Markets Hang on Powell and Data to Kick Off Busy December

All Eyes on Powell’s Speech

We are getting into the time for decisions about when to put up Christmas trees and decorations. Is it too early yet or should we delay it until closer to the festive period? Monetary policy decisions of a bigger kind will have to be made soon in mid-December when all three of the major central banks meet to decide their next steps on their policy tightening paths.

Indeed, the calendar sees US CPI data released hours before the final FOMC meeting on December 14, which comes the evening before the last Bank of England and ECB gatherings of the year. It promises to be spicey ending to another tumultuous year!

In the meantime, we get to hear what Chair Powell makes of the economy and labour market in a speech later today. This is the final chance we will hear from the main man ahead of the Fed blackout period which comes two weeks before the Saturday preceding the FOMC meeting.

After this time, no Fed speakers will be on the wires which means it could potentially be a significant occasion for Powell to guide markets. Otherwise, markets may be watching the WSJ’s Nick Timiraos who is the Fed’s whisperer-in-chief for further policy clarity.

Chair Powell is likely to remind markets that the Fed is unlikely to pivot soon and will keep raising rates further and most probably hold them at an elevated level for longer. Most Fed watchers see him reiterating that demand remains strong, the labour market is still tight and there needs to be compelling evidence that inflation is coming down soon.

These kind of comments in theory should support the stabilisation and bottoming out process in US Treasury yield and the dollar after their recent correction. The widely followed DXY index tapped its 200-day simple moving average yesterday, so this offers major support to the buck.

US Data Dump Kicks Off Thursday

Markets will be laser-focused on the monthly non-farm payrolls report released at the end of the week. This is the last big employment report before the Fed meeting in a few weeks. Consensus expects job gains of a still healthy 200,000 in November, down from the 261,000 and the three-month average of 289,000.

The jobless rate is forecast to remain at 3.7% with earnings set to grow 0.3%. Whether the data shows some cooling in the labour market will be central to hiking expectations into next year and with it, the peak terminal rate in the US Fed funds rate.

We also get an array of other figures tomorrow which includes the Fed’s preferred inflation gauge, the PCE. This is a broader measure of price pressures and is expected to cool to 0.3% from 0.5% in September. Fed rate expectations were pulled back after the softer 0.3% rise in core CPI earlier this month.

Finally, ISM manufacturing figures are predicted to fall to 50 with attention on new orders and the employment metric ahead of NFP. It’s a busy few days which should set markets up for the middle of next month.

Written on 30/11/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

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.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Risk Sentiment Improves As China Rebounds

Investors received a taster early this morning with Asian stocks rallying as Chinese shares rebounded from the heavy selloff triggered by unrest over Covid restrictions. Shares in the region were also supported by a rally in the property sector after China removed restrictions on developers selling stock to raise funds. European futures are pointing to a positive open amid the improving market mood in Asia.

This renewed appetite for risk could find its way back to Wall Street as market jitters over the developments in China ease. In the currency space, the dollar fell along with Treasury yields while the euro hovered around the 200-day SMA at 1.0380. Gold prices rebounded during early trading helped by a weaker dollar, while oil prices jumped as speculation around more supply cuts by OPEC+ intensifies.

In Europe, the pending economic sentiment and consumer confidence figures for November could provide insight into the health of the European economy. The euro may find itself under renewed pressure if these reports fail to meet expectations. However, the key focus falls on the German inflation figures scheduled to be released today and then for the wider region on Wednesday. Inflation in Europe is expected to remain at elevated levels, with the CPI projected to ease slightly from a record high of 10.6% in October.

All Eyes on Fed Chair Powell

Dollar bulls were injected with renewed inspiration on Monday thanks to hawkish comments from Federal Reserve officials. Perennial hawk Bullard said he believed “markets are underpricing a little bit the risk that the FOMC will have to be more aggressive rather than less”. New York Fed President Williams struck a softer tone but also said he saw the rate path higher.

Regardless of recent gains, the greenback could find itself under fresh selling pressure not only due to the improving market mood, but if Powell reinforces expectations over the central bank slowing its pace of interest rate increases in a speech scheduled for Wednesday.

Much attention will also be directed toward the PCE Core Deflator on Thursday which is the Fed’s preferred measure of inflation. Any signs of cooling inflation will most likely fortify expectations around the Fed adopting a less aggressive approach toward rates.

Friday could be the main market shaker as all eyes turn to the monthly US non-farm payrolls report. The US economy is expected to have created 200,000 jobs in October with the unemployment rate unchanged at 3.7%. A report that meets or prints below expectations may justify a change in the pace of the Fed’s policy tightening, ultimately weakening the dollar further.

Talking technicals, the DXY remains under pressure on the daily charts. A move back below 106.00 could encourage a decline toward the 200-day SMA around 105.30. Below this point, the next level of interest can be found at 104.50.

Currency Spotlight – EUR/USD

This is bound to be a volatile trading week for the EURUSD thanks to the numerous key risk events in Europe and the United States.

With the Eurozone inflation figures and Powell’s speech on Wednesday, the US PCE deflator and US ISM on Thursday, topped off with the US jobs report on Friday, this could be a rollercoaster week for the EURUSD. Looking at the technical picture, the currency pair is bullish on the daily charts but remains capped around the 200-day SMA. A solid daily close above 1.0450, followed by a move towards 1.0500 could signal that bulls remain in control. Alternatively, a selloff towards 1.0300 could result in a move to 1.0190 and 1.0100.

Commodity Spotlight – Gold

Gold is waiting for a fresh fundamental spark to get its gears moving and this could come in the form of speeches from Fed officials, geopolitical risks, or key US economic data such as the NFP.

The precious metal remains in a wide range on the daily charts with support at $1735 and resistance at $1785. However, with the fundamentals slowly tilting in favour of gold bulls, a solid breakout could be around the corner. In the meantime, prices are trading above the 50-day and 100-day SMA but below the 200-day SMA. A solid breakout above $1785 could open the doors toward $1800 and $1840. Should prices slip back below $1735, this may result in a selloff towards $1700.

For more information visit FXTM.

Week Ahead: How Likely Will EUR/USD Hit 1.05?

Economic Calendar for Next Week

Monday, November 28

  • AUD: Australia October retail sales
  • EUR: European Central Bank President Christine Lagarde speech
  • USD: Speeches by New York Fed President John Williams, St. Louis Fed President James Bullard

Tuesday, November 29

  • JPY: Japan October unemployment, retail sales
  • GBP: Bank of England’s Catherine Mann speech
  • EUR: Germany November inflation, Eurozone November economic confidence
  • CAD: Canada September GDP
  • USD: US November consumer confidence
  • Twitter to relaunch blue-tick verification

Wednesday, November 30

  • JPY: Japan October industrial production
  • CNY: China November PMIs
  • AUD: Australia October inflation
  • EUR: Eurozone November inflation, Germany November unemployment
  • GBP: Bank of England Chief Economist Huw Pill speech
  • USD: Fed Chair Jerome Powell speech, Fed Beige Book, US 3Q GDP (second estimate)
  • US crude: EIA weekly oil inventory report

Thursday, December 1

  • JPY: Bank of Japan Governor Haruhiko Kuroda speech
  • CNY: China November Caixin manufacturing PMI
  • EUR: Eurozone October unemployment, November manufacturing PMI, speech by ECB Chief Economist Philip Lane
  • GBP: UK November manufacturing PMI (final)
  • USD: US weekly initial jobless claims; October personal income/spending, PCE deflator; November manufacturing
  • USD: Speeches by Dallas Fed President Lorie Logan, Fed Governor Michelle Bowman

Friday, December 2

  • USD: US November jobs report, Chicago Fed President Charles Evans speech
  • CAD: Canada November unemployment

The coming week appears set up for a major move in EURUSD, as markets await key data out of the Eurozone and the US economies.

  • The Eurozone’s November consumer price index (CPI) is expected to remain at painful levels, with the CPI from the month prior hitting a record high of 10.7%.
  • The headline US November nonfarm payrolls figure is forecasted to come in at 200,000 (lower than October’s 261k), while the unemployment rate is set to hold at 3.7%.

Ultimately, such economic data will be filtered the global tightening lens.

That means that markets will interpret the data based on whether or not they allow either the European Central Bank of the US Federal Reserve to carry on with larger interest rate hikes.

Raising Interest Rates Has Been the Best Tool To Fight Against Inflation

Keep in mind that inflation has been enemy #1 for major central banks, and their primary weapon in fending off the inflation beast is by raising interest rates.

  • The stronger the inflationary pressures, the larger the rate hike (typically).
  • The larger the rate hike (relative to other economies), the stronger its currency.
  • However, aggressive hikes also carry the risk of triggering an economic recession.
  • Hence, central banks may start to ease up on their rate hikes (either by opting for smaller rate hikes, or pausing, or even making a u-turn with a rate cut instead) if they grow concerned about incurring too much economic damage.

Hence, it’s the above narrative that will guide investors and traders, as they asses the EURUSD’s prospects over the week ahead, in light of the incoming data.

Potential Scenarios

  1. EURUSD may move higher if Eurozone’s November inflation punched its way to a fresh record high above 10.7% + a higher-than-expected US unemployment rate/lower-than-expected headline US NFP number (<200k)
  2. EURUSD may move lower if Eurozone inflation eases below October’s 10.7% + a lower-than-expected US unemployment rate/higher-than-expected headline US NFP (>200k)

Will EUR/USD Stay Above or Below its 200-day SMA?

EURUSD’s 200-day simple moving average (SMA) has exerted strong resistance over the world’s most popularly traded FX pair in recent sessions.

Note also that the 1.04 region was a key battleground between bulls and bears back in May/June, twice repelling euro bears (those who believe that EURUSD will fall).

Based on current levels, markets are forecasting a likelier-than-even chance (61%) that EURUSD would move northward and touch 1.05 by this time next week, as opposed to the 43% chance that EURUSD would moderate back down to 1.03 over the same period.

However, further gains may tip EURUSD over into ‘overbought’ territory, with its 14-day relative strength index now threatening to cross over the 70 threshold.

Such a technical event may signal an immediate pullback.

Ultimately, whether EURUSD can stay either above or below its 200-day SMA next week is set to depend on which central bank has been allowed to persist with supersized rate hikes.

For more information visit FXTM.

Trade of the Week: Kiwi to Reach 200-day SMA on Record RBNZ Hike?

NZD in Q4: By the Numbers

NZD has a quarter-to-date gain against all of its G10 and Asian peers.

Here’s a sample:

  • NZD up 3.1% against GBP
  • NZD up 4.4% against EUR
  • NZD up 5.3% against AUD
  • NZD up 6.5% against JPY
  • NZD up 8.5% against USD

(% performance since September 30th till time of writing)

Even going slightly further back, for the second half of this year so far, the kiwi only has declines against FX safe havens such as the US dollar, Swiss Franc, Singapore dollar, and the Hong Kong dollar (HKD is pegged to USD).

What’s Driving NZD’s Outperformance of Late?

Markets are forecasting a 64% chance that the RBNZ will trigger a 75-basis point hike this week.

If so, that which would be the RBNZ’s largest ever hike since its official cash rate was rolled out in 1999!

And a record hike would only add to cumulative hikes by this central bank, having already raised its official cash rate by 325 basis points (bps) since October 2021, including 50-basis points at each of its past five meetings.

Generally speaking, the higher interest rates go in an economy relative to its peers, the stronger its currency.

Why Would the RBNZ Need to Trigger a Record Hike?

A larger 75bps hike may be needed to keep consumer prices from rising uncontrollably.

Note that a central bank’s main weapon against runaway consumer prices is by raising interest rates to “destroy” demand in the economy.

Keep in mind:

  • New Zealand’s consumer price index (CPI) for the third quarter rose by 7.2% compared to 3Q 2021.
  • That 7.2% figure was above the median forecast of 6.5%, with the former number being near its highest levels since 1990!

And that’s even with all of the RBNZ’s hikes that have been incurred over the past year which apparently are having little impact on the inflation scourge so far.

Hence, NZD has been lifted on the wings of expectations that the RBNZ may well send its benchmark rates higher than previously anticipated.

Markets are now forecasting that New Zealand’s interest rates will keep rising from the 3.5% level at present before peaking around 5.15% by mid-2023.

And this has been an opportune time for NZD bulls to take advantage of the US dollar’s pullback, with markets expecting that the Fed is getting closer to being down with its own US rate hikes.

But if the RBNZ actually opts for a 50-bps hike this week instead, that may disappoint NZD bulls who had been hoping for that larger 75bps hike, potentially prompting them to unwind some of NZD’s recent gains.

Can NZD/USD Reach 200-day SMA?

At present, markets are forecasting only a 16% chance of NZDUSD the 0.63 mark, around where the kiwi’s (nickname for NZDUSD) 200-day simple moving average currently lies.

After all, Kiwi bulls (those hoping NZDUSD can climb higher) are already encountering resistance around the 0.62 psychological area, which has been a key battle region between bulls and bears since May.

Looking at a key technical indicator, NZDUSD’s 14-day relative strength index (RSI) is also pulling back from the 70 threshold which typically denotes overbought conditions, suggesting that the NZD’s ascent has gone too far.

To the downside lies its 100-day SMA, just above the 0.60 mark, which may offer underlying support should the RBNZ disappoint this week or if the US dollar’s catches fresh safe haven bids.

Markets are currently forecasting a 41% chance of 0.60 being attained by Kiwi bears for the next one-week period.

To recap, NZDUSD’s performance this week may all come down to the following key events:

  • the size of the RBNZ’s actual cash rate hike
  • RBNZ’s outlook for the cash rate going into 2023
  • Fed meeting minutes released on Wednesday/scheduled speeches by Fed officials this week

And on that final point above, let’s take a brief look at the USD half of NZDUSD.

Noting that this week is absent of tier-1 US economic data, the US dollar could react to fresh policy clues out of the FOMC meeting minutes and the Fed speakers due before the Thanksgiving break.

Should the US dollar relinquish its gains at the onset of this week, on renewed hopes that the Fed is closer to being down with its own rate hikes, that could make NZDUSD’s path towards its 200-day SMA a lot easier.

For more information visit FXTM.

Upbeat Markets Hit the Dollar

Written on 15/11/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

A much more positive vibe has infected markets recently on the back of the softer than expected US inflation data released last week which has seen sharp position adjustment in both dollar ownership and equity indices. Traders cheered and even chest-bumped several statistical measures which showed that “peak inflation” might now be in place after many false dawns.

Revisions to China Covid policy and a possible de-escalation in the Ukraine-Russia conflict have also helped boost sentiment as we head into year end. The Xi-Biden meeting on Monday has simply added to the feel-good environment swirling around risk taking.

The fear of missing out or “FOMO” is being mentioned again on trading desks as fund managers who are knee-deep in cash holdings ponder jumping on board the bull markets we are now seeing in numerous stock indices. For example, the German Dax has gained over 20% since its lows in early October which is the classic definition of a market in bull territory.

According to data from the Bank of America, fund managers have been holding more cash than at any point since 2001. The short squeeze is powerful driver as concerns over materially underperforming this powerful bullish momentum could see more upside, especially as we enter the seasonal period of a traditional risk rally into the final trading period of the year.

Dollar Doldrums

The most crowded trade in the global investment community has undergone a severe adjustment very recently. Long dollar positions lost over 4% of its value last week and the greenback continues to struggle. Fed rate expectations have dropped dramatically since the CPI data with the peak Fed funds rate now below 5%. Numerous Fed speakers are scheduled over the coming days with policymakers expected to make it known that they do not want to make any concessions to inflation at this point.

The well-known dove Lael Brainard signalled there is more work to do while also stating explicitly that the Fed will likely shift to slower rate increases soon. The reality is that the FOMC is much closer to the end of its rate hiking cycle now with slower growth likely to emerge early next year along with a further reduction in inflationary pressures.

EUR/USD Tests 200-day SMA

The weak dollar dynamics and lower gas prices are helping EUR/USD make new cycle highs after its broke out of the long-term bear channel earlier this month. The world’s most traded currency pair is nearing key resistance, the 200-day simple moving average at 1.0427, an indicator it last touched back in June 2021.

GBP/USD also looks to have moved out of its descending channel as sterling traders eye up CPI data released tomorrow ahead of the pivotal Autumn Statement announced by the new Chancellor on Thursday. That is an event not to miss as financial market credibility will do battle with political expediency.

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.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Week Ahead: Can GBP/USD Rise to 1.190?

First, let’s recap the volatile week that was for global financial markets!

Here’s the stunning price action that ensued after the lower-than-expected US inflation print that was released yesterday (Thursday, Nov 10th):

  • DXY, the benchmark used to measure the US dollar’s performance against six major G10 currencies, saw its biggest single-day drop since December 2015!
  • The S&P 500 posted its best one-day surge since the onset of the Covid-19 pandemic, while also registering its best CPI day advance since 2008!
  • Gold is on course for its largest one-week gain since July 2020 (unless the precious metal can keep on climbing today to register a weekly gain of more than 5.06%)

And even before the dust has fully settled from yesterday’s major moves, it’s already time we look ahead to next week, given the forward-looking nature of the markets.

Major Forex Market Releases for the Week Ahead

The British Pound is set to be in particular focus amidst these potential market-moving economic data releases and events:

Monday, November 14

  • EUR: Eurozone September industrial production; speeches by ECB’s Fabio Panetta, Luis de Guindos
  • USD: Speech by New York Fed President John Williams

Tuesday, November 15

  • JPY: Japan Q3 GDP
  • AUD: Reserve Bank of Australia November meeting minutes
  • CNH: China October industrial production, retail sales, jobless rate
  • EUR: Eurozone September trade balance, Q3 GDP and employment, November ZEW survey
  • GBP: UK September unemployment, October jobless claims
  • Brent: International Energy Agency releases monthly oil market report
  • Former US President Donald Trump to make announcement
  • Walmart 3Q earnings

Wednesday, November 16

  • CNH: China October new home prices
  • EUR: Speeches by ECB’s Christine Lagarde and Fabio Panetta
  • GBP: UK October CPI, BOE Governor Andrew Bailey speech
  • CAD: Canada October CPI
  • USD: US October retail sales, industrial production; speeches by New York Fed President John Williams and Fed Vice Chair Lael Brainard
  • US crude: EIA weekly oil inventory report

Thursday, November 17

  • JPY: Japan October external trade
  • AUD: Australia October unemployment
  • EUR: Eurozone October CPI (final)
  • GBP: UK Chancellor of the Exchequer Jeremy Hunt presents fiscal statement; speech by BOE’s Huw Pill and Silvana Tenreyro
  • USD: US weekly initial jobless claims; speeches by Minneapolis Fed President Neel Kashkari, Fed Governor Philip Jefferson, Cleveland Fed President Loretta Mester
  • Alibaba 3Q results

Friday, November 18

  • JPY: Japan October CPI
  • EUR: Speeches by ECB’s Christine Lagarde, Joachim Nagel, Klass Knot
  • GBP: Speeches by BOE’s Catherine Mann and Jonathan Haskel
  • USD: Speech by Boston Fed President Susan Collins

Technical Indicators for the British Pound

GBPUSD is about to head into this weekend on a 2-month high, having surged back above its 100-day simple moving average (SMA), thanks to the US dollar’s post-CPI tumble.

This currency pair, nicknamed “cable”, is now testing the mid-September high around 1.173, after building upon a series of higher-lows and higher-highs since careening towards parity.

Fundamentals

Sterling’s resurgence of late has also been built on the optimism that the UK government will be on a better financial footing (or at least, it won’t be as bad as previously feared) under the new administration, following the removal of Liz Truss as Prime Minister along with her administration’s proposals for unfunded tax cuts.

However, such optimism would have to be vindicated when current UK Chancellor of the Exchequer, Jeremy Hunt, unveils the latest fiscal plans on Thursday.

Keep in mind that the UK government has a GBP 50 billion fiscal hole to fill.

Markets now expect Hunt to unveil some tax hikes as well as spending cuts, including a potential spending freeze after the UK’s next general election which may happen sometime in 2024.

In other words, this new UK government has to find ways to get more money into its coffers and avoid spending too much money, in order to shore up market confidence about the country’s financial health.

With this UK government’s credibility at stake, failure to shore up market confidence could see GBPUSD finding its way back to its 50-day SMA for support around the 1.133 region.

And of course, markets are still wary about the UK’s economic prospects, with the Bank of England just last week implying that the economy is currently in a recession and may continue contracting until mid-2024.

Against such a bleak outlook, the UK incoming jobs report and inflation data may offer scant relief. That should leave Hunt’s November 17th speech as the major catalyst for further GBPUSD gains, besides further declines in the US dollar.

British Pound Price Forecast

At the time of writing, here are some forecasts for GBPUSD’s performance for the coming week (based on current levels):

  • 59% chance of GBPUSD of revisiting 1.1599
  • 47.6% chance of GBPUSD climbing by 2 big numbers from current levels to hit 1.19
  • 33% chance of GBPUSD touching the early-October cycle high just below 1.1496
  • 23.7% chance of GBPUSD staying above 1.190 over the next one week

Though to be fair, the options markets have become notably less bearish on GBPUSD’s immediate fortunes, with bearish one-week bets having halved since the start of November.

For more information visit FXTM.

Mid-Week Technical Outlook: Market Gems & Jewels

Republicans and Democrats remain in a tight race for control but Republicans appear on course to win a majority in the House of Representatives with 198 seats as of writing. However, the Senate fight is too close to call.

The growing anticipation and tension from the US midterms have left market players cautious – stimulating some appetite for safe-haven assets. The dollar edged higher as risk sentiment took a hit while sterling slipped back below 1.1500.

Looking at commodities, gold remains above $1700 while oil has found itself back under $95. Things could turn volatile for financial markets over the next few days thanks to the US inflation report and other key reports from major economies. When volatility strikes, this presents potential trading opportunities and there are a couple of gems hidden under all the noise.

USD Index Breakdown on Horizon?

The FXTM Equally-weighted USD Index remains under pressure with prices wobbling around 1.2400 as of writing. There have been consistently lower lows and lower highs in the H4 timeframe with prices trading below the 50,100 and 200 SMA. Sustained weakness below 1.2400 could trigger a selloff towards 1.2340 and 1.2300, respectively. A move back above 1.2400 may open a path towards 1.2650.

EUR/USD Tests Strong Resistance

After pushing back above parity earlier this week, the EURUSD has found itself trapped within another range with resistance at 1.0100 and support at 1.0000. Given how prices are trading above the 50 and 100 SMA coupled with the fact that the MACD is trading above zero, bulls have some control. A strong move above 1.0100 could spark an incline towards 1.0190. Should 1.0100 prove to be strong resistance, the EURUSD may retest parity.

GBP/USD Waits for Fresh Spark

If one word comes to mind when looking at the GBPUSD, it will be “noisy”. The currency pair is pretty choppy and trapped within multiple layers of support and resistance. Bulls or bears need to breakout of this noisy region for the GBPUSD to push higher or lower. A strong move above 1.1500 may trigger an incline towards 1.1600, 1.1750, and 1.1850, respectively. A breakdown under 1.1400 could open a path towards 1.1200.

USD/JPY Wobbles Above 145.00

After creating consistently higher highs and higher lows, the USDJPY bullish trend could be coming to an end in the daily timeframe. Prices are trading above the 50-day SMA which is where the 145.00 support level resides. A strong breakdown below this level could encourage a selloff towards 142.00 and 139.50, respectively. Another rebound from 145.00 is seen opening a path back to 149.00.

S&P 500 Respecting Bearish Channel

A picture says 1000 words. Much can be said for the S&P 500 on the weekly timeframe which continues to respect a bearish channel. There have been consistently lower lows and lower highs on the weekly charts while the MACD trades lower. Prices may test 3650.0 which is just above the 200-week SMA. A breakdown and weekly close under this point may trigger a further decline towards 3450.

For more information visit FXTM.

How Might 2022 US Midterm Elections Affect Stocks? Here Are 3 Scenarios

  • Since 1946, US stocks typically fared better in 6-month period after midterms elections, than six months prior.
  • Democrats retaining control of Congress may be deemed negative for US stocks, while Republicans wresting control of Congress could be seen as positive for equities.
  • However, any reaction to this midterm election could be relatively modest compared to the larger driver that is the Fed’s attempts to cool still-hot inflation (and possible trigger a US recession).

History Has Been Kind for US Stock Markets Following the Midterm Elections

According to Bloomberg data, for 16 out of the past 19 midterms since 1946, stocks have fared better in the 6-month period after a midterms than the six months before the elections.

Also, take into account the year-end seasonality which typically heralds stock gains.

Over the past three decades, the month of November has seen an average monthly gain of 1.84% for the S&P 500.

That’s the second-highest monthly average gain going back to 1993, after first-placed April’s 2.28% average monthly climb over that three-decade span.

However, This Year Could Be Different

The US pollical landscape has since changed drastically, with the chasm seemingly growing more polarized with the passage of time.

Also, the macroeconomic backdrop and the resultant central bank response has been unkind to risk assets, to say the least.

After all:

  • US core inflation (consumer prices that exclude more-volatile food and energy prices) is at its highest since 1982, pending this Thursday’s (Nov. 10th) US inflation data release.At 6.6% as of September 2022, that core CPI print is still more than triple the Fed’s 2% target (though the Fed’s preferred inflation gauge is the Core PCE).
  • The US Federal Reserve has already hiked its benchmark interest rates by 375 basis points so far this year, bringing the upper bound of its rates range now to 4% = a level not seen since 2008.Using current market forecasts, US rates are expected to peak at 5.1% by mid-2023, though that peak could move even higher if US inflation is shown to be stubbornly elevated.

A Reminder of What’s at Stake in Today’s Midterm Elections: Control of the US Congress

NOTE: Senate + House = US Congress

Up for grabs today:

  • 435 seats in House of Representatives
  • 35 of the 100 Senate seats
  • 36 governorships

Going into this election, Democrats have control of both chambers of Congress, as well as the White House (US President Joe Biden is a Democrat).

Republicans only need to take on 5 seats to claim a House-majority, while only one more seat is needed to take control of the Senate.

Ultimately, markets want to know how the political makeup of Congress would set the incoming fiscal policies, and how such policies would feed into the current inflation outlook as well as the Fed’s expected response.

After all, inflation woes as well as recession fears are very much framing voters’ mindsets as they cast their ballots today.

Such worries have already seen a notable shift away from Democrats, with President Biden’s approval ratings falling in the lead up to today’s elections.

3 Scenarios for US Stocks

But as for investors and traders around the world, here are some broad outcomes that they might have to content with over the next 24 hours:

1. If Republicans Control Both the House and the Senate = S&P 500 May Extend Recent Gains

Republicans are typically associated with tighter fiscal spending.

Less government spending could work in tandem with the Fed rate hikes in subduing red-hot consumer prices.

Hence, we may see immediate gains for US stocks based on the above assumptions, as a Republican stronghold on Congress (and tighter fiscal spending) implies that the Fed may have less work to do in subduing inflationary pressures.

Though whether or not Republicans can actually rein in government spending, especially if the US economy threatens to enter a recession in 2023, would be a different matter.

2. If Democrats Retain Control of the House and Senate = S&P 500 May Fall Further

Democrats are typically associated with looser fiscal spending plans/larger government spending.

Already in the lead up to today’s elections, the party has touted boosting healthcare and childcare subsidies and wage hikes for workers.

These types of measures tend to fan inflationary pressures, which implies the Fed has to raise US interest rates even higher.
As we know, Fed rate hikes have essentially been enemy #1 for US stocks this year.

Hence the simplistic assumption here would be:

More government spending by Democrats = more Fed rate hikes = more pain for US stocks.

3. Political Uncertainty / Unclear or Contested Outcome = S&P 500 Could Revel Amidst the Ambiguity and Hang on to Recent Gains

Markets generally dislike uncertainty.
However, uncertainty that preserves the way things are (the status quo) may not be such a bad thing for stocks.

Additionally, US stocks have proven resilient to political unrest, judging by recent history.

Recall how even amidst the January 2021 riots at the US Capitol, the S&P 500 barely budged, going about its merry way towards its all-time high just a hair below 4820 (intraday prices) at the start of 2022.

Still, one could argue how any chaos in Congress might yet trigger a knee-jerk selloff across stocks, with investors potentially entering into risk-off mode and seeking refuge in safe havens (e.g. gold, US dollar, US Treasuries).

Looking at the Charts …

To be clear, the S&P 500 remains very much in a downtrend on the weekly timeframe.

And with the S&P 500 already headed for its worst year since the Global Financial Crisis, today’s midterm elections may influence whether its:

  • year-to-date losses of 20% can be trimmed, or …
  • the ongoing bear market will be extended in 2023

Heightened macro fears (and downward earnings revisions) may yet see the S&P 500 ultimately retesting its 200-week SMA for support in the mid-3000 region.

Key Resistance and Support Levels for S&P 500 After 2022 US Midterm Elections

  • IMMEDIATE RESISTANCE: 3920
    (late-October/early-November cycle high, also around its 100-day simple moving average)
  • STRONGER RESISTANCE: 4000 psychologically-important mark
  • IMMEDIATE SUPPORT: 3700 region
    (last week’s low)
  • STRONGER SUPPORT: around 3637
    (mid-June cycle low)

Overall, I’m inclined to think that any reaction to the US midterm elections are expected to be relatively muted compared to the bigger driver that is the Fed’s ongoing rate hikes which in turn are ramping up recession risks for the world’s largest economy.

Noting that the final tally for this US midterm elections could take days before reaching a conclusive ending, then should leave Thursday’s US inflation report in the driver’s seat for dictating how the S&P 500 would fare over the immediate term.

For more information visit FXTM.

Week Ahead: Will Gold Hit New 2-year Low?

And we’re about to get the next chapter in that lesson: the incoming US consumer price index (CPI) is set to be the central focus for markets over the coming week.

Economic Data for Next Week

Here are the scheduled economic data releases and potentially market-moving events for the week ahead:

Monday, November 7

  • CNH: China October external trade
  • EUR: ECB President Christine Lagarde speech, Germany September industrial production
  • USD: Fed Speak – speeches by Boston Fed President Susan Collins, Cleveland Fed President Loretta Mester, Richmond Fed President Tom Barkin

Tuesday, November 8

  • AUD: Australia October household spending, November consumer confidence
  • EUR: Eurozone September retail sales
  • GBP: Speeches by BOE MPC member Catherine Mann, BOE Chief Economist Huw Pill
  • USD: US midterm elections
  • Disney 4Q earnings
  • Twitter shares to delist

Wednesday, November 9

  • CNH: China October CPI and PPI
  • GBP: Speech by BOE MPC member Jonathan Haskel
  • USD: Fed Speak – speeches by New York Fed President John Williams, Richmond Fed President Tom Barkin
  • US crude: EIA weekly oil inventory report

Thursday, November 10

  • AUD: Australia November consumer inflation expectations
  • Gold: US October inflation
  • USD: US weekly initial jobless claims, speeches by Dallas Fed President Lorie Logan, Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester

Friday, November 11

  • EUR: Germany October CPI (final)
  • GBP: UK 3Q GDP, September industrial and manufacturing production, external trade
  • USD: US November consumer sentiment

Inflation Forecast for Next Week

Here are the forecasts by economists for Thursday’s (November 10th) crucial inflation data release:

  • Headline CPI is set to moderate from September’s 8.2% year-on-year growth down to 8% for October. That’s still four times higher than the Fed’s 2% target.
  • Core CPI (excluding food and energy prices) is expected to remain stubbornly elevated at a 40-year high of 6.6%.

Tightening Cycle vs Gold

Until the inflation data points to a sustained slowdown, the Fed would be unrelenting in sending US interest rates upwards.

And as we know, this ongoing policy-tightening has already been this year’s enemy #1 for risk assets.

In addition to the hard data, the scheduled speeches by Fed officials in the days ahead may offer further nuance to the US rates outlook, even as Fed Chair Powell’s hawkish signals are still ringing in our ears.

If the other Fed officials suggest that at least some of them are considering when to hit pause on the rate hikes, that may spell some measure of relief for the likes of gold.

Gold Price Forecast

Note how since September, spot gold has been able to rebound every time its reaches down into the $1614-$1617 region.

Still, the precious metal remains firmly in its longer-term downtrend, having been guided lower by various simple moving averages (SMA).

Another major dose of unrelenting US inflation, especially in the case of higher-than-expected CPI figures in the week ahead, may result in this key support region giving way below spot gold.

On the other hand, spot gold could resurface above its 21-day SMA if the inflation data eases meaningfully, or if next week’s Fed speak do not echo Chair Powell’s hawkish rhetoric.

Of course, the projected price action above assumes that such levels haven’t been reached before the weekend, depending on how bullion reacts to the pivotal US jobs data due to be released later today (Friday, Nov. 4th).

For more information visit FXTM.

BoE Delivers Biggest Rate Increase in 33 Years

Rate Hike Details and Future Policy Scenarios

Despite delivering its biggest rate increase in 33 years, this came with grim warnings over the UK’s economic outlook and path of future policy rates. The central bank struck a cautious note, expressing concerns over Britain experiencing its longest recession since records began.

Looking at the policy statement and overall mood of the meeting, today’s decision felt like a “one-off” move – especially after stating that the peak interest rates are likely to be lower than speculated by financial markets.

The BoE meeting certainly took a different turn when compared to the Fed. Yesterday, not only did the Federal Reserve raise interest rates by 75bp – it also signaled that the ultimate level for interest rates will be higher than previously expected!

The British Pound Weakens Against Every Single G10 Currency

Redirecting our attention back towards the pound, it has weakened against every single G10 currency today. With investors expecting the BoE to exit the jumbo rate hike club by December due to the deteriorating economic outlook and political developments, sterling could be set to weaken further. The GBPUSD remains under pressure on the weekly and daily charts. Sustained weakness below 1.1500 could open the doors back towards 1.0925.

Zooming in on the daily charts, prices have broken through the bullish channel and currently testing the 1.1200 support level. A strong daily close below this support could encourage a selloff towards 1.0925. Should 1.1200 prove to be reliable support, prices could experience a rebound back toward 1.1400.

For more information visit FXTM.

Fed Goes Jumbo, For One Last Time?

Written on 01/11/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

It’s a busy week of central bank meetings with the marquee FOMC gathering widely expected to hike rates by another 75bps. Their rate decision is set to be announced at 18.00 BST (an hour earlier than usual due to the clock change!) with the press conference half an hour later. As this jumbo-sized move is already baked in, markets will focus on the tone and language in the policy statement and press conference for any hints on the future path for rate rises.

There are no new updates to the quarterly macro and rates projections at this meeting. The rate move would be the fourth straight 75bp increase since June and lift the target range for the Fed funds rate to 3.75%-4.00%. We note that the latest FOMC dot plot projections issued in September had a peak rate of around 4.6% early next year.

FOMC To Keep the Risk Rally Alive?

The idea of a “Fed pivot” has grown increasingly strong over the past few weeks due to softer economic data and other major central banks signalling a slower pace of rate hikes. Various Fed officials have also hinted that after so much front-loading, it may be a time to reassess the speed of tightening and its impact on the economy.

Possible tweaks to the statement could introduce the idea of a downshift in December. The Committee may also be keen to introduce some policy flexibility, which seems entirely reasonable after 3.75% of interest rate increases.

But there’s no question the battle against elevated price pressures continues to rage. Inflation remains high and sticky with monthly readings still red hot, even if pipeline price pressures have eased and demand is cooling. Similarly, the robust jobs market has not wilted in the face of rising borrowing costs and inflation.

In which light, it seems doubtful that Jerome Powell will want to be seen as softening his hawkish stance already, as this would result in an easing of financial conditions.

Volatility to Rise if More Data Dependent

Perhaps not offering detailed guidance could be the best course of action as it allows the Fed more time to signal their intentions nearer to its last meeting of the year in mid-December. In which case, expect heightened volatility in the build-up to that meeting and more focus on economic data, with Friday’s non-farm payrolls report being a key focal point.

Keep an Eye on USD

The dollar’s month-long, near 5% correction from multi-decade highs should come to an end if Powell is more hawkish and pushes back on the “Fed pivot”, which has been trending on Twitter. This would be a catalyst to sending the greenback towards those highs. An initial reaction to a more dovish tilt could also be short-lived if it is not backed up by softening data in the weeks ahead.

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.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trade Of The Week: Will BoE Join 75-bp Hike Club?

Central banks across the world are on the offensive, unleashing aggressive rate hikes despite the growing risks of collateral damage to their respective economies.

Last week, the Bank of Canada (BoC) announced a smaller-than-expected hike of 50bp as recession fears intensified. However, the European Central Bank (ECB) hiked rates by 75 basis points for the second consecutive time thanks to soaring inflation in the Euro Area.

Over the next few days, the Federal Reserve is poised to raise rates by 75 basis points for the fourth consecutive time while the Bank of England could finally join the jumbo hike club!

Before we take a deep dive into what to expect from the BoE on Thursday, it’s safe to say that the past few weeks have been wild for not only the UK economy but Pound. A toxic combination of political drama and central bank intervention sent the GBPUSD on a chaotic roller-coaster ride.

After making a swift recovery in recent days, the GBPUSD is trading back above 1.15 for the first time in 6 weeks. This move has been the product of dollar weakness and improving sentiment toward the UK economy after Rishi Sunak became Prime Minister. The currency pair will most likely be influenced by the Fed rate decision on Wednesday and the BoE meeting on Thursday.

The Low Down…

The Bank of England remains in a tricky position as it potentially delivers what would be the biggest UK rate hike in 33 years.

Sentiment towards the UK economy is fragile due to fears that the country is probably already in a recession while the recent political drama over ex-Prime Minister Liz Truss’s controversial mini-budget has left a bitter aftertaste. With inflation through the roof at 10.1%, expectations remain elevated over the Bank of England joining the heavy hitters by unleashing a 75bp monetary policy bazooka. However, recent economic data including retail sales, monthly GDP, and manufacturing data among many others have shown signs of a slowing economy.

At the peak of the political crisis when the pound tumbled to an all-time low, markets were pricing in a gargantuan 200 basis point hike in November. But with some normality returning to UK markets and sterling staging a strong recovery, BoE rate hike expectations have cooled.

Although according to Bloomberg, traders have fully priced in a 75bp rate hike at the BoE’s November meeting – expectations can differ from reality.

Other Things to Watch Out For…

Mid-week, the Federal Reserve is expected to raise interest rates by 75 basis points. Given how such a move has already been priced, much attention will be on the press conference for clues on future monetary policy. Should the central bank strike a cautious tone with doves entering the scene, this could weaken the dollar as aggressive rate hike bets cool. A weaker dollar may push the GBPUSD higher ahead of the BoE meeting on Thursday 3rd November.

Possible Outcomes of BoE Meeting

  • BoE hikes rates by 75-basis points. This decision could inject some life into pound bulls but gains may be limited if the central bank signals that this is a “one-off” move. Expect the pound to weaken eventually as expectations rise over the BoE adopting a less aggressive approach towards rates beyond November and 2023.
  • BoE hikes rate by 50-basis points. This decision could be based on the gloomy macroeconomic decisions and fears of the UK already entering a recession. Such a move could trigger a pound selloff as the BoE rejects the 75bp club membership.

Unlikely Outcomes of BoE Meeting

  • BoE hikes rates by 100 basis points. Given how UK inflation remains at a 40-year high, the central bank decides to go full-auto to contain rising prices. Pound is likely to rally aggressively following such a move but the upside may be capped by recession fears.

GBP/USD to Breakout or Breakdown?

The next few days could be volatile for the GBPUSD thanks to the Fed & BoE policy meetings.

Fundamentally, the GBPUSD remains bearish but the technicals could be singing a different tune. Prices are trading above 1.1500 due to the recent weakness in the USD as traders bet over the Fed slowing the pace of rate hikes. Should 1.1500 prove to be reliable support a move back towards 1.1750 and 1.1850 could be on the cards.

If bears succeed in dragging the GBPUSD back under 1.1500, the first point of interest can be found at 1.1400 where the 50-day SMA resides. Below this point, prices could sink towards 1.1200 and 1.0925.

For more information visit FXTM.

Markets Steady As Investors Eye Earnings & ECB

European markets edged cautiously higher on Tuesday as investors digested upbeat corporate earnings and news that Rishi Sunak would replace Liz Truss as U.K. prime minister.

The latest German IFO Business Climate Index supported sentiment by showing some signs of stabilisation, albeit at low levels. Most Asian shares staged a sharp rebound during early trade, tracking the recovery from Wall Street as soft economic data fueled bets around the Fed softening its hawkish stance.

Interestingly, some stability returned to Chinese markets following Monday’s historic selloff as traders weighed bargain prices against China’s uncertain political landscape and economic outlook.

In the currency space, the offshore Yuan has weakened past the psychological 7.30 level following the party congress, while dollar bulls are taking a pause amid expectations around a potential Fed pivot. Sterling has appreciated against every G10 currency this morning ahead of Rishi Sunak’s meeting with King Charles and his first public address later this morning. The euro seems to be on standby and is likely to remain trapped within a range until the European Central Bank (ECB) meeting on Thursday.

Will the ECB Come to the Euro’s Rescue?

Markets widely expect the central bank to raise interest rates by another 75 basis points on Thursday, in a move to contain inflation which is well above the 2% target. Given how this has already been priced in, this may offer little support to euro bulls that have been beaten black and blue by a stronger dollar over the past few months.

Much attention will be directed towards President Christine Lagarde’s press conference which will be closely scrutinised by investors for clues on the central bank’s next policy move.

If policymakers move ahead with a 75bp hike and open the door for more jumbo hikes in the future, this could provide some support to the euro. A shock 100bp rate hike would inject euro bulls with fresh inspiration to break decisively out of the current range.

Should the central bank surprise markets with a smaller than expected 50bp hike, the EURUSD could tumble back to 0.9700 and lower. Whatever the outcome of the ECB meeting, it is likely to set the tone for the euro over the next few weeks.

Currency Spotlight – Time for King Dollar to Rest?

The dollar has weakened against most G10 currencies since the start of the fourth quarter thanks to the improving market mood and expectations around the Fed dialing back on its hawkish stance. As economic data in the United States continues to illustrate a gloomy picture, this could fuel speculation around the jumbo-sized rate hikes coming to an end.

Throughout 2022, dollar bulls have derived strength from safe-haven flows, optimism over the US economy, and Fed rate hike expectations. As some positivity returns to global markets amid robust earnings, and shaky US data prompts the Fed to drop its aggressive approach towards rates, this could hit dollar bulls hard.

Looking at the technical picture, DXY bulls look exhausted on the daily charts with prices back within a range. A breakdown below the 111.50 support level could trigger a decline toward 110.00 and 109.00, respectively. If prices can break out above 113.50, the DXY could retest its 20-year high at 114.78.

Oil Prices Wait for Fresh Catalyst

Oil prices are likely to swing between losses and gains as fears over a global economic slowdown collide with caution over tightening supply. Brent remains under pressure this morning, trading around $90.25 as of writing. As investors juggle with slowdown concerns, sharp changes in risk sentiment, dollar volatility, and other themes impacting the supply/demand dynamics, this could result in more choppy price action into year end.

Looking at the technical picture, Brent remains under pressure on the daily charts. Prices are trading below the 50-, 100- and 200-day Simple Moving Average. A breakdown below $90.00 could open a path toward $87.00 and $82.50. Should prices push back above $92.00, the next key level of interest can be found at $95.00.

Commodity Spotlight – Gold

After staging a stunning rebound last Friday, gold has found itself under pressure thanks to the improving market mood and rising Treasury yields. Appetite towards the precious metal is likely to remain shaky as investors evaluate whether the Fed will indicate next week if it will remain hawkish after raising interest rates by another 75 basis points in November.

In the meantime, gold could trend lower until a fresh directional catalyst is brought into the picture. Talking technicals, sustained weakness below $1655 could open the doors towards $1615 and $1600 respectively. A breakout above $1655 may trigger an incline towards $1670 and $1680.

For more information visit FXTM.

The British Pound Hits Resistance Zone After Astounding U-turns

Written on 18/10/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

Amid the manic political theatre going on right now in the UK, markets have been busy rallying after the new UK Chancellor ripped up the government’s controversial tax-cutting plans. The once rarely watched, opaque gilt government bond market has become the star of the show, hopefully only for 15 minutes, as many are keen to see it return to the “back benches” where it normally resides.

The UK government’s interest rate borrowing gauge has fallen as confidence and stability return to the country’s assets. But there is a long, grim road ahead with depressed growth accompanied by elevated price pressures.

Roller Coaster Ride of UK Markets

The history books will note the last few months in UK economic history have seen the country referred to as an “emerging market”. Policial instability, soaring inflation, trade troubles and an energy crisis have stigmatised the once rock-steady and admired economy. But with the Bank of England warning in the middle of the summer that the economy would enter its longest recession since the global financial crisis in the final quarter, GDP will be lower while inflation stays high.

A currency crisis was missing from that list, but the last few weeks have ticked that box. Sterling crashed to an all-time low during Tokyo hours and has now bounced over 10% from those dark days. Moves of a few percentage points intraday have been common, with extreme volatility which is highly uncommon in a G7 currency. Many politicians and UK residents will be hoping the “emerging market” moniker stays in the history books going forward.

UK CPI in Focus

If instability really is a thing of the past, gaining Parliament’s approval for extra tax hikes or spending cuts will prove interesting. Then focus may turn back to economic data and we get the latest CPI figures released on Wednesday. Whilst fiscal measures and policies have been under the spotlight recently, it is rampant price pressures which have really lit the volatility bonfire and poured gas on the interest rate markets.

Expectations are for annual CPI to climb to 10.1% from 9.9% with the core metric set to rise to 6.4% from 6.3%. Economists forecast upside pressure from food prices battling with falling petrol prices, while going forward, inflation is expected to remain in double digits in the next few months.

This key piece of data will inform the next Bank of England rate decision, with money markets pricing in roughly a two-in-three chance of a 75bp rate hike. There are still around 175bps of increases by the end of the year. This crucial meeting is what may impact sterling the most if the currency can once again return to its name. For cable, the pandemic low at 1.1409 is a major resistance level. The 50-day simple moving average looms above here at 1.1500, while trendline resistance from the August high sits around 1.1357.

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.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trade Of The Week: Sterling Influenced By Political Drama

A toxic combination of uncertainty, confusion, and repeated U-turns on the government’s mini-budget coupled with central bank intervention placed sterling on a chaotic rollercoaster ride! After collapsing to an all-time low back in late September, prices have rebounded but remain in a downtrend.

Before we unpack what to expect from the pound this week, it is worth keeping in mind that the currency is not only dealing with political drama but mounting concerns over economic growth. Given how inflation continues to squeeze households and fuel speculation around the BoE launching a monetary policy bazooka, this certainly does not bode well for sterling. While a jumbo-sized rate hike could tame the inflation beast, it may come at the cost of economic growth.

The Low Down…

Political developments in the UK have felt like a blockbuster TV series over the past couple of days.

After making repeated U-turns on the mini-budget, British Prime Minister Liz Truss made another drastic U-turn last Friday by scrapping plans to freeze corporation tax in 2023. This decision was taken just hours after sacking Kwasi Kwarteng as Chancellor of the Exchequer and replacing him with Jeremy Hunt. Despite these dramatic steps and a short press conference, markets were un-amused with some even raising questions over her future as prime minister.

After what must have felt like a long weekend for the PM, the UK markets kicked off the new week on a positive note after the Treasury released an unexpected statement at 6 am UK. The treasury notified markets that it would “bring forward measures from the medium-term fiscal plan”, to cool nerves, reduce uncertainty and provide fresh clarity. Sterling has rallied on growing expectations that more of Prime Minister Liz Truss’s tax cuts would be reversed with the GBPUSD trading around 1.1300 as of writing.

The Week Ahead…

The new Chancellor of the Exchequer Jeremy Hunt hijacked the spotlight on Monday after delivering an emergency statement that practically reversed almost all of Liz Truss’s mini-budget tax cuts. Markets offered a calm reaction to this major development with the pound stabilizing as investors evaluated how these changes may influence the UK economy and consumers.

Although Hunt stated that the tax changes would raise an extra £32 billion more a year, this could hit households who are already dealing with an income squeeze. One key thing that stood out was the government potentially cutting support on energy bulls after April 2023. Liz Truss initially promised to support UK households by capping the price of energy bills at no more than £2500 for two years, but this will now last until April 2023.

Hunt is scheduled to make another speech on Monday afternoon to provide further clarity on the unprecedented fiscal U-turn. Whether this will be enough to conclude this saga and fully calm markets from the recent chaos, time will tell.

In other news, the UK publishes its latest inflation figures mid-week which could trigger additional volatility. Inflation is expected to remain unchanged at 9.9% YoY. A hot CPI report may fan expectations around the BoE moving ahead with a supersized rate hike in November.

While such a hike could boost Sterling, gains are likely to be limited by recession fears. If inflation cools in September, this could allow the BoE to approach inflation less aggressively. Another important report to keep an eye on will be the retail sales figures on Friday.

Pound Breakout on the Horizon?

Talking technicals, the GBPUSD remains in a wide range on the daily charts. Resistance can be found at 1.1500 and support around 1.0925. A break back above 1.1300 could trigger an incline towards 1.1500. Should prices struggle to push higher, bears are likely to target 1.0925 and 1.0850, respectively.

For more information visit FXTM.

Oil Bulls Try to Make a Comeback

Technical Analysis

A closer look at the Momentum Oscillator reveals a positive divergence between points “a” and “b” when comparing the bottoms at 83.74 and 76.13. This could have alerted technical traders that the downtrend might be losing momentum.

After the lower bottom at 76.13, the price of Crude Oil broke through the 15 and 34 Simple Moving Averages and the Momentum Oscillator cut through the 100 base-line into bullish territory.

A higher top and possible critical resistance level formed on 10 Oct at 92.59. Bears are currently trying to drive the price lower but a possible higher bottom might be forming at a support level on 12 October at 85.17.

Crude Oil Price Forecast

If the support level holds and the bulls manage to break through the critical resistance level at 92.59, then three possible price targets can be calculated from there. Applying the Fibonacci tool to the higher top at 92.59 and dragging it to the bottom of the support area at 85.17, the following targets may be considered. The first target may be likely at 97.18 (161%) and the second price target at 104.60 (261.8%). The third and final target may be expected at 116.60 (423.6%).

If the support level at 85.17 is broken, the bullish scenario is overturned and the scenario needs to be re-assessed.

As long as the supply remains constrained, the outlook for the Crude Oil market in the D1 time frame will remain bullish.

Crude oil daily chart

For more information visit FXTM.

Market Mood Fragile Ahead Of US CPI

European stocks were painted red this morning amid fears around untamed inflation pushing interest rates higher at the expense of economic growth. US stock futures are pointing to a lower open with the negative momentum and risk-off sentiment infiltrating Wall Street. In the currency space, king dollar continues to draw power from aggressive rate hike bets while sterling remains shaky despite efforts from the Bank of England to support the currency and the vulnerable UK bond market. Oil is weaker thanks to a strong dollar and an outbreak of Covid-19 cases in China, while gold is selling off for a fifth day in a row as traders await Thursday’s US CPI report.

It may be wise to fasten your seatbelts tightly because this will be another busy week for markets. Investors will be served a platter of key economic reports and speeches from various financial heavyweights. Most importantly, all eyes will be on the latest US inflation figures which is now the biggest risk event on the calendar. Later today, the International Monetary Fund (IMF) publishes its World Economic Outlook and will almost certainly revise global growth lower.

ECB Chief Economist Philip Lane, Bank of England Governor Andrew Bailey, and Cleveland Fed President Loretta Mester will be under their separate spotlights. Given how financial markets remain highly sensitive to anything relating to inflation or monetary policy, any fresh insight offered by these central bank officials could translate into market volatility.

All Eyes on the US Inflation Report

Most attention will be directed toward the US inflation report on Thursday with investors watching to see if prices are rising again or perhaps finally peaking. According to Bloomberg, the headline print for September is projected at 8.1% from 8.3%, while the core is expected to rise to 6.5% from 6.3% in August. A higher-than-expected CPI figure may reinforce expectations around the Fed unleashing another monetary bazooka in November to tame inflation.

This could inject dollar bulls with fresh momentum to steamroll G10 and other currencies. It’s worth keeping in mind that the greenback has had a phenomenal trading year, appreciating against every single major currency. Alternatively, a softer print could reduce aggressive rate hike bets and feed the “dovish pivot” narrative ultimately hitting the dollar. Traders are currently pricing in an 80% probability of a 75-basis point rate hike next month.

Currency Spotlight – GBP/USD

Sterling has struggled for direction so far on Tuesday despite the upbeat jobs report soothing concerns over the UK economy. Unemployment hit a fresh multi-decade low at 3.5% in the three months to August from 3.6% in the previous period. This was the lowest level witnessed since February 1947. However, the fall in unemployment was the result of a sharp rise in the number of adults within working age labelled as economically inactive.

The focus now shifts toward the BoE Governor Bailey’s speech later today. If he mentions anything relating to inflation, monetary policy, and the ructions in the gilt market, this could translate into pound volatility.

Focusing on the technical picture, GBP is under pressure on the daily charts. An appreciating dollar could drag prices back toward 1.0850 support. Weakness below this point may trigger a selloff towards 1.0520. Alternatively, a break back above 1.1100 has the potential to spark a rally towards 1.1300.

Commodity Spotlight – Gold

Where gold concludes this week will most likely be influenced by the US inflation data on Thursday.

A red-hot CPI report will almost certainly reinforce aggressive rate hike bets, ultimately boosting the dollar and Treasury yields at gold’s peril. Such a development may drag the precious metal towards $1655, $1615, and $1600. Alternatively, an inflation report that misses expectations could offer space for gold bulls to fight back, opening a path back toward the psychological $1700 level.

For more information visit FXTM.

NFP to guide Fed’s Next Rate Hike

Written on 05/10/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

There’s a lot going in markets right now. In amongst the currency interventions, crisis management QE, QT that wasn’t, energy crisis and systemic risk, we can’t forget it’s the first Friday of the month. For traders, that means only thing on the calendar which is the US non-farm payrolls report. This is the last major jobs data before the next Fed meeting at the start of November. The figures will definitely be a major part of the decision making so grab the popcorn and buckle up.

Consensus expectations are for US jobs growth to slow to 250k from 315k in August for the headline print. Analyst forecasts currently range between 175k and 350k. The jobless rate is seen unchanged at 3.7% while there will be particular attention on the average hourly earnings.

Wage growth month-on-month is projected to rise by 0.2% again in September, though forecasts are quite wide at 0.2-0.5%. The annual number is forecast to rise by 5.1%, a tick lower than the previous figure. With the equally important September inflation data from the US released next week, these average hourly earnings will be scoured for clues about the direction of price pressures.

Still Very Tight Labour Market

We note that other recent jobs data has been grabbing the headlines. The latest US vacancy rates, in the form of the JOLTS figures, slowed sharply this week with a drop of one million vacancies. This fall was way more than analysts expected and was added to the list of the “pivoters” who think and hope the Fed will stop hiking rates sooner than thought.

But the jobs market remains tight with four million more job vacancies than there are unemployed Americans to fill them. If you’ve been across the pond recently, you can’t fail to notice the amount of “We’re hiring” signs everywhere! The more frequent initial jobless claims data also shows data still very low by historical standards. In fact, there’s been nine straight weeks of numbers below expectations and the most recent print hit the lowest level since April. These figures are meant to go up in recessions!

The Fed and Jobs

A weaker labour market is needed by the Fed to get inflation back to its 2% target. The latest median projection in the Fed’s recent September update saw unemployment rise to 4.4% in 2023 from 3.65% in August. Economists reckon that equates to over a million job losses which is the pain Fed Chair is willing to put the U.S through to tame inflation.

With the chances of another jumbo-sized 75bp rate hike next month oscillating between 50% and 70% over recent weeks, a headline print above 300k and solid wage growth may seal the deal for another historic big increase. This would be bullish for the dollar while growth stocks especially could roll over quickly back to recent lows as “pivot” talk evaporates.

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Global Sentiment Improves But Caution Lingers

Global equities could be offered further support if soft economic data fuels speculation around doves infiltrating central banks across the globe.

In the currency space, king dollar extended losses this morning as U.S Treasury yields dipped with the risk-on sentiment and softer US data. After clawing its way out of the abyss last week, sterling continues to recover, hitting a two-week high at 1.1430 this morning before paring back. A weaker dollar gave gold bugs the thumbs up to conquer $1700 while oil prices remain steady ahead of the OPEC + meeting on Wednesday.

In other news, Australia’s Reserve Bank surprised markets by raising interest rates by a smaller than expected 25 basis points this morning. Although the central bank had flagged in the past a possible slowdown in the pace of hikes, this surprise move sends an important message about the size of future hikes.

Despite the improving market sentiment, a sense of caution continues to linger in the air as investors brace for another busy week for global markets. The numerous speeches from Fed officials should keep market players well occupied ahead of the highly anticipated US jobs report on Friday. If hawks dominate the scene once again, this could fuel bets over more aggressive rate hikes by the Fed. Alternatively, any hint of more caution may stimulate speculation around the central bank adopting a softer stance on rates resulting in a weaker dollar.

All Eyes on the US Jobs Report

Given how markets remain highly sensitive to anything relating to rate hikes, Friday’s non-farm payrolls report could set the tone for markets this month.

According to Bloomberg, consensus is expecting jobs growth to slow from 315k in August to 250k in September. The unemployment rate is projected to remain at 3.7% while wage growth is seen hitting 0.3%. If the jobs data exceeds market expectations, this boosts the chances around the Fed firing another monetary bazooka in the form of a 75-basis point hike. Alternatively, a disappointing report may reduce the odds of another super-sized move, ultimately weakening the dollar while supporting equity bulls.

Currency Spotlight – GBP/USD

GBPUSD has staged an incredible rebound over the past few days, continuing its bounce from the all-time low of 1.0350. Sterling has drawn strength from the government’s U-turn to cut the top-rate tax for higher earners and a softer US dollar. While prices could edge higher in the short term, sterling is not out of the woods yet. Concerns over rising inflation, the gloomy economic outlook, and political noise are likely to haunt investor attraction towards the British pound. Looking at the GBPUSD through a technical lens, prices could sink back to 1.0850 if 1.1300 proves to be unreliable support. If bulls can stay in the driving seat, the next key level of interest can be found at 1.1600.

Commodity Spotlight – Gold

Gold has kicked off the final quarter of 2022 on a positive note thanks to a softer dollar and subdued Treasury yields.

Market speculation around the Fed adopting a less aggressive approach on rate hikes has also sweetened appetite for zero-yielding gold. While prices may push higher over the next few days, the metal’s outlook will be influenced by the US jobs report on Friday.

Looking at the technical picture, the breakout above $1700 may open the doors towards $1724 and $1760, respectively. Should prices dip back under $1700, the next key levels of support can be found at $1680 and $1655.

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Week Ahead: Robust US Jobs Data to Restore USD Index to 1.28?

And as it’s been for most of the year, it’s set to be yet another dollar-centric week for global markets, with investors and traders awaiting the next US jobs report as well as potential policy clues by Fed officials who are scheduled to make public comments over the coming week.

Economic Calendar for Next Week

Monday, October 3

  • Mainland Chinese markets closed this week
  • JPY: Japan 3Q Tankan
  • EUR: Eurozone September manufacturing PMI (final)
  • GBP: UK September manufacturing PMI (final)
  • USD: US September ISM manufacturing and manufacturing PMI (final)
  • USD: Speeches by Atlanta Fed President Raphael Bostic, New York Fed President John Williams

Tuesday, October 4

  • JPY: Tokyo September CPI
  • AUD: Reserve Bank of Australia rate decision
  • EUR: Eurozone August PPI
  • USD: Speeches by New York Fed President John Williams, Dallas Fed President Lorie Logan, Cleveland Fed President Loretta Mester, and San Francisco Fed President Mary Daly

Wednesday, October 5

  • NZD: Reserve Bank of New Zealand rate decision
  • EUR: Eurozone September services PMI (final)
  • Brent: OPEC+ meeting
  • US crude: EIA weekly oil inventory report
  • USD: Speech by Atlanta Fed President Raphael Bostic

Thursday, October 6

  • AUD: Australia August external trade
  • EUR: Eurozone August retail sales, Germany August factory orders
  • USD: US weekly initial jobless claims
  • USD: Speeches by Chicago Fed President Charles Evans, Fed Governor Lisa Cook, Cleveland Fed President Loretta Mester

Friday, October 7

  • EUR: Germany August retail sales, industrial production
  • GBP: Speech by BOE Deputy Governor Dave Ramsden
  • CAD: Canada September unemployment
  • USD: US September nonfarm payrolls, speech by New York Fed President John Williams

US Dollar and the Next US Jobs Report

Recently, the equally-weighted USD index soared past 1.28, well above the 1.25 level cited in our previous Week Ahead article (posted every Friday). 1.25 also marked the early-April 2020 cycle high.

However, this dollar index then swiftly unwound gains, as it pulled away from ‘overbought’ conditions, with its 14-day relative strength index moving back below the 70 level.

The upcoming US jobs report may help determine whether this USD index can be restored to its recent peak above 1.28, or at least remain at these elevated levels.

Here are the market forecasts at present:

  • August nonfarm payrolls: 250,000 increase (median estimate)
    If so, this would be the lowest monthly jobs growth since December 2019.
  • August US unemployment rate: 3.7% (median estimate)
    If so, this would mark s slight uptick, but still hovering close to the pre-pandemic low of 3.5%.
  • 75-basis point hike by the Fed in November: 69%

If the US labour market continues to demonstrate its resilience, either by way of a higher-than-expected headline NFP figure or a lower-than-expected unemployment rate, that should ramp up market expectations for yet another 75-basis point hike by the Fed at its next policy decision due November 2nd.

Such ramped-up expectations may then restore the USD Index back up to 1.28.

Also, keep an eye on the slate of Fed officials who are scheduled to make public comments in the coming week.

Should they offer fresh signs that they’re willing to take bolder measures to quell stubbornly elevated US inflation, that may translate into more USD strength as well.

Alternatively, if market fears over an ultra-aggressive Fed further subside, that may in turn see the US dollar unwinding more of its recent gains.

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