights into how Fed officials interpret the path forward for US interest rates.

Fresh meaningful insights into the path forward for US interest rates are set to sway the greenback, which in turn would reverberate across the FX universe.

For more information visit FXTM.

Bond Yields Move Lower, Stocks Too

This follows on from US equities, that snapped a three-day win streak after capping their best month since 2020 last week. Trading volumes are typically thinner during summer as European traders especially are running flat trading books during the holiday season.

This means volumes will be a fraction of the size of normal trading activity which can exacerbate price action and swings. These were certainly seen intraday yesterday as the broad S&P500 index moved between gains and losses.

Yesterday’s falls across the pond followed on from a gain of more than 9% for the blue-chip S&P500 in July and a 12.3% increase in the tech-heavy Nasdaq that marked the tech benchmark’s strongest month since April 2020. Easing expectations for interest rate rises and positive earnings updates from several big tech and energy companies were the two key drivers of this summer rally. The question on many investors’ lips has been if the low is now in place, or if this is a bear market rally in a broader downtrend?

On the technical side, the S&P500 has hit the 100-day simple moving average at 4121 in a resistance zone with the February low at 4114. The halfway point of the March to June move is also near at 4137.

Data dependent traders

Market participants are now watching data more closely too, after Fed Chair Powell, and President Lagarde, and the ECB, bailed out of offering forward guidance to investors and markets. Probably this is an honest admission that policymakers don’t know what the economy is going to do next. Instead, they are now data dependent and yesterday’s main economic indicator painted a cloudy picture at best.

The US ISM slipped to 52.9 in July, its lowest level since June 2020. Any figure above 50 indicates an expansion, but the latest result points to a slowdown in growth.  But the ISM’s index did provide an encouraging gauge that cost pressures may be easing on companies. The sub-index fell to a near two-year low, well below the estimates of economists.

Falling bond yields take down USD/JPY

The high in USD/JPY seems a distant memory today from when it was posted in mid-July above 139. The major is correlated with US 10-year rate differentials, mainly due to the Bank of Japan’s commitment to yield curve control. This effectively means where the US 10-year Treasury yield goes, so to does USD/JPY.

And those yields have fallen sharply as markets have scaled back their expectations of how much the Fed will tighten policy to curb red-hot inflation. From a high close to 3.5%, the US 10-year yield is now nearing 2.5% after dropping below the lower bound of the recent sideways trading range around 2.7%. This is a mighty fall in bond markets and has weighed heavily on USD/JPY.

The major is back below 135 and smashed down through the next major support at 131.34 overnight. The latest US wage and inflation data may slow the descent of US yields. But the yen may retain a small bid on growing odds of a US recession as the Fed hiking cycle continues.

This week’s bid for safe haven assets as US House Speaker Pelosi gears up to visit Taiwan is also helping the yen. The 100-day simple moving average could offer support at 130.12 as prices go into overbought territory.

For more information visit FXTM.

Fed Decision: What You Need to Know

When is it due?

  • The FOMC policy statement is set to be released at 6:00 PM GMT
  • Fed Chair Jerome Powell is then scheduled to hold his press conference at 6:30 PM GMT.

Here are the key points to look out for:

1. The Fed is widely expected to raise its benchmark interest rates by another 75 basis points (bos)

Anything else would be a surprise.

A 75-basis point hike is 3 times larger than the customary 25-basis point adjustments that central bankers traditional deploy per meeting.

Given the roaring inflation figures around the world, central bankers have been deploying such larger-than-usual hikes in a bid to stop consumer prices from rising uncontrollably.

Note: Interest rate hikes are a central bank’s main weapon in trying to subdue runaway inflation.

The Fed has already hiked its rates by a total of 150 basis points since March (excluding today’s forecasted 75bps hike):

  • March: 25bps hike
  • May: 50bps hike
  • June: 75bps hikeAs you can see, each hike has gotten incrementally bigger.

    Hence, faced with multi-decade high inflation, the Fed is roundly expected to fire yet another 3-in-1 shot today. Back-to-back hikes of 75bps at a time are the most aggressive seen out of the US central bank since the 1980s.

    That figures, given that US inflation is also at its highest since the early 1980s.

    Recall that, back on July 13th, we learned that the US consumer price index a.k.a. CPI (which is used to measure how much consumer prices have changed) rose by 9.1%. Not only did it beat market forecasts, but that was also the fastest CPI year-on-year growth since November 1981.

2. After today’s decision, markets are expecting an additional 100bps in hikes over the Fed’s remaining three policy meetings scheduled for the rest of the year

Given the forward-looking nature of the markets, investors and traders are already trying to anticipate how high US interest rates will go before the curtains come down on 2022.

Adding today’s 75bps hike with the additional incoming 100bps by year-end, that would raise the upper bound of Fed Funds target rate up to around 3.5%.

If today’s policy decision and press conference play out exactly as per the above-listed scenarios, then it could be a ho-hum session for FX markets.

However, if there’s any clue that forces markets to significantly alter those above-listed expectations, then we could see heightened volatility across FX markets (and also stocks, commodities, and even crypto; across asset classes).

How would this impact the US dollar?

  • If the Fed triggers a smaller-than-expected 50bps hike, that could result in a softer US dollar.
  • If the Fed triggers a larger 100bps hike, that could jolt the US dollar back to recent heights.
    Up until a couple of weeks ago, some market participants had forecasted a 60% chance that the Fed could trigger such a gargantuan move, in light of the fresh multi-decade high in the headline CPI print (as mentioned above). Those odds (for a 100bps hike today) now stand at just 14%, at the time of writing.
  • If Chair Powell suggests that the Fed will have to incur more hikes through year-end, more than the 100bps that’s been priced in by the markets for the September-December meetings, that should also lift the US dollar.
  • If Chair Powell suggests that the Fed will have to slow down its intended rate hikes, for fear of sending the US economy into a recession, that could see the US dollar moderate further.

Expect a combination of the above-listed scenarios.

How do market forecasts surrounding rate hikes affect FX pairs?

Generally, the more aggressive a central bank is about raising its own rate, the stronger its currency, relative to the other currency whose central bank is deemed to be lagging behind.

For example:

  • The Fed has already raised its rates by 150 basis points since March.After today’s 75bps hike (if it happens), markets expect another 100bps to go through the end of 2022.

    If so, that would bring 2022’s total of Fed rate hikes to 325 basis points.

  • In contrast, the European Central Bank (ECB) has only hiked once so far this year, by 50 basis points just last week.Markets are expecting another 110 bps in hikes through the end of 2022.

    That would bring 2022’s total of ECB rate hikes to 160 basis points.

With the Fed clearly being more aggressive with its rates hikes compared to the ECB (325bps vs. 160bps in total hikes expected for 2022) this has resulted in declines EURUSD.

No surprise that the world’s most popularly-traded currency pair has remained around 20-year lows close to parity in recent weeks.

US dollar set to remain sensitive to shifting expectations surrounding incoming Fed rate hikes

In order to assess how the US dollar might react overall in relation to its G10 peers, one could just look at the equally-weighted USD index (as opposed to the benchmark dollar index – DXY), which measures the buck’s performance against six other major currencies all in equal proportions:

  1. Euro
  2. British Pound
  3. Canadian Dollar
  4. Australian Dollar
  5. New Zealand Dollar
  6. Swiss Franc

Key support and resistance levels for USD Index

  • Resistance: 1.195 area (the mid-May and mid-June cycle highs)
  • Stronger resistance set to arrive above 1.21, around the mid-June peak
  • Support: 1.18 (the upward trendline since April)
  • Stronger support set to arrive at the 50-day simple moving average (SMA) around 1.175

Generally, as long as the Fed can persist with its pedal-to-the-metal approach in raising US interest rates, assuming the US economy can withstand such elevated rates, that should ensure that the US dollar remains well supported.

For more information visit FXTM.

Big Tech Earnings and Fed Meeting in Focus

Overnight, Wall Street delivered a mixed performance thanks to the growing caution ahead of earnings from the tech titans, as well as the Federal Reserve decision on Wednesday. In the FX space, the dollar weakened against most G10 currencies while gold traded within a tight range, waiting for a fresh fundamental catalyst. Oil prices are on the front foot this morning following reports that Russia plans to tighten its gas supplies on Europe.

On the data front, the IMF will be in focus today as it releases an updated world economic outlook. There are also a couple of key economic releases from major economies over the next few days, especially in the United States. It may be wise to keep an eye out on the latest US consumer confidence report for July, US Q2 GDP, and the PCE core deflator among other key economic releases.

The tech megacaps will be under the spotlight as they publish their earnings this week. Google’s parent company, Alphabet, and Microsoft announce their results today after US markets close. Meta, Amazon, and Apple report their earnings over the next few days. If these titans report much better than expected quarterly result, this could support US equity markets, especially the Nasdaq 100 which is down almost 25% year-to-date.

It’s all about the Fed meeting

The Federal Reserve is widely expected to raise interest rates by 75-basis points for a second straight meeting tomorrow. However, the main focus will be directed towards Fed Chair Jerome Powell’s post-meeting conference. When considering how financial markets remain highly sensitive to any topic relating to inflation and interest rates, Powell will have to choose his words very wisely.

He is likely to highlight the Fed’s determination to extinguish inflation while inflicting more pain on the economy with continued policy tightening. While the U.S economy seems to be holding steady with the latest employment numbers encouraging, inflation remains a cause for concern as consumer prices jumped 9.1% in June from a year earlier. There have also been worrying signs from recent data with weakness in business survey data and the jobless claims.

If the Fed moves ahead with a 75-basis point hike, this may not be enough to keep dollar bulls in the driving seat. Such a move needs to be complemented by firmly hawkish comments from Powell, feeding speculation around more aggressive hikes this year. Should the Fed surprise the market with a smaller than expected hike, this could send the dollar tumbling with a cautious-sounding Powell adding insult to injury. Whatever the outcome of the Fed meeting, it is likely to influence the dollar which has weakened against most G10 currencies this week.

Commodity spotlight – Gold

Gold is likely to remain on standby until the Fed rate decision on Wednesday. The precious metal has barely moved since Monday due to the absence of a fresh directional catalyst. It will be interesting to see how gold reacts when the Fed moves ahead with a 75-basis rate hike. Will the precious metal weaken due to its zero-yielding status? Or will a weaker dollar limit downside losses?

Looking at the technical picture, prices are trading around the $1724 level as of writing. The $1700 remains a key point of interest this week and a level that can determine whether gold rebounds or extends the decline.

For more information visit FXTM.

Week Ahead: Lower Dollar if Fed Surprises With “smaller” 50bps Hike

Calendar for next week

Markets have been preparing for such an outcome at the upcoming FOMC policy decision, which will star in next week’s economic calendar.

Monday, July 25

  • EUR: Germany July IFO business climate
  • GBP: UK PM candidates’ debate – Rishi Sunak vs. Liz Truss

Tuesday, July 26

  • JPY: Bank of Japan June meeting minutes
  • USD: US July consumer confidence
  • IMF releases updated world economic outlook
  • Alphabet 2Q earnings

Wednesday, July 27

  • AUD: Australia Q2 CPI
  • CNH: China June industrial profits
  • USD: Fed rate decision
  • US crude: EIA weekly oil inventory report
  • Meta Platforms 2Q earnings

Thursday, July 28

  • AUD: Australia June retail sales
  • EUR: Germany July CPI, Eurozone July economic and consumer confidence
  • USD: US Q2 GDP, weekly jobless claims
  • Amazon 2Q earnings
  • Apple 2Q earnings

Friday, July 29

  • JPY: Japan June unemployment, retail sales, industrial production; July Tokyo CPI
  • EUR: Eurozone July CPI, Q2 GDP
  • USD: US June personal income and spending, PCE core deflator, July consumer sentiment
  • Exxon 2Q earnings
  • Chevron 2Q earnings

Next Federal Reserve rate hike

Markets have fully priced in a second consecutive 75-basis point hike at next week’s FOMC policy meeting, as the US central bank continues its battle against the hottest inflation in 40 years.

However, that 75bps hike is a relative step down from the 100-basis point hike that some segments of the markets were expecting. Hence the recent unwinding of gains in the equally-weighted USD index. Still, this instrument is well within its uptrend since Q1 2022.

Note that this index compares the US dollar’s performance against six of its major peers, all in equal weights:

  • Euro
  • British Pound
  • Swiss Franc
  • Australian Dollar
  • New Zealand Dollar
  • Canadian Dollar

Any other outcome that deviates from the 75bps script would be a surprise

  • DOVISH: A “mere” 50bps hike, though still twice the size of the traditional 25bps rate adjustments per meeting deployed by central bankers worldwide, should prompt more declines in the USD index, potentially moving it closer to its 50-day simple moving average (SMA) around the 1.175 region.
  • HAWKISH: Although the bar has been set high for a hawkish outcome at next week’s meeting, a 100bps shocker would reinvigorate dollar bulls into sending this USD index back above the 1.20 line. More dollar gains may also ensue if Fed Chair Jerome Powell, during his press conference, refuses to rule out a 100bps hike at upcoming meetings.

Ultimately, policymakers at the US central bank, as well as market participants, will continue to be guided by the inflation data.

And on that point, after the FOMC meeting concludes, next Friday’s release of the June PCE deflator will be closely watched, considering that it’s the Fed’s preferred way of measuring inflation.

The PCE deflator is forecasted to come in at 6.6% in June, which would mean that it has posted a reading of 6% or higher for every month so far this year. 6.6% is also more than three times the Fed’s 2% target, underscoring the tremendous task that the Fed is up against.

Further evidence of stubbornly elevated price pressures is set to force the Fed into triggering even more jumbo-sized rate hikes over the coming months. Such hawkish expectations could then see the USD index being restored to the last cycle high at 1.21859, or perhaps even higher.

Overall, as long as the Fed keeps the “pedal to the metal” while leaving other major central banks struggling to catch up with their own rate hikes, that should leave the buck with an easier path to climb even higher.

For more information visit FXTM.