Trade of the Week: Gold Waits For Fresh Fundamental Spark

A growing sense of anticipation ahead of the US jobs report along with other top-tier data this week added to the overall caution, leaving investors on edge. With a softer dollar adding to the mix, bulls were injected with enough confidence to challenge levels not seen since November 18.

Nevertheless, the precious metal remains in a wide range on the daily charts with support at $1735 and resistance at $1785. Over the past few weeks, gold has bounced within this range as bulls and bears engaged in a fierce tug of war.

However, with the fundamentals slowly tilting in favour of gold bulls – a solid breakout could be around the corner. Gold needs a fresh fundamental spark to get its gears moving and this could come in the form of speeches from Fed officials, geopolitical risks, or high-quality US economic data.

Before we thoroughly discuss what to expect from gold over the next few days, it is worth keeping in mind that gold is up roughly 8% this month. November will be the first positive month for the precious metal since March 2022! Looking at the technicals, bulls are certainly in the vicinity on the daily and weekly timeframe but things still look choppy on the monthly charts. If the developments and data over the next few days support gold bulls, this could set the tone for December.

The Low Down…

It has been a volatile year for gold.

After surging and peaking in March following Russia’s invasion of Ukraine, the precious metal found itself on a slippery decline as the Fed aggressively raised rates to tame inflation. Although gold is down roughly 4% year-to-date, this inflates to almost 15% when measured from the March 2022 high.

Could the precious metal be experiencing a change of fortune after being beaten black and blue for most of this year? Given how the Fed is expected to slow its pace of interest rate increases in the face of cooling inflation, this may lead to a weaker dollar and falling Treasury yields. This combination is nothing but good news for zero-yielding gold which will most likely shine in a low-interest rate environment.

The Week Ahead…

This could be a big week for gold due to the protests in China, speeches from Fed officials including Jerome Powell, and key US economic reports.

Bulls have already made a move on Monday thanks to geopolitical tensions and this momentum could roll over into the next trading session. It may be worth keeping an eye on speeches by New York Fed President John Williams, and St. Louis Fed President James Bullard. There is a lot going on mid-week with Fed Chair Jerome Powell under the spotlight.

He is expected to reinforce expectations over the central bank slowing its pace of interest rate increases from December. Such a development may lead to a weaker dollar and falling Treasury yields – resulting in a boost for gold prices. Investors will also be presented with the Fed Beige Book report and US 3Q GDP second estimate which could result in some additional dollar volatility, spilling over to gold.

Thursday sees the release of the US weekly initial jobless claims and most importantly PCE deflator. Much attention will be directed toward the PCE Core Deflator 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.

It’s all about the US jobs report on Friday which could be the real market shaker. Markets expect the US economy to have created roughly 200,000 jobs in October while the jobless rate is expected to remain unchanged. A report that meets or prints below expectations may justify a change in the pace of the Fed’s policy tightening – ultimately supporting gold.

Time for Gold to Re-test $1800 and Beyond?

On the daily timeframe, gold prices are trading above the 50 and 100 SMA but below the 200 SMA. As identified earlier, support can be found at around $1735 and resistance at $1780. A solid breakout above $1780 could open the doors towards $1800, $1840, and $1858. Alternatively, a move back below $1735 could signal a selloff towards $1700, $1680, and $1665.

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.

Thanksgiving: 3 Assets That Can Be Grateful for 2022

This year has been a tumultuous one for global financial markets, to say the least. War, soaring inflationrate hikes, recession, bear market – these terms have been flung about for much of this year, sending fear coursing through many investors and traders.

However, certain assets have flourished even amidst the doom and gloom, enjoying year-to-date gains as we head into the final month of the year.

Here are 3 of them:

US Dollar (DXY) = 10% year-to-date Gains

King Dollar asserted its grip across the FX world, being the preferred safe haven (an asset which investors hope will protect their wealth in times of great fear).

The ongoing Fed rate hikes have also contributed to the US dollar strength, much to the anguish of most of the FX world.

The DXY has pulled back significantly from recent heights, as markets grow to expect that the worse of the Fed rate hikes are now behind us.

As long as the Fed hikes again at its next FOMC meeting on December 14th and signals that more rate hikes are in store for 2023, while inflation and job hiring doesn’t fall off too drastically, the DXY should still be able to close out 2022 with an annual gain.

NOTE: The DXY, which is the benchmark US dollar index measuring the buck’s performance against six other major currencies.

Brent Oil = 16.3% year-to-date Gains

Since Russia invaded Ukraine, Western economies have ramped up sanctions against Russian exports of the precious commodity, leaving buyers around the world scrambling for oil, bidding up prices along the way.

Oil’s year-to-date advance has also swept up other oil-linked assets with it:

  • Occidental Petroleum Group is the best performer on the S&P 500 so far this year: +145.3% year-to-date
  • The Russian Ruble is the world’s best-performing currency so far this year: +24.15% year-to-date

However, markets now fear the prospects of a global recession in 2023, which would constrict demand for oil, especially as China continues to battle with Covid Zero lockdowns.

Such fears have seen Brent drop considerably from its year-to-date peak above $130.

Still, oil prices remain very much in a position to end the year with an annual advance.

Much would depend on whether global supplies are further tightened by another OPEC+ supply cut and the ramp up in the EU’s ban on Russian shipments, both set for early December.

Turkish Stocks = 87% year-to-date Gains (in US Dollar Terms)

The Borsa Istanbul 100 reached a new record high in 2022, while becoming the world’s best-performing stock market.

After all, double-digit gains are in stark contrast to the double-digit declines for global stocks, as measured by the MSCI ACWI Index which is down by 17.4% so far this year.

And this isn’t a one-off.

The Borsa Istanbul 100 Index has posted double-digit annual gains in 4 out of the past 5 years!

Why Have Turkish Stocks Soared?

Turkey’s central bank has been cutting its interest rates, at a time when central bankers around the world have been frantically hiking their own rates. And stocks generally love lower interest rates.

This asset class has also been a hedge against other economic turmoil:

  • Turkey’s inflation hit 85.5% in October – its highest CPI print since 1998
  • The Turkish Lira is the 8th-worst performing currency in the world against the US dollar so far in 2022

Hence, Turkish stocks have been seen as a hedge (a way to offset risks) against such woes.

And there’s a fundamental reason for these double-digit gains as well.

Turkish companies are still raking in the dough, where profits have risen by 234% in the first 9 months of the year.

And there’s your “Turkey” connection this Thanksgiving.

In the spirit of being grateful, we truly appreciate you reading our Daily Market Analysis.

And may you find gratitude in all of life’s blessings.

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.

Mid-Week Technical Outlook: USD Majors & Commodities

Renewed fears of further escalation in geopolitical tensions dragged European markets lower with the risk-off sentiment hitting US equity futures. In the currency space, the dollar got no love which offered an opportunity for G10 currencies to fight back. While gold found comfort above $1780 as market players rushed to safe-haven destinations.

Looking at the economic calendar, dollar volatility could be around the corner as investors closely scrutinize speeches from numerous Fed officials and US economic data. Just this afternoon US retail sales surged 1.3% month-over-month in October after the flat reading in September.

Although this report beat market expectations, buying sentiment towards the dollar remained muted. As the week progresses, the developments surrounding the missile blast in Poland are likely to influence sentiment, especially if investors remain jittery about the prospects of further escalation.

With dollar bears marking their territory and the fundamentals pointing to further weakness down the road, G10 currencies could strike back hard.

EUR/USD Hits 200-day SMA

A broadly weaker dollar has inspired EURUSD bulls to rally over the last few days. The currency pair has turned bullish on the daily charts with the MACD trading above zero. The 1.0427 level could be a tough nut to crack but a strong breakout above this point may open a path toward 1.0530. If prices are capped below 1.0427, the next key point of interest can be found at 1.0280.

GBP/USD Breaks Above 1.1850

Sterling pushed higher on Wednesday after the latest UK inflation figures jumped to a 41-year high of 11.1% in October, exceeding market expectations. This development may re-kindle expectations around the Bank of England raising interest rates aggressively to combat soaring prices.

A weaker dollar has also played a role in the GBPUSD’s rally as prices approach levels not seen since mid-August. Looking at the technicals, another solid daily close above 1.1850 could trigger an incline toward 1.2050. Alternatively, a move back under 1.1850 may see a sell-off towards 1.1750 and 1.1500, respectively.

AUD/USD to Challenge 200-day SMA?

If the dollar continues its slippery decline, this could push the AUDUSD toward 0.6850. A strong breakout and daily close above 0.6850 has the potential to encourage a move higher toward 0.6950. Should bulls run out of steam before hitting 0.6850, bears could target the 0.6700 level.

USD/JPY Lingers Around 139.50

The trend is bearish on the USDJPY as there have been consistently lower lows and lower highs. Sustained weakness below 139.50 could trigger a selloff towards 137.50 and lower. Should prices stage a rebound back above 139.50, prices could challenge 142.00

Commodity Spotlight – Gold

Gold seems to be on standby as investors digest the latest US retail sales data and developments revolving around Poland. However, the precious metal may resume drawing strength from a weaker dollar and subdued Treasury yields as the trading week progresses. Given how the dollar may be influenced by the numerous speeches from Fed members and US economic data, this could find its way back to gold which is trading below $1780 as of writing.

Gold remains bullish on the daily charts as there have been consistently higher highs and higher lows. A solid move above $1780 could encourage an incline towards the psychological $1800 resistance level – where the 200-day SMA resides. Should this resistance prove to be a tough nut to crack, prices could descend back below $1780 with the next key level of interest found at $1750 and $1715 – just above the 100-day SMA.

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

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Trade Of The Week: USD Bears Mark Their Territory

Last week we questioned whether the mighty dollar would continue dominating the FX space after its shaky performance since the start of Q4.

Our question was partially answered last Thursday after official reports showed annual inflation in the United States slowed to 7.7% in October. Not only was this the lowest level seen since January 2022 but well below the 8.2% figure seen in September. Given how this development significantly reduced the pressure on the Fed to keep raising interest rates aggressively, the dollar collapsed like a house of cards.

With the dollar falling for a fourth straight week in its worst performance since 2020, it is safe to say that bears are in the building and ready to rumble.

Even the equally-weighted USD index collapsed, dipping below the 1.2000 support level for the first time since mid-September.

Given how the fundamentals are swinging in favour of USD bears and the technicals are singing a similar note, dollar weakness could become a key theme for the rest of 2022. Such a development may even set the stage for renewed USD weakness in 2023 as easing inflationary pressures bring Fed doves back into the scene.

This could be another big week for the greenback thanks to numerous speeches from Fed officials, key US economic data, and a big announcement from Former US President Donald Trump on Tuesday. In the meantime, the trend remains a trader’s friend with the path of least resistance on the USD pointing south.

The Low Down…

One only needs to look at the DXY daily chart to see that bears are back in town.

The dollar’s extreme reaction to last Thursday’s inflation data confirms how sensitive the currency remains to anything concerning inflation and rate hike expectations. Over the past few months, the fundamental forces supporting the almighty dollar have been diminishing slowly.

Initially, the greenback drew ample strength from the risk-off mood, confidence in the US economy, and bets for aggressive interest rate hikes by the Fed. Over time, these themes have changed – slowly stripping the dollar of its regal strength and dominance in the FX space.

With roughly six weeks until the New Year, the dollar’s fortunes seem to be changing rapidly as bears enter the scene. If US economic data and Fed officials fuel speculation around slower rate hikes, the dollar could find itself on a slippery decline over the next few weeks.

The Week Ahead…

Price action could be the primary force influencing the dollar as investors closely scrutinize speeches from Fed officials and US economic data.

There could be a burst of dollar volatility on Tuesday thanks to Donald Trump’s big announcement, where he is expected to announce a second bid for re-election. Mid-week, Fed’s John Williams, and Lael Brainard will be under the spotlight. On Thursday, Fed’s Neel Kashkari and Loretta Mester speak with the US Conference Board leading index and existing home sales published on Friday. It will be interesting to see whether the pending economic reports and Fed speeches fuel or limit the dollar’s downside momentum.

Dollar Bears March Into the Scene

The equally weighted dollar index remains under intense pressure on the daily charts. After cutting through the 1.2400 level like a hot knife through butter, prices dipped below 1.2000 for the first time since September. Bears are clearly in a position of power and may drag the index lower over the next few days to weeks.

The current downside momentum may drag prices toward the 1.2900 support level. Below this point prices could test 1.2800 and 1.2700, respectively.  If prices can break above 1.2184, a rebound back towards 1.2400 could be on the cards.

For more information visit FXTM.

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.

Markets Cheer As Inflation Beast Retreats

The bad news…is the fact that it’s still running dangerously hot for the Federal Reserve.

Inflation Was Cooler Than Expected

In a welcome development for financial markets, the annual inflation rate in the United States slowed to 7.7% in October, the lowest level since January. This figure was below the 7.9% market forecast and much lower than the 8.2% witnessed in September. Core inflation which strips out food and energy prices rose 6.3% year-on-year last month, after rising to a 40-year high of 6.6% in September.

Market Reaction

After being blasted by monetary policy bazookas in the form of 75bp rate hikes, the US inflation beast seems to be retreating. This has boosted market sentiment, sending the S&P500 and Nasdaq futures surging over 3%. In the currency markets, the dollar has collapsed like a house of cards while gold prices are up over 1.5% with bulls breaking through the $1725 level!

In a nutshell, US inflation is cooling faster than expected and this is reducing the pressure on the Fed to keep raising interest rates aggressively. According to Bloomberg, traders are now only pricing in a 50bps point rate hike in December. With the Fed adopting a less aggressive approach towards rates as inflation cools, this continues to ease fears over a rate hike-induced recession. As growth concerns ease, the market mood is set to improve – supporting equity markets but pressuring the dollar which remains a safe-haven destination.

Technical Charts

Looking at some quick technical setups, the dollar index may test 108.00 in the near term.

Earlier in the week, we identified how 1.2400 was an important level on the equally-weighed USD index. Prices have cut through this level like a hot knife through butter and even the 1.2340 target. The downside momentum could drag prices towards 1.2200.

The EURUSD has punched above 1.0100 and could venture higher thanks to dollar weakness.

Little needs to be said about the S&P500

Gold has experienced a strong breakout which could signal the start of a bullish trend on the daily charts.

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.

Trade Of The Week: Will USD Continue to Reign Supreme?

The past few weeks have been rough for the greenback thanks to renewed risk sentiment and markets scaling back bets for further aggressive Federal Reserve interest rate increases. Since the start of Q4, the dollar has depreciated against almost every single G10 currency – shedding more than 6% against the Norwegian Krone and over 5.7% versus the New Zealand Dollar.

Since hitting a fresh 20-year high above 114.50 back in late September, the Dollar Index (DXY) seems to be respecting a bearish channel, creating fresh lower lows and lower highs. With prices trading below the MACD and approaching the 110.00 support, a breakdown could be on the horizon.

There was a similar move on the equally-weighted dollar index which is wobbling above 1.2400 as of writing.

With the path of least resistance on the technical charts pointing south and the fundamentals slowly swinging in favour of bears as investors trim Fed hike bets, the dollar could end Q4 on a negative note. However, there are a couple of key US economic reports and one more Fed meeting in December which could heavily influence the dollar’s medium to longer-term outlook.

In the meantime, the dollar may be waiting for a fresh fundamental spark…and this could be the US inflation report on Thursday.

The Low Down…

Last week, king dollar surrendered its gains thanks to the improving market mood and growing expectations around the Federal Reserve delivering smaller rate hikes.

The Fed hiked interest rates by 75bps for the 4th straight time and Jerome Powell sent a clear message to markets about the potential for rates to peak higher than expected. Given how this move poured cold water around a dovish pivot, dollar bulls were injected with renewed confidence.

However, the jobs report for October sent mixed signals about the US labour market. Although the Nonfarm payrolls surged by 261k in October, above market forecasts of 200k – the unemployment rate rose to 3.7%, still close to a 50-year high. The mixed jobs report combined with soft economic data prompted market players to price in smaller rate hikes in the future. According to Bloomberg, traders have priced in a 50bps rate hike in December with the probability of a 75bps move only at 25%.

These reduced Fed hike bets may keep the dollar subdued ahead of the next major risk event. On a technical front, the damage is already being done on the equally weighted USD index which is struggling to keep above 1.2400. A breakdown below this point could trigger a selloff towards 1.2340 in the near term.

Will CPI Data Revive USD Bulls?

The greenback is set to remain choppy and shaky ahead of the latest US inflation reading on Thursday.

Markets expect the headline CPI to have increased 8% year-on-year in October, down from 8.2% in September. In regards to Core CPI, which strips out the volatility from food and energy prices, it is expected to remain at a 40-year high of 6.6%.

If the US inflation data exceeds market expectations, this may rekindle expectations around the Fed delivering jumbo hikes – resulting in a strong US dollar. Although a scenario where prices begin to slow may weaken the dollar and reduce rate hike expectations, inflation is still well above the Federal Reserve’s safe zone.

Time for Dollar to Sell Off?

The equally weighted dollar index could be preparing to tumble lower if 1.2400 proves to be unreliable support. Prices remain in a bullish channel on the weekly charts but the heavily bearish candle printed last week signals a potential breakdown. Such a development could open the doors back towards 1.2184 and 1.1900, respectively. Should 1.2400 prove to be solid support, prices may rebound back towards 1.2500, 1.2750, and 1.2800, respectively.

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.

Mid-Week Technical Outlook: Major Indices

Sentiment in general remains shaky and fragile thanks to concerns over slowing global growth with investors adopting a guarded approach ahead of what could be a volatile event. Markets widely expect the Federal Reserve to raise interest rates by 75bp in November but much attention will be directed towards the press conference which could offer fresh clues into monetary policy.

Our focus this afternoon will be directed toward the global equity arena, especially US indices which remain highly reactive to Fed rate hike expectations.

S&P 500 Tangled Between MA’s

After failing to secure a daily close above the 100-day SMA, the S&P 500 has the potential to trade lower if the 50-day SMA is breached. A strong breakdown below 3810 could trigger a selloff towards 3760 and 3700, respectively. Should 3810 prove to be reliable support, prices could rebound towards 3945 and 4000. It is worth keeping in mind that the short-term outlook will be influenced by the Fed meeting this evening and the US jobs report on Friday.

Nasdaq Trapped Below 11650?

It looks like the Nasdaq could gearing up for a selloff. After failing to break above the 11650 resistances, prices have tumbled with bears eyeing the 11037 supports. The Fed rate decision and press conference may influence the Nasdaq’s short-term outlook. Technical levels to watch out for are 11037 and 10716. Given how prices are trading below the 50, 100, and 200 Simple Moving Average – bears still have some power. A strong break under 10716 could signal a selloff towards 10436.

FTSE 100 Lingers Below Resistance

Since punching above the 7200-resistance level, prices have struggled to push higher as the 100-day Simple Moving Average offered another line of resistance. Although the FTSE100 has staged a rebound from the 6705 regions, prices still remain in a bearish channel. Should 7200 prove to be a tough nut to crack for bulls, prices could sink back towards 7000. Alternatively, a strong breakout above 7200 may open the doors towards 7340 – a level where the 200-day SMA resides.

EURO STOXX 50 Breakout or Fakeout?

This index remains in an uptrend on the daily charts as there have been consistently higher highs and higher lows. Prices are trading above the 50 and 100-day SMA but below the 200-day which could offer strong resistance. If bulls lose momentum and secure a solid daily close below 3650, this may trigger a selloff back towards 3550 – a level just above the 100-day SMA. Alternatively, a strong daily close above the 3685 regions could inject bulls with enough confidence to push above the 200-day SMA. Such a development may result in an incline towards 3700, 3770, and 3820, respectively.

Fore 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

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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.

Week Ahead: Hawkish Fed, Robust Jobs Report Could Fuel Dollar Rebound

However, how high the US central bank can ultimately raise interest rates would depend on the state of the economy, of which the jobs data is a key indicator.

Data Releases and Events for Next Week

The upcoming Fed policy meeting, along with the latest US nonfarm payrolls report, will be of utmost importance in the week ahead, also featuring these scheduled data releases and events:

Monday, October 31

  • JPY: Japan September industrial production, retail sales, October consumer confidence
  • AUD: Australia September retail sales, October inflation
  • CNH: China October PMIs
  • EUR: Eurozone 3Q GDP and October inflation, ECB Chief Economist Philip Lane speech, Germany September retail sales
  • Brent: OPEC releases 2022 World Oil Outlook

Tuesday, November 1

  • AUD: Reserve Bank of Australia policy decision
  • CNH: China October Caixin manufacturing PMI
  • GBP: UK October manufacturing PMI (final)
  • CAD: Canada October manufacturing PMI (final)
  • USD: US October manufacturing PMI (final), ISM manufacturing

Wednesday, November 2

  • NZD: New Zealand 3Q unemployment rate
  • JPY: Bank of Japan September meeting minutes
  • EUR: Eurozone October manufacturing PMI (final); Germany September external trade and October unemployment
  • USD: FOMC rate decision
  • US crude: EIA weekly oil inventory report

Thursday, November 3

  • AUD: Australia September external trade, October PMIs (final)
  • CNH: China October composite and services PMIs
  • EUR: Eurozone September unemployment, ECB President Christine Lagarde speech
  • GBP: Bank of England rate decision
  • USD: US weekly initial jobless claims, October ISM services index

Friday, November 4

  • EUR: Eurozone September PPI, Germany September factory orders, ECB President Christine Lagarde speech
  • USD: US October nonfarm payrolls, Boston Fed President Susan Collins speech
  • CAD: Canada October unemployment rate

The Next Federal Reserve Meeting and Possible Influence on US Dollar

With next week’s hike already well-telegraphed, markets are already honing their attentions to what Fed Chair Jerome Powell might say during Wednesday’s press conference about potential policy adjustments to be made at the Fed’s December meetings and beyond.

Assuming we indeed see yet another 75bps hike next week, that would bring the upper bound of the Fed benchmark rates up to 3.75%.

  • Markets currently believe that such a move (75bps hike next week) would put the largest chunks of the Fed rate hikes behind us.
  • At present, markets also expect that US interest rates would peak around 4.8% in Q2 2023.
  • That suggests just another couple of relatively smaller 50bps hikes left in the Fed’s pipeline before this rate-hiking cycle is over (again, assuming that a 75bps hike does indeed materialize next week).

The above essentially comprises the “dovish pivot” narrative that traders and investors have been testing at various intervals since the summer.

This latest iteration of that “dovish pivot” narrative has prompted a softening of the US dollar, with the equally-weighted USD index falling away from its post-pandemic high and bounce off its 50-day simple moving average (SMA) as key support.

Ultimately, how high US interest rates would go could ultimately depend on the incoming economic data.

And the incoming US nonfarm payrolls (NFP) report is expected to remind investors of the resilience evident in the jobs market of the world’s largest economy, potentially paving the way for more Fed rate hikes.

Here’s what economists are predicting for the upcoming US jobs report:

  • Headline NFP figure: 200,000 jobs added in October; lower than September’s 263k.
  • Unemployment rate: a slight uptick to 3.6% compared to the 3.5% in the month prior.

A lower-than-expected headline NFP figure, or a higher-than-expected unemployment rate, could bolster the “dovish pivot” narrative.

That should, in turn, prompt the USD Index to unwind more of its year-to-date gains and retest the early-September peak around 1.22 for support, with stronger support set to follow around its 100-day SMA at 1.21.

However, if hiring in the US economy comes in better than expected, being able to withstand the Fed rate hikes that have been ongoing since March, that could restore this USD Index back on a path back closer to its mid-October high above 1.29 as the “dovish pivot” proponents are forced to forego their expectations for a while longer.

And of course, much of the USD Index’s performance in the coming week should rely heavily on the latest policy clues due out of the FOMC policy statement and Fed Chair Jerome Powell’s press conference.

If the Fed signals that it remains hell bent on squashing red-hot US inflation by sending US interest rates past the market-forecasted 4.7% peak, such hawkish policy clues should reinvigorate dollar bulls.

While this Week Ahead article has been rather US-centric, also note that the Bank of England is in action at the onset of November. With central banks on either side of the pond in action in the coming week, that sets up some potential volatility for GBPUSD.

So be sure to check back in on Monday when we publish our regular Trade of the Week article.

For more information visit FXTM.

Mid-Week Technical Outlook: US Dollar

Since the start of Q4, dollar bulls have been missing in action as investors bet the Federal Reserve will slow the pace of rate hikes in the face of slowing economic growth.

This has pushed the Dollar Index (DXY) to its lowest level in five weeks, injecting bears with enough confidence to attack 110.00. Given how the dollar may weaken further on Fed pivot hopes, this could drag the DXY towards 109.00 in the near term.

We can see a similar theme in the equally-weighted USD index. Prices are under pressure on the weekly charts. Sustained weakness below 1.2500 could open the doors towards 1.2184.

EUR/USD Back Above Parity

As the dollar struggles across the board, this has offered an opportunity for currencies to fight back. Euro bulls wasted no time in pushing the EURUSD back above parity for the first time in five weeks. With dollar bulls missing in action amid Fed pivot hopes, and the ECB expected to raise rates by 75 basis points on Thursday, this has propelled the EURUSD towards 1.0030. A daily close above parity could encourage a move towards 1.0100 in the short term. If parity proves to be unreliable support, we could see a decline back toward 0.9900.

GBP/USD Breaks Above 1.1490

Pound bulls blasted above the 1.1490 resistance level this morning thanks to a weaker dollar. Prices have turned bullish on the daily timeframe and could hit the 100 SMA in the short term. A strong break above this level may see prices test the daily bullish channel around 1.1850. Should the upside lose momentum, a move back toward 1140 could be on the cards.

AUD/USD Eyes 0.6550

It looks like AUDUSD bulls are back in town. The sharp rebound witnessed today could signal the return of bulls with 0.6550 acting as a key point of interest. A strong break above this level could see the currency pair target the 50-day SMA and higher. Should 0.6550 prove to be a tough resistance to crack, the AUDUSD could return towards 0.6340 and 0.6200, respectively.

USD/JPY Capped Below 149.00?

After creating consistently higher highs and higher lows, USDJPY bulls could be taking a break. Prices are trading back below 149.00 thanks to fundamental forces and may sink lower due to a weaker dollar. Bears may target 145.00 and 143.50 which is where the 50-day SMA resides.

Watch Out for the NZD/USD

It looks like the NZDUSD could be gearing for a major breakout above 0.5800. Such a move could open a path toward the 50 day SMA at 0.5880 and 0.5900. A scenario where 0.5800 holds the forte may send prices back towards 0.5720 and 0.5560.

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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.

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