Mid-week Technical Outlook: FX Minors & Crosses In Focus

Global equities were tugged and pulled by inflation fears, rate hike expectations, and ongoing geopolitical risks. In the currency space, king dollar loosened its grip on the FX space allowing G10 majors to bounce while lingering below its 200-day Simple Moving Average.

Over the past few weeks our attention has been on king dollar but this afternoon the spotlight shines on minor and cross currency pairs. The minors are normally referring to non-USD forex currency pairs while crosses are pairs that do not contain the dollar as either the base or quote currency.

Although minors and crosses are slightly less popular than the majors and often experience more wild swings due to less liquidity in the markets, they still present trading opportunities. So, if you have had enough of the dollar and would like something different, check out the setups below!

GBPJPY wobbles above 160.00

After rallying the previous session, the GBPJPY looks tired and may be running on empty fumes. Prices remain bearish on the daily timeframe with the candlesticks trading within a negative channel. A breakdown below 160.00 could result in a steeper decline towards 157.50 and lower. Should 160.00 prove to be reliable support, an incline back towards 162.00 could be on the cards.

GBP/JPY Daily chart

EUR/JPY ready to resume selloff?

The technical bounce on the EURJPY could be over if prices fail to push above 137.00. Bears still remain in some control with prices respecting a bearish channel on the daily charts. A decline back under the 50-day Simple Moving Average could trigger a selloff towards 134.50 and 133.00, respectively. If prices are able to break above 137.00, then a move towards 138.00 could become reality.

EUR/JPY Daily chart

EUR/GBP choppy as ever

There is a lot going on with the EURGBP as bulls and bears battle it out. Prices remain as choppy as ever but the trend could turn negative if prices close below 0.8420. Sustained weakness below this level could result in a further decline towards 0.8380. If prices are able to bounce from 0.8420, the next key level of interest can be found at 0.8500.

EUR/GBP Daily chart

EUR/AUD breakdown or bounce?

As the subtitle says, the EURAUD can either experience a technical bounce from 1.4900 or breakdown below this point to hit 1.4600. The trend looks bullish on the daily charts but prices are trading below the 100 and 200-day Simple Moving Average. Should 1.4900 prove to be reliable support, a move back towards 1.5300 could on the cards.

EUR/AUD Daily chart

AUD/NZD higher highs and higher lows…

This currency pair remains firmly bullish on the daily timeframe. There have been consistently higher highs and higher lows while the MACD trades to the upside. A solid breakout and daily close above 1.1100 could encourage a move higher towards 1.1200. A daily close below 1.0750 could trigger a selloff towards 1.08200.

AUD/NZD Daily chart

For more information, please visit: FXTM

Can the UK Data Splurge Save Sterling?

Written on 17/05/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Sterling should come with some sort of health warning. This morning, it is the turn of the bears to take a bruising after sellers were looking to push GBP/USD down to another round number and 1.20. This morning’s strong set of UK employment data has helped propel the pound higher and we get the all-important inflation figures out early tomorrow.

Red-hot labour market

It’s the middle of the month so that means a UK data deluge. First up were today’s jobs numbers which saw unemployment fall to its lowest level in nearly half a century in the first quarter of 2022. The jobless rate stood at 3.7% with fewer people out of work than there were job openings for the first time on record. Hiring demand remains solid and a lack of workers means wage growth is running a little faster than it was before the pandemic.

Amid all the headlines, the scorching labour market may start to cool as the squeeze on household incomes deepens. It is also important to note that the Bank of England recently forecast that the unemployment rate could rise above 5% in the next two years. So, upcoming employment reports will be important as they inform on increasing recession risks to the economy.

CPI on a tear to 9%+

We may get even bigger headlines tomorrow with the release of inflation data for April. Consensus sees a huge jump in the headline figure to 9.1% y/y from 7% in March. It is going some when a miss on the data could still print at 9% for headline CPI. The main culprit for the surge is the massive 54% energy price hike by the UK energy regulator (Ofgem). This is really a symptom of the energy crisis in Europe due to surging wholesale market prices surpassing the caps and driving several suppliers to the wall.

Key for markets will be the size of the relative price shock to household’s energy bills. The BoE has already warned of 10% inflation into autumn later this year. This is expected to dampen discretionary household spending and crowd out some pricing power in other part so the economy. Indeed, this could show up in the retail sales numbers that are released on Friday.

Sterling bounces hard

Governor Bailey added to the more positive sentiment around the pound by sounding more combative yesterday on fighting inflation. This was in contrast to the recent BoE meeting and the focus on the grim growth outlook. His emphasis was clearly more on runaway inflation and the tight labour market at his testimony. This has helped solidify rate hike hopes for a 2% policy rate by the end of the year. Cable needs to close above 1.25 to fend off more selling. Any consolidation would then need to advance beyond the month-to-date top at 1.2638.

For a look at all of today’s economic events, check out our economic calendar.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Week Ahead: Sterling to Sink to Greater Depths?

The selloff across bonds, stocks, and even cryptos has taken a steeper dive so far this month, amid worries that central bank rate hikes could choke the global economy.

Economic Calendar for Next Week

Investors and traders worldwide will be scouring the following economic data and events in the coming week, looking for reasons as to whether the selloff should be extended or perhaps take a breather:

Monday, May 16

JPY: Japan April PPI
CNH: China April industrial production, retail sales, property sales, and unemployment rate
EUR: EU Commission releases Spring economic forecasts
USD: New York Fed President John Williams speech

Tuesday, May 17

AUD: RBA releases May policy meeting minutes
GBP: UK March unemployment and April jobless claims
EUR: Eurozone 1Q GDP and employment
USD: US April retail sales and industrial production
USD: Fed speak
Fed Chair Jerome Powell
Chicago Fed President Charles Evans
Cleveland Fed President Loretta Mester
Philadelphia Fed President Patrick Harker
St. Louis Fed President James Bullard
Q1 earnings: Walmart, Home Depot, Vodafone, JD.com

Wednesday, May 18

JPY: Japan 1Q GDP
GBP: UK April CPI and PPI, BOE MPC member Catherine Mann speech
US crude: EIA weekly US crude inventories
CAD: Canada April CPI
USD: Philadelphia Fed President Patrick Harker speech
Q1 earnings: Tencent, Target

Thursday, May 19

JPY: Japan April external trade
AUD: Australia April unemployment
ZAR: South Africa Reserve Bank rate decision
EUR: ECB publishes April meeting accounts
USD: US weekly initial jobless claims
Xiaomi Q1 earnings

Friday, May 20

JPY: Japan April CPI
GBP: UK April retail sales, May consumer confidence
EUR: Eurozone May consumer confidence

British Pound Latest Moves and Fundamentals

The GBP index, which measures Sterling’s performance against six of its G10 peers in equal weights, is trading around its lowest levels since December 2020.

GBP/USD Daily chart

This index could return to recent lows if the coming week’s data on jobs, inflation, retail sales, and consumer confidence point to more economic woes.

After all, the Bank of England recently highlighted the risk of a recession by year-end.

Darker clouds over the UK economic outlook should keep the GBP index firmly entrenched in the downtrend that has persisted since February, potentially sending this index back towards the 1.47 mark.

The growing downside risks to the UK economy, which are expected to narrow the window of opportunity for further BOE rate hikes, have allowed most of Sterling’s G10 peers to maintain a year-to-date advance against the Pound.

Even the beleaguered euro has seized the opportunity to break out of its downtrend against GBP that had been in place since September 2020.

Last week, EURGBP secured a weekly close above its 50-week simple moving average for the first time since January 2021.

EUR/GBP Weekly chart

And with King Dollar reigning supreme across the FX universe, GBPUSD has been sent to its weakest levels since November 2020.

GBP/USD Daily chart

GBP/USD Price Forecast

We may see even more US dollar strength in the coming week if the scheduled Fed speak does little to douse the prospects of a 75-basis point US rate hike over the summer months.

Such perceived signals for an ultra-hawkish Fed, coupled with dismal data out of the other side of the Atlantic, should heap more downward pressure on GBPUSD and potentially drag ‘cable’ closer to the psychologically-important 1.20 line.

Although GBPUSD’s 14-day relative strength index has broken below the 30 threshold that denotes oversold conditions, any recovery should prove fleeting, as long as the UK economic data suggests that a recession is inevitable and binds the BOE’s hawkish hands, all while the Fed presses ahead with rate hikes galore.

By Lukman Otunuga Senior Research Analyst

Trade Of The Week: Will Gold Prices See More Pain?

After almost kissing the psychological $2000 level back in mid-April, bulls ran out of steam – allowing bears to drag the precious metal to prices not seen since February 2022!

Last Friday’s strong US report compounded gold‘s woes as expectations intensified over the Federal Reserve maintaining an aggressive approach towards monetary policy. This report comes after the Fed raised interest rates by 0.50 bps points for the first time since 2000.

Federal Funds target rate

With the dollar climbing to its highest level in two decades and treasury yields rising amid expectations the Fed may continue hiking rates to tame inflation, gold could be in trouble.

The week ahead promises to be eventful for the precious metal thanks to key US economic data, speeches by Fed officials, and ongoing geopolitical risks.

Gold Technical Analysis

On the technical front, the path of least resistance points south with prices wobbling above the $1855 support as of writing. Although the balance of power currently swings in favour of bears, bulls could still strike in the right conditions.

Before we cover what to expect from gold over the next few days, it is worth keeping in mind that the precious metal has dropped roughly 6% since the 18th of April when prices almost hit $2000.

Since the start of May, gold is down almost 2% and has extended its longest run of weekly losses this year.

With the 10-year Treasury yield rising to its highest level since November 2018, gold may struggle to shine. It’s worth keeping in mind that the precious metal offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

US Inflation data & Fed speeches in focus

The major risk event for gold may be the pending US CPI report.

Given how markets remain highly sensitive to inflation fears, the report could spark explosive levels of volatility in gold. The key question is whether the report will send the precious metal tumbling or provide a lifeline. According to an economist’s poll by Bloomberg, US inflation is expected to rise 8.1% year-on-year in April compared with 8.5% in March. A figure that exceeds market expectations could send the dollar higher, enforcing downside pressures on gold prices. Expect the gold to also feel the burn if speeches from Fed officials over the next few days revive expectations around a 75 basis-point rate hike in June.

Geopolitical risks could provide cushion

The heightened levels of uncertainty and volatility caused by geopolitical risks could direct investors towards gold’s safe embrace.

As the Russia-Ukraine conflict continues, global sentiment is likely to remain shaky with investors adopting a guarded approach toward riskier assets. Inflationary worries and increasing concerns relating to China could fuel the risk-off sentiment – lending some support to gold. Will this support be enough to counter the pressure created by an appreciating dollar, rising treasury yields, and Fed rate hike bets? Time will tell.

Gold ETFs Favour Bears

According to an automated report from Bloomberg, gold ETFs cut 66,718 troy ounces of golf from their holdings last Friday, bringing this year’s net purchases to 8.42 million ounces.

The outflows could be the product of the strong US jobs report which boosted Fed rate hike bets and an appreciating dollar. A gold ETF provides investors exposure to gold without owning it physically. In this instance, outflows from ETFs are seen as bearish for the underlying asset.

Gold breakdown on the horizon?

The subtitle says it all.

Gold remains under pressure on the daily charts with prices wobbling above the $1855 support as of writing. Over the past few weeks, the precious metal has been battered by a stronger dollar, rising treasury yields, and Fed rate hike bets. Prices are bearish with a breakdown below $1855 opening a path towards $1820 and $1780. Should $1855 prove to be reliable support, prices may rebound back towards $1900 and $1920.

Zooming out on the monthly charts, prices remain in a wide range with support around $1700 and resistance at $2000. A major directional catalyst may be needed for gold to secure a monthly close above or below these key levels.

By Lukman Otunuga Senior Research Analyst

How Far Is the Fed Prepared to Take Policy Tightening?

Written on 03/05/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Inflation, Labour Market and the FOMC

This aggressive step is just the first of three half point moves anticipated by markets at its next meetings in June and July. Policymakers are focused on the historic pace of inflation at 40-year highs and the associated risks.

Markets have been left in no doubt that the FOMC intends to speed up rate hikes to get the Fed Funds target rate quickly back to neutral. The March FOMC minutes revealed that a 50bp hike could have been on the table had it not been for the Ukraine conflict. That is a rare event when the Fed even considers delivering something that was not pre-discounted by the market (even if often pushed there by the Fed in the first place).

Chair Powell himself has said it was appropriate to “be moving a little more quickly” to tighten policy. indeed, he guided that “there’s something to the idea of front-loading” rate hikes. The latest inflation print hit 8.5% and Fed officials have warned of upside risks to price growth due to war in Ukraine and Chinese lockdowns.

The tight labour market should also be confirmed with another healthy non-farm payrolls report on Friday, which should trump the surprise first quarter GDP contraction. Wages are rising amid a lack of workers with most economists seeing US consumer price growth remaining elevated above 4% during 2022.

Fed Funds Rate Forecasts for the Rest of the Year

Markets are betting that the Fed funds rate, currently between 0.25% and 0.5%, will be lifted to 2.7% by the end of December, pushing potentially up to 3% next year. Financial conditions have begun to tighten, in anticipation of quantitative tightening that should be formally announced on Wednesday. We also note that sentiment figures have been edging lower recently. This could point to a cyclical slowdown in the second half of the year.

But monetary policy remains highly accommodative with the US 10-year “real” rate only just turning positive. That means it is still below neutral which signifies that policy remains very easy. Many economists see risks may be skewed towards faster rate moves and an even stronger dollar. A half point rate rise is baked in so it will be down to Chair Powell and a repeat of an “expeditious” normalisation of policy to keep the buck bid. The key question is how fast the Fed can raise rates without slowing growth and causing a US recession.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Trade Of The Week: Is The Pound In Trouble?

Sterling hijacked our attention last Friday after collapsing like a house of cards!

GBP/USD Daily chart

It has stumbled into the new week under renewed pressure, struggling to nurse deep wounds inflicted by the dismal retail sales and consumer confidence data. Mounting concerns over the cost-of-living crisis dragging the UK economy into a recession continue to hammer the pound, which is currently trading at levels not seen since September 2020.

Disappointing economic data may fuel speculation over the BoE slowing interest rate rises while political noise from Westminster regarding the post-Brexit trade deal is likely to compound the currency’s woes. Since the start of April, sterling has weakened against most G10 currencies, shedding over 3% versus the dollar of writing.

Taking a quick peek at the technicals, prices look heavily bearish on the weekly timeframe with support at 1.2750. A solid breakdown below this point could drag the GBPUSD to levels not seen since mid-2020 around 1.2500.

GBP/USD Weekly chart

More pain on the horizon for sterling?

Since the start of 2022, the pound has weakened against almost every single G10 currency. It’s is down over 6% versus the dollar and more than 5% against the Canadian dollar.

GBP Year to Date

The pound has the potential to weaken further if weak economic data forces the Bank of England to adopt a cautious approach towards rate hikes. In fact, Andrew Bailey, BoE governor recently hinted that the UK interest rates may be increased less aggressively amid recession fears.

Indeed, retail sales fell by an unexpected 1.4% in March as the rising cost of living hit consumer spending. Consumer confidence plunged to its lowest level since the 2008 recession while PMIs decline in April, signalling that the economy is slowing considerably. But with inflation hitting a 30 year high of 7% which is more than triple the target of 2%, the BoE is certainly in a tricky position.

The central bank is widely expected to raise interest rates by 0.25bp in May, with a total of 6 hikes expected by the end of 2022.

However, repeatedly weak economic data and post-Brexit related uncertainty could throw a spanner in the works for BoE hawks – resulting in a weaker pound. This weakness is likely to be intensified by an increasingly aggressive and hawkish U.S Federal Reserve.

The week ahead…

It’s a relatively quiet week on the UK economic calendar. However, this does not mean it will be a quiet week for the British pound.

GBP/USD 1 hour chart

The GBPUSD has already dropped over 100 pips this morning, with weakness being seeing across the board.

GBP/USD 4 hour chart

There is a lot going on with the dollar with key economic data likely to inject the currency with renewed vigour. Over the next few days, US consumer confidence data, Q1 GDP, consumer sentiment and the PCE deflator among other key reports will be published. Should they reinforce market expectations over the Federal Reserve aggressively raising interest rates, the dollar is set to appreciate further – dragging the GBPUSD lower.

GBP/USD bears step into higher gear

The GBPUSD is heavily bearish on the daily timeframe as there have been consistently lower lows and lower highs. Prices are trading well below the 50, 100 and 200-day Simple Moving Average while the MACD trades below zero. Interestingly, the RSI has fallen below 30 which suggests that the GBPUSD could be oversold.

GBP/USD Daily chart

A solid daily close below the 1.2750 support level could see the currency pair sink towards 1.2600 before experiencing a technical bounce. Alternatively, should 1.2750 prove to be reliable support, the GBPUSD could rebound back towards 1.2900 before resuming the downtrend.

GBP/USD Daily chart

On the monthly timeframe, the GBPUSD is respecting a monthly bearish trend. A solid monthly close below 1.2750 could open the doors towards 1.2500 and 1.2300. If bears run out of steam, a move towards 1.3000 and 1.3150, respectively.

GBP/USD Monthly chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Yen Bashing Continues as USD/JPY Closes in on 130

Written on 20/04/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Japanese Yen Fundamental Analysis

The Japanese currency has dropped over five per cent this month alone and more than 10 per cent this year. This puts it outpacing even the Russian ruble and Argentinian peso as the worst performer among 31 major currencies, with it chalking up its worst losing streak against the dollar in more than half a century.

In recent weeks, after prices broke to the upside above the March high at 125.10, it has seemed inevitable that traders would test the Y130 marker as a potential line in the sand for Japanese authorities. But the market reaction to recent comments from both the Bank of Japan and the Ministry of Finance has been fairly dismissive as traders have appeared to take little notice of remarks aimed at calming the yen’s descent.

Japan’s Finance Minister Suzuki was the most recent official to hit the wires, adopting a marginally stronger one than in previous days, declaring the speed and abruptness of the currency’s move as “undesirable”.

But as loud as this jawboning has become, once again the Bank of Japan overnight offered to buy unlimited amounts of 10-year Japanese Government Bonds at 0.25% in a move that indicated an unchanged, very dovish policy. It is this increasing divergence between the BoJ and other major central bank policies that continues to weigh on the yen.

US 10-year Treasury yields have notched a new cycle peak and are threatening the hugely significant 3% level. The 30-year US Treasury yield has already breached this mark, for the first time since March 2019. There are around 225 basis points of Fed rate hikes priced in by the markets for this year, while the BoJ continues to stick with its yield curve control policy that caps 10-year Japanese Government bond yields at 0.25%.

Yen Impact on Economy

The pressure to intervene will undoubtedly increase as the yen continues its desperate slide. Of course, for all the authority’s rhetoric, JPY weakness is good news for the economy and exports, as well as a factor to spur imported inflationary pressures. This is key when we see that core inflation remains in negative territory and growth is still below pre-pandemic levels.

Above 130, the government may start to worry about consumer’s purchasing power ahead of this summer’s Upper house elections. Clothing and textile industries too, are being hurt substantially by the weaker yen. But the market will do what markets do and test the authorities as much as they can. There is no easy fix and intervention, and jawboning will only be a temporary solution while underlying policy and market dynamics stay as they are.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

A Volatile Week Ahead for Financial Markets?

European markets opened lower this morning due to the deepening crisis in Ukraine, with the caution likely to find its way back to US markets this afternoon. In the currency space, the mighty dollar rose to a fresh two-year high during early trade, supported by rising treasury yields and Fed hike bets. Gold slipped after almost kissing $2000 in the previous session, while oil benchmarks steadied after jumping on Monday.

Despite the public holiday in most of Europe yesterday, this is shaping up to be another volatile and eventful week for global markets. The latest comments from the World Bank have added to the cocktail of caution that will most likely influence sentiment over the next few sessions.

The bank cut its global growth forecast for 2022 by nearly a full percentage point to 3.2% from its previous estimate of 4.1%, thanks to the war in Ukraine, soaring inflation, and the lingering effects of Covid-19. Later today, the International Monetary Fund (IMF) will release its updated global economic outlook with markets expecting a downgrade for growth this year. Such a development may hit investor confidence, sweetening appetite for safe-haven assets.

On the earnings front, Johnson & Johnson and insurance company, Travelers will report their latest results before the opening bell. Streaming giant Netflix will release its earnings after the market close. Traders will also focus on speeches from financial heavyweights Fed Chair Jerome Powell and ECB President Christine Lagarde later this week.

Dollar Flexes Muscles Across the FX space

The dollar tightened its grip on its throne this morning by rising to a fresh two-year high as investors braced for more aggressive U.S rate hikes. Markets have fully priced in a 50bp rate hike at the Fed’s May meeting, with the odds of another half-point rate hike in June very high. Given how the dollar has appreciated against every single G10 currency this month, bulls are certainly in a position of power to drive prices higher.

When considering how the week ahead will be filled with more speeches from Fed officials, this could fuel upside gains if they all sing a hawkish tune. Indeed, we heard from arch-hawk Bullard overnight who signaled an openness to a 75bp hike. The dollar index (DXY) has the potential to challenge 103.00 if a solid daily close above 101.00 is secured.

Commodity Spotlight: Gold

After rallying within a hair’s length of $2000 in the previous session, gold is trading back around $1974 as of writing. With numerous competing themes likely to influence market sentiment this week, gold may find itself pulled and tugged by conflicting forces. Heightened geopolitical risks and global growth concerns could trigger risk aversion, sending investors rushing towards gold’s safe embrace. However, an appreciating dollar, rising Treasury yields, and Fed hike expectations may create multiple obstacles down the road.

Looking at the technical picture, gold has the potential to trend higher, but prices seem to be forming another range. Support can be found at around $1960 and resistance at $2000. A move back below $1960 could trigger a selloff towards $1920. Alternatively, a solid breakout above $2000 may open the doors towards $2009, $2015, and $2050, respectively.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Mid-Week Technical Outlook: Dollar Bulls Dominate The Scene

By Lukman Otunuga Senior Research Analyst

It looks like everyone wants a juicy piece of the world’s most liquid currency. The greenback has appreciated against every single G10 currency since the start of the week.

USD Weekly chart

Dollar bulls were injected with fresh inspiration yesterday thanks to hawkish comments from Federal Reserve Governor Lael Brainard. Appetite towards the greenback was sweetened further by geopolitical risks which sent investors rushing towards safe-haven destinations. With the dollar index (DXY) hitting a fresh 2-year high at 100.50, the path of least resistance certainly points north.

DXY Daily chart

Interestingly, bulls were unable to draw strength from the latest US inflation report which showed prices rising at their fastest pace in more than 40 years. Although CPI jumped 8.5% in March, the core CPI that excludes food and energy prices climbed 6.5%. The weaker than expected core print gave investors hope that inflation could be peaking. Nevertheless, dollar strength is likely to remain an ongoing theme this week.

Looking back at the technical picture, the DXY remains firmly bullish on the daily charts, and as highlighted earlier in the week, a strong close above 100 could open the doors toward 101.00 and 102.25.

DXY Daily chart

There is a similar theme on the equally-weighted USD Index as bulls shift their weight. Prices are approaching the resistance 1.1260. A solid breakout above this point could open the doors towards 1.1350.

US Dollar Index Daily chart

EUR/USD breaches 1.0850

In our trade of the week, we discussed the possibility of a breakdown happening in the EURUSD. Fast forward to today, prices are trading below the 1.0850 support level. The currency pair remains bearish on the daily charts with the next key levels of interest at 1.0780 and 1.0700. Although the current trend points to further downside, it may be wise to keep a close eye on the European Central Bank announcement on Thursday afternoon.

EUR/USD Daily chart

GBP/USD Wobbles Above 1.3000

A breakdown could be on the horizon for the GBPUSD. The currency pair is struggling to keep above the 1.3000 support level while the lagging indicators favour bears. There have been consistently lower lows and lower highs while the MACD trades below zero. A strong daily close below 1.3000 could trigger a decline towards 1.2900 and 1.2750, respectively.

Should 1.3000 prove to be reliable support, a rebound back towards 1.3170 could be on the cards.

GBP/USD Daily chart

Is Gold in the process of a breakout?

After being trapped within a range for an extended period, gold could be experiencing a breakout.

Prices are trading above the $1965 resistance as of writing but bulls need a solid daily close above this level encourages further upside. While lagging indicators like the 50, 100, and 200 day-SMA point to higher gold prices, fundamentals could impact the current trajectory. A solid close above $1965 could trigger an incline towards $2000 and $2020. If prices slip back under $1965, the precious metal may test $1940 and $1900, respectively.

Gold daily chart

USD/JPY up up and away…

The USDJPY has jumped to its highest level in two decades. Prices broke through the 2015 high of 125.86 to hit the 126.30 level. Prices are heavily bullish with a daily close above 126.00 potentially opening the doors towards 126.70 and 128.00. Although the trend is bullish, there could be a technical throwback before prices push higher. It may be worth keeping an eye on how prices behave around 125.00.

USD/JPY Daily chart

AUD/USD under pressure…

After failing to close above the 0.7550 resistance last week, the AUDUSD has been under pressure. It looks like the downside is gaining momentum on the weekly charts with 0.7300 acting as a major level of interest.

AUD/USD Weekly chart

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Era of Low Interest Rates Is Over

Much will no doubt be written about the past decade and longer, when interest rates were cut and remained at levels previously seen decades and even centuries ago.

But now, markets are looking warily at major central banks, and certainly the world’s most powerful one, which is set to front-load interest rate hikes in order to tame the inflation genie that has been let out of the bottle to try and get rates quickly back to neutral.

The widely watched US 10-year Treasury yield has hit new cycle highs above 2.83% this morning. Interestingly, the move was still more or less equally driven by higher real yields and inflation expectations. The latter suggests that the market still sees room for the Fed to further step up the pace of tightening.

Red hot US inflation incoming

Today’s March US CPI release takes centre stage.

The headline print is expected to accelerate to 1.2% m/m and 8.4% y/y. The core measure, which excludes the volatile food and energy sectors, is also set to rise to 0.5% m/m and 6.6% y/y. All these readings will be new multi-decade highs with the persistent high pace in the monthly price rises justifying the Fed’s red alert inflation mode.

This means a major correction in the current uptrend in yields is not expected any time soon. Even European bonds have cratered with yields breaking key levels recently ahead of the ECB meeting on Thursday. The major German government bond hit its highest yield since 2015 yesterday with the 10-year at 0.78%. This was still negative as of early March which shows the seismic recent moves in bond markets.

USD in pole position, stocks suffering

The sharp rise in rates, combined with ongoing geopolitical tensions and rising doubts on growth triggered more risk-off in equity markets.

The tech-heavy Nasdaq lost over 2% and futures are pointing to further losses today.

NASDAQ 100 Daily chart

The US earnings season kicks off in earnest this week with several major US banks reporting. Analysts are forecasting overall revenues at the banks to fall around 10% with a 26% drop in investment banking fees.

Meanwhile, King Dollar is enjoying its safe haven status amid rising rates. The DXY has topped the 100 barrier earlier today, with the euro failing to maintain its gains after the first round of voting in the French presidential election.

EUR/USD Daily chart

But the FX pair most affected by the long-end adjustment in bonds has been USD/JPY. Even rare jawboning from the Japanese authorities this morning has not stopped the enduring bids in this major.

Most seasoned traders don’t expect any proper intervention to start before 130, with the June 2015 peak at 125.85 the next resistance level to be toppled.

USD/JPY Daily chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Trade Of The Week: Breakdown On The Horizon For EUR/USD?

Watch this space as this could be an explosively volatile week for the EURUSD!

EUR/USD 1 hour chart

The currency pair seems to be gearing up for a major move with prices hovering above the key 1.0850 support level as of writing. While a solid breakdown below this level could signal further downside, such may require a strong fundamental catalyst. This may come in the form of the US inflation report on Tuesday or the European Central Bank (ECB) meeting on Thursday.

Before we take a deep dive into what to expect from the latest US CPI report and ECB, it is worth keeping in mind that the EURUSD has dropped over 4% year-to-date. The combination of geopolitical risks, surging energy prices and growth concerns continue to weigh on the Euro despite the ECB joining the hawkish bandwagon. Since the start of 2022, the euro has weakened against every single G10 currency excluding the Japanese Yen and Swedish Krona.

Taking a quick look at the technicals, things are looking noisy on the daily charts with resistance around 1.1120 and support at 1.0850. However, the trend remains firmly bearish on the weekly timeframe. Interestingly, the last time the currency pair secured a weekly close below 1.0850 was back in May 2020 – almost two years ago.

EUR/USD Weekly chart

All eyes on the US CPI report…

US inflation is expected to have hit another 40-year high in March.

Consumer prices are forecast to have risen by 8.4% year-over-year, compared to the 7.9% in February. If expectations become reality, this will be the fastest pace since 1981! This could encourage Investors to pile bets on the Federal Reserve adopting a more aggressive pace of rate increases over the next few months – raising speculation around a 50-basis point hike in May (as opposed to the customary 25-basis point moves). Buying sentiment towards the dollar could also receive a boost, which may result in the EURUSD trading lower.

Speaking of the dollar, it has appreciated against most G10 currencies since the start of 2022.

USD Year to Date

The benchmark dollar index (DXY) is up over 4.4% year-to-date with prices trading marginally below 100.00 as of writing. A solid daily close above 100.00 could open a path towards 101.00 and 102.25.

DXY Daily chart

What to expect from the ECB?

The European Central Bank is widely expected to leave interest rates unchanged when it meets on Thursday. However, it may be unwise to label this as a non-event.

At its last meeting in March, the central bank stated it would accelerate the winding down of its bond-buying stimulus, with the possibility of the scheme ending in Q3 depending on economic data. Minutes from the March meeting were also hawkish, but members of the governing council had split opinions over how to tackle soaring inflation.

Euro area annual inflation surged to an all-time high of 7.5% in March, compared to the 5.9% in February. The recent surge in inflation was the product of geopolitical risks pushing fuel and natural gas prices to record high levels. With inflation now more than 3 times above the ECB target level of 2%, the central bank may be pressured to act. However, the fresh economic uncertainty caused by the war in Ukraine has placed the ECB in a tricky position.

Investors will be paying very close attention to ECB President Christine Lagarde’s speech which could offer fresh clues on the ending of the Asset Purchase Programme (APP) and rate hike timeline. If she strikes a hawkish tone, this could support Euro bulls. However, if the ECB disappoints hawks by adopting a cautious stance, expressing concerns over the economy, and offering nothing new on rate hike timelines, the Euro could weaken.

EURUSD poised to break below 1.0850?

Taking a look at the technical picture, the EURUSD remains in a wide range on the daily charts with support at 1.0850 and resistance around 1.1120. With prices trading well below the 200, 100, and 50-day Simple Moving Average, bears remain in a position of power.

EUR/USD Daily chart

Should prices secure a weekly daily close below 1.0850, this could open the doors towards 1.0780 and 1.0700. Alternatively, a move back above 1.1000 could inspire an incline towards 1.1120. Beyond this point, bulls may challenge 1.1230.

EUR/USD Weekly chart

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

No April Love for the Single Currency

Euro Fundamental Analysis

The euro is getting bashed from all sides it seems this month, with peace talks in Ukraine a distant prospect from the hope sparked towards the end of last month. With fresh new sanctions most likely being piled onto Russia adding to the volatile situation, bond yields are ratcheting higher across the globe, and especially in the US, as inflation fears increase. This is pushing the world’s most popular currency pair, EUR/USD, back down to the hugely significant cycle lows at 1.08. The small matter of a French presidential election also kicks off this weekend to add yet another potential headwind to the single currency.

Rising bond yields have been bolstered by more comments from Fed officials in recent days. Known dove Lael Brainard called the task of reducing inflationary pressures “paramount”. She said the central bank will raise interest rates steadily while starting a “rapid” reduction of its balance sheet to tight policy further as soon as next month. This quantitative tightening talk raises the significance of asset runoff to the FOMC’s policy of overall tightening.

Markets are pricing in two bigger 50 basis point rate hikes at its next meetings in May and June. Front-loading is certainly the current narrative with the peak of the Fed’ hiking cycle eventually hitting around the 3% mark. Tonight’s FOMC minutes will be parsed for any signals of a wider consensus to shrink the balance sheet at a fast pace. This would keep bonds on the back foot and continue to support the greenback.

For the euro, mounting geopolitical risks have been the key factor in its very recent underperformance, and this shows no sign of ending. The recent shock to the eurozone’s terms of trade may be compounded by another round of sanctions on Russia. While oil exports have so far been excluded, further consequences for energy exports should keep EUR under pressure.

With investor confidence collapsing in the zone, the ECB’s response to rising inflation will also be key, with all eyes on next week’s meeting. Markets are pricing in around 50bps of rate hikes by year end. But the loss of support in EUR/USD around the 1.10 level may indicate that FX traders at least are concerned that policymakers will sound more cautious than current money market pricing.

French Presidential Election and the Euro

Another risk for the common currency is also looming with the upcoming French presidential election. Tightening polls have showed the lead for the incumbent Macron over the far-right Le Pen being cut from 61% to 39% two weeks ago to a much narrower 54% versus 46% recently. Some surveys even have a Le Pen victory within the margin of error. We note there is a noticeable pick up in implied volatility in EUR/USD options around the date of the second-round election on 24 April. All eyes will be on the first round of votes due this weekend as the beleaguered euro hopes for some Easter forgiveness.

Written on 06/04/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

For a look at all of today’s economic events, check out our economic calendar.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

 

Trade Of The Week: Gold Hunts For Fresh Fundamental Spark

Monday’s trading activity in gold was like watching paint dry…

The precious metal kicked off the new week in a muted fashion as investors digested last Friday’s US jobs report and ongoing geopolitical tensions.

Gold H1 chart

So why is gold the TOTW?

  1. This could be a volatile week for the precious metal thanks to heightened geopolitical risks, the FOMC meeting minutes, and speeches by key Fed officials.
  2. Price action shows a fierce tug of war between bulls and bears with a potential breakout/down on the horizon.

Gold could be waiting for a fresh fundamental spark to tilt the balance of power in favour of bulls or bears.

Gold H4 chart

Before we take a deep dive into what to expect from the precious metal in the week ahead, it is worth keeping in mind that gold glittered in Q1 by gaining almost 6%. This was its best quarter since mid-2020 as fears over the Ukraine-Russia conflict, soaring inflation, and global growth concerns boosted bullion’s safe-haven appeal.

Gold monthly chart

As we enter the second quarter of 2022, the path ahead could be rocky for gold bugs. Last Friday’s strong jobs report has reinforced market bets over the Fed adopting an aggressive policy stance against high inflation. Such expectations are likely to boost the dollar and Treasury yields at the expense of zero-yielding gold.

DXY Weekly chart

Gold offers no yield, making it less attractive for investors to own in an environment of rising Treasury yields.

10 year US Treasury Yield

Taking a quick look at the technical picture, the trend swings in favour of bulls on the weekly charts with weekly support found around $1900 and resistance at $1965. A move above $1965 could re-open the doors back towards the psychological $2000 level and higher.

Gold weekly chart

Fed minutes and speeches in focus

Investors across the globe will direct their attention toward the latest FOMC meeting minutes as well as scheduled speeches from key Fed officials.

The meeting minutes are expected to offer market players fresh insight into how officials view the monetary policy outlook after raising interest rates for the first time since 2018. Investors will also scrutinize the minutes for details on the central bank’s balance sheet reduction which is expected to kick off in May. Should the minutes strike a firmly hawkish tone with policymakers discussing the possibility of a 50-basis point rate hike next month, this could boost the dollar and Treasury yields – ultimately weighing heavily on gold.

There will also be a cavalry of US policymakers, including Fed Governor Lael Brainard scheduled to speak this week. Given how these speeches may influence rate hike expectations, gold could be injected with a fresh dose of volatility over the next few days.

Keep an eye on geopolitical risks

Over the weekend, things got messy on the geopolitical front with Ukraine-Russia tensions escalating following the destruction in Bucha, a town on the outskirts of Ukraine’s capital.

This negative development has dampened hopes of peace talks and prompted not only the European Union but world leaders to discuss new sanctions on Russia. The heightened levels of uncertainty and potential volatility caused by geopolitical risks could drain sentiment, extending some support to safe-haven gold.

Gold ETFs favour bulls

According to an automated report from Bloomberg, gold ETFs added 176,458 troy ounces of gold to their holdings last Friday – bringing this year’s net purchase to 8.06 million ounces. Since the start of 2022, total gold held by ETF’s are up over 8% – marking the highest level since February 2021.

The inflows could be the result of geopolitical tensions in Eastern Europe, soaring inflation, and concerns over global economic growth. An ETF (Exchange Traded Funds) is an investment instrument that allows retail traders to gain exposure to an existing market or groups of markets. A gold ETF provides investors exposure to gold without owning it physically. Inflows from ETFs are seen as bullish for the underlying asset.

Support, Resistance, Support….

The subtitle says it all.

Gold remains trapped within a $65 range on the daily charts with support at $1900 and resistance at $1965. Prices are trading above the 50, 100, and 200 Simple Moving Average while the MACD trades to the upside. A strong daily close above $1965 could trigger an incline towards $2000, $2020, and $2070.

Should $1900 prove to be unreliable support, gold could decline back towards $1874 and $1850, respectively.

Gold daily chart

For a look at all of today’s economic events, check out our economic calendar.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Market Mood Lifted By Renewed Peace Talk Hopes

Asian shares opened higher on Tuesday morning, tracking the positive overnight cues from Wall Street as market players cast aside fears of rising interest rates to focus on geopolitical developments. European stocks pushed higher this morning amid the improving market mood, with the risk-on sentiment potentially keeping US equity bulls in the driving seat later this afternoon.

In the currency arena, the yen hijacked our attention by weakening to levels not seen in seven years as the Bank of Japan intervened in bond markets to cap yields. Oil prices tumbled as China lockdowns prompted demand worries, while gold stood little chance against an appreciating dollar and rising Treasury yields. The widely watched US 10-year Treasury yield hit 2.5% yesterday.

On the geopolitical front, Ukraine’s president has said he is willing to discuss becoming a neutral country as part of a peace deal with Russia. Should a ceasefire agreement become reality, this could boost global sentiment further and revive investor confidence, sending equity markets higher.

Japanese Yen melts as BoJ intervenes

The yen is struggling to nurse the deep wounds inflicted by yesterday’s painful selloff. It weakened to a seven-year low against the dollar after the Bank of Japan (BoJ) offered to buy an unlimited amount of 10-year Japanese Government Bonds after yields rose to a fresh six-year high of 0.255%.

One would think that the extreme levels of uncertainty and geopolitical risks would send investors rushing towards the yen. However, the currency has weakened against every G10 currency since 24 February, when Russia began its invasion of Ukraine.

It is becoming clear that the yen’s weakness is a product of central bank divergence among other themes. While the Fed is willing to raise interest rates aggressively to tame rising inflation, the BoJ continues to stick with its dovish policy settings. If it carries on intervening to prevent yields from rising beyond the 0.25% policy target while other major market yields continue to rise, this could result in further yen weakness.

Looking at the technical picture, USD/JPY is heavily bullish on the daily charts. A strong close above 125.00 could open the door to the 2015 high around 125.85. Should 125.00 prove to be reliable resistance, prices could decline back towards 122.50 before experiencing some consolidation.

Oil prices shaky ahead of OPEC+ meeting

Oil benchmarks were shaky this morning after falling in the previous session amid fears over weaker fuel demand in China. WTI Crude and Brent have shed over 7% since the start of this week.

The world’s second-largest economy has announced its biggest city-wide lockdown since the Covid outbreak started more than two years ago. Given how China is the world’s largest crude consumer, this development continues to weigh on oil markets.

There could also be more volatility ahead with the OPEC+ meeting on Thursday. The cartel will determine output production beginning in May with markets expecting the group to stick with its pre-planned production quota hike of 400,000 barrels per day. Expect oil to remain sensitive to any news revolving around the China lockdown and Ukraine developments.

Gold breakdown on the horizon?

This could be a rough week for gold as renewed peace talks rekindle risk appetite. An appreciating dollar and rising Treasury yields are likely to rub salt into the wound, sending the precious metal on a slippery decline. On top of this, the US jobs report on Friday could compound gold’s woes if the numbers exceed market expectations.

Looking at the technical picture, prices have the potential to sink lower if a solid breakdown below the $1910 support is achieved. This could open the door towards $1900 and $1875. Should $1910 prove to be reliable support, prices may rebound back towards $1965 and $2000, respectively.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

“Behind the curve” Fed Plays Catch Up

Written on 23/03/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Recently, we’ve had a “melt-up” in commodities, and now it’s the turn of bond markets to experience a “meltdown”. This comes about due to a reacceleration this week in the rise in bond yields from more hawkish talk from Fed Chair Powell and other FOMC policymakers. The ground is most definitely being dug, prepared, and seeded for a more aggressive policy calibration in May and the rest of the year.

Across the central bank spectrum, officials are scrambling to regain control of the inflation picture and contain further damage to their policy credibility. The message is now crystal clear, none more so than from the world’s most important central bank. Inflation is higher and more persistent than expected and the risks are skewed to an ever greater rate of price rises. Of course, this is a major shift for the US Federal Reserve which had maintained a call that inflation was “transitory” for an unsuitably long time.

There are numerous policy implications now as the Fed plays catch up, as it is “behind the curve”. This is when a central bank is seen as not raising interest rates at a pace fast enough to keep up with inflation. So, rather than a smooth transition in the normalisation of monetary policy and the economy, a much faster tightening of policy is set to take place this year than the Fed would have had to do, with potential risks of overcompensation. This will amplify worries about how the economy and markets will cope with rising borrowing costs and prices.

We’ve heard from other Fed officials already this week after Chair Powell’s updated “forward guidance” put (interest rate) markets on red alert on Monday. He said that the central bank is prepared to raise rates by 50bp at its next meeting, which is double the usual 25bp increments.

These more hawkish intentions are drawing ever more support within the FOMC, as even more dovish leaning officials like San Francisco Fed President Daly stress the need to step up the pace of policy normalisation and are not ruling out bigger rate hikes at some point soon. A strong economy and unacceptably high inflation are building a consensus to frontload tightening and bring the policy rate to, or even above the neutral rate.

Money markets have reacted swiftly and are now fully pricing in 75bps of tightening in the next two meetings, which implies at least one 50bp increase. Two back-to-back 50bp hikes in May and June is now very possible as the message seems fairly unambiguous. Real yields, those adjusted for inflation, are driving the bond market moves with an implied policy rate of 2.25% at the end of this year and a terminal rate nearing 3%.

This environment should still favour the dollar, particularly against low yielding currencies and those more exposed to the Ukraine crisis. The former we are certainly seeing in USD/JPY which has made fresh six-year highs this week, with talk of 125 being the ultimate target. And yet, we should also be mindful of the potential for a policy mistake, with tightening coming after inflationary expectations have become de-anchored. This could result in higher prices and lower incomes which means a “soft landing” could turn out to be a mirage.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Trade Of The Week: Are Dollar Bulls Getting Tired?

US Dollar index 1 hour chart

It has weakened against most G10 currencies since last Wednesday despite the Federal Reserve raising interest rates for the first time in more than three years.

USD After Fed meeting

The mighty dollar’s failure to rally on a hawkish Federal Reserve and updated “dot plot” that signalled another 6 rate hikes in 2022 points to signs of exhaustion for bulls. Given how the latest war-related headlines failed to cushion downside losses, bears could be lurking and ready to pounce down the road.

Federal Reserve policymakers project they will increase their benchmark rate to 1.875% by the end of 2022.

FOMC Dot Plot

According to Bloomberg’s world interest rate probability model, markets have priced in 7 rates hikes this year.

The week ahead promises to be eventful for the dollar thanks to speeches from Fed policymakers, ongoing geopolitical developments, and key economic reports. It is also worth keeping a close eye on US President Biden’s meeting with European leaders at a NATO summit in Brussels on Thursday.

Before we discuss how these factors and themes could influence the dollar’s trajectory, it is worth keeping in mind that March has been a mixed month for the dollar thus far. However, it is a different story year-to-date with the greenback still maintaining some grip on the FX throne.

USD Year to date

In regards to the technical picture, the Dollar Index (DXY) may be entering a range on the daily charts with support at 97.80 and resistance at 99.40.

DXY Daily chart

Looking at the equally-weighted USD Index, prices are wobbling above major support at 1.1080 on the weekly charts.

US Dollar Index weekly chart

The week ahead

Jerome Powell hijacked the spotlight on Monday afternoon as his hawkish comments injected life into markets. He stated that the Fed will take the “necessary steps” to get inflation down even if it means aggressively raising interest rates. According to a report on Bloomberg, investors are now pricing a more than 50% probability that the Fed will hike interest rates by 0.5 bps in May. Raphael Bostic, president of the Atlanta Fed also made a speech, stating that he supported just five more interest rate increases this year.

On Tuesday, New York Fed President John Williams is scheduled to make a speech. Fed Chair Powell will be back under the spotlight on Wednesday.

Thursday could be a volatile day for markets as Joe Biden attends an emergency NATO Summit on Ukraine as well as a G7 meeting. The conflict between Ukraine and Russia continues to sap investor confidence and fuel concerns over the global economy. There is a thick smog of uncertainty created by the military conflict with fears of further escalation leaving investors on edge. If tensions escalate, this could send shockwaves across global financial markets, sending investors rushing towards safe-haven destinations like the dollar.

Should the emergency NATO meeting conclude on a positive note and revive optimism about peace talks between Russia and Ukraine, this could drag the dollar lower as risk-on returns.

Dollar breakdown on the horizon?

Watch this space as the equally-weighted USD Index could be gearing up for a major breakdown.

Prices are trading below the 50 and 100 SMA but still above the 200-day SMA while the MACD trades to the downside. A solid breakdown below the 1.1080 support level could encourage a decline towards 1.0950 and 1.0800, respectively.

Should 1.1080 prove to be reliable support, a rebound back towards 1.1300 and 1.1360 could be on the cards.

US Dollar Index daily chart

Zooming out to the weekly timeframe, the weekly bullish trend could be invalidated if prices trade back under the 1.0950 higher lower. A decline below this point could open the doors towards 1.0780.

US Dollar weekly chart

For a look at all of today’s economic events, check out our economic calendar.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Market Sentiment Sours Amid Ongoing Geopolitical Risks

In the currency space, the dollar got off to a shaky start despite the rise in Treasury yields while gold extended losses, sinking closer to $1900. Also falling are WTI oil prices which fell below $100 as China imposed lockdowns in key cities. European futures are pointing to a negative open as hopes fade over a ceasefire in Ukraine, with risk-off sentiment potentially trickling back to Wall Street which ended mostly lower Monday.

A sense of caution continues to shroud financial markets due to ongoing geopolitical tensions, rising Covid-19 cases in China, inflation fears, and looming U.S monetary policy tightening. Earlier this morning, data from China exceeded market expectations but this failed to shake off the jitters and overall gloom. This could be the theme this week as the current themes overshadow economic data. With investors likely to maintain a defensive stance towards riskier assets ahead of the Federal Reserve meeting on Wednesday, equity markets could be in store for further punishment. The S&P500 remains under pressure and has shed over 4.5% this month. A solid daily close below 4150 could signal further downside, especially if risk-off remains the name of the game.

All eyes on the Federal Reserve Meeting

The main risk event this week will be the monetary policy decision from the Federal Reserve on Wednesday. Markets widely expect the central bank to raise interest rates by 25-basis points as Federal Reserve Chair Jerome Powell recently signaled. It would be the first hike by the Fed since 2018.

Given how the conflict in Ukraine has left investors fearful over the global growth outlook, the policy path beyond March may be clouded by the fog of war. Much attention will be directed towards the economic projections (“dot plot”) and press conference for fresh clarity on future rate hikes. With US inflation hitting a new 40-year high at 7.9% in February, the Fed remains entangled in a fierce battle against rising prices. It will be interesting to hear Powell’s thoughts on recent events and how the Fed plans to navigate through this current storm.

The dollar may appreciate if the Fed adopts an aggressive approach towards higher interest rates despite ongoing geopolitical risks. Should the central bank strike a more cautious tone and economic forecasts are downgraded, this could result in dollar weakness.

Oil prices extend selloff

Oil benchmarks were under pressure this morning with WTI dipping below $100 as investors evaluated demand risks from China’s imposed lockdowns and the Ukraine-Russia ceasefire talks.

The global commodity is likely to remain sensitive to geopolitical risks and supply-side factors, especially as Russia’s oil imports are banned further. It may be wise to keep a close eye on the Energy Information Administration (EIA) report published on Wednesday. Another weekly drawdown in crude inventories could limit downside losses for oil.

Commodity spotlight – Gold

Gold stumbled into Tuesday’s session under renewed pressure as Treasury yields rose ahead of an expected rate hike by the Federal Reserve.

While heightened geopolitical risks and overall uncertainty have recently accelerated the flight to safety, the prospect of the Federal Reserve raising interest rates could result in further losses. Given how prices have dropped almost $70 since last Friday, the path of least resistance points south in the short term.

Ultimately, where gold concludes this week will be heavily influenced by the outcome of the Fed meeting, movements in bond markets, and ongoing geopolitical tensions.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Key Events This Week: Fed, BoE Set to Hike Interest Rates as War Continues

Here are the key scheduled economic data releases and events slated for this week:

Tuesday, March 15

CNH: China Feb industrial production, property investment, retail sales, surveyed jobless rate
EUR: Eurozone January industrial production, March ZEW survey expectations
GBP: UK jobs report

Wednesday, March 16

USD: Fed rate decision
US crude: EIA weekly US crude inventories

Thursday, March 17

EUR: Eurozone February CPI (final print); speeches by ECB officials
GBP: BOE rate decision
USD: US weekly jobless claims, Feb industrial production

Friday, March 18

JPY: Bank of Japan policy decision
RUB: Bank of Russia key rate decision
USD: Fed speak – Richmond Fed President Thomas Barkin

Against a highly uncertain backdrop, both the Fed and the BOE are set to look beyond the current depressing outlook and raise interest rates by 25bp. The instability of markets is failing to rattle future rate hike forecasts too, even if growth in the eurozone especially will be crimped.

It’s all about rising inflation getting even stronger in the near future as commodity and energy prices stay elevated for a prolonger period.

With US inflation already close to 8% and soon to test 9%, the domestic economy is growing and creating jobs in significant number. The newly updated Fed dot plots will show us how aggressive this tightening cycle will be, with markets currently pricing in over six rate hikes this year. But the FOMC may again highlight a need to reman “nimble” given the geopolitical upheaval.

The dollar should continue to find support amid a relatively hawkish Fed, energy independence and widening interest rate differentials. Rising US bond yields and a modest pro-risk mood have driven USD/JPY to five-year highs above 117. Safe haven currencies like the yen notably underperformed last week. This bullish dollar trend against low yielding currencies, despite slowing growth risks, may push the major up near to 118 after its breakout of an ascending triangle pattern.

USD/JPY Daily chart

Sterling hoping for some support from the Old Lady

The Bank of England is also set to raise rates for a third straight meeting, taking the Bank Rate back to its pre-pandemic level at 0.75%. There is a small chance of a 50bp move, but whether the “unreliable boyfriend” makes an appearance is open to debate.

Unchanged rates would be a major surprise given the threat of sky-high inflation.

But the cost of living crisis is sure to put a dent in economic activity while Ukraine war risks linger.

A cautious stance by the MPC would further drag on GBP for an eventual test of 1.30 and below, particularly as the Fed is expected to deliver a relatively hawkish message the day before. On the flip side, the Bank of England may rescue the beleaguered pound in the near term if policymakers show increasing concern about higher inflation over the risk of economic weakness.

GBP/USD Daily chart

Gold tries to consolidate around $2,000

Safe haven status and plunging “real” interest rates saw the precious metal get very close to the all-time high last week at $2,075. Stagflation concerns are also helping but the question remains whether the “stag” will fade at a faster pace than the “flation”. If so, expect gold bugs may suffer as a more persistent inflation shock pushes prices back to major support at $1916.

Gold daily chart

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Mid-Week Technical Outlook: Hidden Jewels & Gems

The mood across markets slightly improved as investors placed hopes on EU leaders fending off a recession caused by geopolitical risks. In the commodities arena, gold prices reversed course to dip below $2000 while oil bulls took the day off. There was action across the FX space as the dollar and yen weakened with the EURUSD among other currency pairs snatching our attention. Volatility has certainly been the name of the game over the past few days. While this comes with risk, it also presents potential setups across equity, foreign exchange, and commodity markets.

There are a couple of jewels and gems hidden beneath all the noise. However, technical analysis remains a suitable tool to unearth these opportunities.

EURUSD breakout or throwback?

It may be wise to keep a close eye on how the EURUSD behaves around 1.1121 on Thursday.

With the European Central Bank (ECB) widely expected to leave interests rates unchanged and the dollar drawing strength from the overall uncertainty, the EURUSD is poised to decline. Given how prices are approaching a key dynamic level, anything could be on the table. A strong breakout above 1.1121 may open the doors towards 1.1320. Alternatively, sustained weakness under 1.1121 could trigger a decline back towards 1.0850.

EUR/USD Daily chart

GBPUSD above major resistance

If you want clarity on the GBPUSD, just take a look at the weekly charts.

Prices remain in a bearish weekly channel and there have been consistently lower lows and lower highs. Strong support can be found at 1.3100 which is also where the 200-week Simple Moving Average resides. Should bears secure a weekly close below this support, a decline back towards 1.3000 and lower could be on the cards. Alternatively, a rebound from this level could signal a move to 1.3430 and potentially higher.

GBP/USD Weekly chart

USD/JPY same old story

It’s the same old story for the USDJPY. Prices remain trapped within a range with multiple levels of support and resistance levels on both sides. The currency pair needs a fresh directional catalyst and this could come in the form of the pending US inflation report on Thursday. In the meantime, a breakout above 116.00 could open a path towards 116.30 and 117.40. If prices slip below 115.50, then the next level of interest can be found at 114.50.

AUDUSD bears still lingering

The AUDUSD experienced a rebound over the past few weeks with bulls pushing the currency beyond 0.7300. Interestingly, prices still remain in a bearish channel on the weekly charts with 0.7300 acting as a pivotal point. Sustained weakness under this level could trigger a selloff towards 0.7120 and 0.6990.

EURJPY trend reversal?

The EURJPY has jumped over 200 pips today thanks to a weakening Japanese Yen. Prices could turn bullish on the daily charts if a strong daily close above 129.30 is achieved. A selloff back below 128.00 may trigger a steep decline towards 124.38.

GBPJPY to push higher on shorter timeframe

Things are looking bullish for the GBPJPY on the hourly charts. The upside momentum could take prices to 153.30 and 154.00 before bears re-enter the scene. A move below 152.20 could trigger a selloff towards 151.00.

Is the party over for gold bugs?

They say a picture says 1000 words. Well, then check out gold on the weekly timeframe. The forming pin bar on the weekly charts is bad news for bulls with a weekly close back below $2000 signalling further downside. It is worth keeping in mind that gold prices may be influenced by the US inflation report on Thursday.

Oil bulls twist ankles

Yesterday we questioned whether oil bulls were unstoppable? It looks like they have tripped over something or injured themselves today as prices tumble. Brent crude is trading around the $108 level after punching above $131 on Tuesday. A strong breakdown below $108 is likely to encourage a decline back towards $100.

S&P500 respects bearish channel

Despite today’s sharp rebound, the S&P500 remains in a bearish channel on the daily charts. If 4300 proves to be reliable resistance, a decline back towards 4150 and lower could become reality. Above 4300, the next key levels of interest can be found at 4415 and 4470 – a level just below the 200-day Simple Moving Average.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

ECB Caught Between a Rock and a Hard Place

Written on 09/03/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

The dilemma of being in a position where one is faced with two equally unwelcome options appears to lie deep in the human psyche. Language has always reflected people’s worries and a quick Google search finds that the phrase in our title originates back to the early part of the 20th century and a financial crisis in the U.S. Fast forward to tomorrow’s ECB meeting and a major humanitarian, trade and inflation crisis has certainly erupted on the borders of the continent.

The Russian offensive in Ukraine has made the economic outlook for the eurozone considerably more uncertain as the fighting goes on. At the same time, we have seen a melt-up in energy and commodity prices meaning that inflation will rise much further in the near term and likely remain at higher levels for longer than the ECB thought only a few weeks ago.

Typically, a central bank would ignore the inflationary impact of an energy price spike stemming from a supply shock. This is because it would have a dampening impact on consumption and actually push inflation lower in the medium term. But now, the rock and the hard place sit squarely on President Lagarde’s mantelpiece.

The ECB is playing catch up after underestimating inflation for more than a year, and also seeing increasing underlying price pressures and a tight labour market. On the flip side, it seems clear that if heightened uncertainty and higher energy prices deliver a major and longer-lasting blow to the Euro-area economy, the ECB will need to continue its easy policies for longer.

In fact, some economists are starting to forecast a potential technical recession in the region. That means two consecutive quarters of negative GDP growth, which several estimate could start at the beginning of 2023. With a war on their doorstep, will consumers go out and spend their savings they’ve built up through the pandemic? Inflation expectations are also surging and now remain clearly above the ECB’s 2% target. This has forced traders into pricing in rising risks of stagflation – the toxic mix of weak growth and high inflation.

With all this to tax the minds of the Governing Council, money markets are still pricing in around a full 25bp interest rate hike by the end of this year. The bank will release their latest staff economic projections which are expected to show softer growth along with higher inflation forecasts. Consumer prices have already been rising at their fastest rate in the 22-year history of the single currency, jumping 5.8% in the year to February. Most economists expect it to remain well above the ECB’s 2% target at least for this year.

A neutral stance is now the call for President Lagarde at her press conference tomorrow. Recent comments from ECB officials have cautioned against repeating past mistakes of tightening policy too early. This means careful steps are warranted as the fallout from the geopolitical events unfolds. This definitely marks a shift in tone from just a few weeks ago when a normalisation of policy and an interest rate rise by the end of the year was forecast.

Will there be some semblance of policy normalisation with added flexibility further out? It will be instructive to see if the already announced rotation of its bond buying programmes continues as planned. All eyes are on you, Madame Lagarde.

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