Gold Starting Stage 4 Decline and What It Means for Investors

Passive Buy and Hold Investors in General are Starting to Panic: XLU, Dividends, Bonds

It has been an interesting year with stocks down nearly 25% and the bond ETF TLT down over 40% since the 2020 highs. The passive buy and hold investor is becoming panicked and we can see this in the stock market through the mass selling of utility stocks dividend stocks and bonds.

When the masses become fearful they liquidate nearly all assets in their portfolios which is why we see the Big Blue chip stocks selling off along with precious metals. As investors liquidate around the world they focus on where their money can be preserved. With most currency falling in value there is a flood towards the U.S. dollar index as the safety play.

Gold Video Analysis

Here you can watch my detailed analysis along with both my short-term expectations and long-term supercycle outlook.

Global Currency Trends – Monthly Charts

As the US dollar index rises we tend to see precious metals fall. As you can see from the charts below almost all currencies are falling in value helping to send the US dollar index sharply higher this is a headwind for precious metals until it finds resistance in tops.

Gold Monthly Chart Comparing 2008 Bear Market and 2022

Let’s take a look at the monthly chart of gold. I believe gold entered a new bullish supercycle in 2019, which is very similar to the Super cycle that started in 2001.

I believe the bear market in equities we have started can be compared to the 2008 bear market. Technical analysis shows that gold could correct another 16% lower and match the same 34% correction we saw in 2008.

The price of gold is threatening the 1674 support level. If price is broken on the monthly chart it will signal a large sell off to roughly the $1300 to $1400 level for gold.

While the circumstances and economy are very different from 2008 the price charts are painting a very similar picture. I believe there’s still a long way to go for gold to find support and it may take another 8 to 12 months to unfold. I also believe that the precious metal sector will be one of the first assets to bottom and then start a multiyear rally very similar to what happened during the 2009 to 2011 rally.

While the 34% correction starting to take place may look very large it is in line with what we’ve seen in the past. While price charts don’t repeat they do tend to rhyme so I’m expecting a similar type of scenario though I’m sure it will unfold a little differently and take a different length of time to mature.

Price Stage Analysis – Gold Starting Stage 4 Decline

The price of gold is on the verge of breaking down from a stage three topping phase. Once the breakdown is confirmed it will then be in a stage 4 decline which is known as a bear market. It’s important to note that we can have bear markets within supercycles.

Just like when gold started at new super cycle in 2001 which lasted to 2013 there can be large corrections and smaller bear markets within the bullish Super cycle.

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Dollar Index Rockets Higher and Has More Room to Run

The US dollar Index has been one of the hottest assets to own this year. I believe the rising value of the dollar index has been putting downward pressure on the metals sector all year. As you can see from the quarterly chart below, The US dollar index still has more room to run to match the high set in 2001.

Keep in mind I still think there’s another three to five more bars before the dollar forms a top and reverses direction. Each bar on the chart is 3 months because this is the quarterly chart so we still have potentially a year of sideways or lower gold pricing ahead of us.

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Gold Miners Will Be Under Pressure If Gold Falls

If gold breaks down and the bear market in equities continues, we will see gold mining stocks continue to sell off. The large cap gold stocks ETF GDX shows a potential of 44% decline in price over the next year. While this may sound bad it will become an extraordinary opportunity in do time.

I believe silver and silver mining stocks will follow that of gold stocks as well.

Graphical user interface, chart Description automatically generated

Concluding Thoughts

In short, I’m very excited for what is unfolding in the precious metals sector. And while it may still be early I’m keeping my eye on the sector for the start of a new super cycle rally in 2023 which could be life changing for investors.

TheTechnicalTraders created the Consistent Growth Strategy that can be manually followed or autotraded in a self-directed retirement account for people who do not want to spend their valuable time in front of a computer. Save time to do what you love and lower stress to enjoy every moment of today.

Chris Vermeulen
Founder & Chief Investment Officer
www.TheTechnicalTraders.com

Disclaimer: This article and any information contained herein should not be considered investment advice. Technical Traders Ltd. and its staff are not registered investment advisors. Under no circumstances should any content from websites, articles, videos, seminars, books or emails from Technical Traders Ltd. or its affiliates be used or interpreted as a recommendation to buy or sell any security or commodity contract. Our advice is not tailored to the needs of any subscriber so talk with your investment advisor before making trading decisions. Invest at your own risk. I may or may not have positions in any security mentioned at any time and maybe buy sell or hold said security at any time.

Global Inflation Shows No Indication That It is Diminishing but Rather Moving Higher

Latest Inflation Data Around the World

This prompted Credit Suisse to issue a dire global economic outlook, saying that the “worst is yet to come”.

Chart 1 PCE Graph

The Commerce Department released the latest inflation numbers vis-à-vis the PCE that revealed that the Core PCE jumped 0.6% in August. It shows that inflation is still intense and increasing. The preferred gauge used by the Federal Reserve, the PCE (Personal Consumption Expenditures Price Index) revealed that inflation accelerated even more than expected in August. On a year-over-year basis, the core PCE which omits food and energy costs increased 4.9%, above projections of 4.7%.

Chart 2 U.S. Core PCE Price Index YoY

It was reported by Dow Jones newswires that inflation in the eurozone hit a new record high of 10% in September. Dow Jones reported, “The consumer price index –a measure of what consumers pay for goods and services– increased 10.0% in September compared with the same month a year earlier after climbing 9.1% in August, according to preliminary data from Eurostat, the European Union’s statistics agency.”

Chart 3 Eurozone CPI at 10%

The CPI for the Eurozone differs from the United States in that it was higher energy prices up 40.8% year-on-year in September after a 38.6% increase in August. The latest numbers for the CPI in the United States showed a slight downtick in August from 8.5% to 8.3%.

Latest Comments from Federal Reserve Members

After five consecutive interest rate hikes including three consecutive 75 basis point rate hikes at the last three FOMC meetings, the Federal Reserve has raised interest from 0 to ¼% in March 2022 to its current range of 3% to 3 ¼% since March. However, today’s report suggests that the Fed’s extremely aggressive rate hikes have yet to lower inflation.

Vice-chair Lael Brainard spoke at a research conference organized by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, saying, “Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out. She later added that policymakers were “committed to avoiding pulling back prematurely saying that, “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target,”

Gold vs U.S. Dollar Technical Analysis

Chart 4a Weekly candlestick chart for gold

This week gold futures basis the most active December contract traded to a low of $1621, a high of $1684.40 and as of 5 PM, EDT is currently fixed at $1668.30 after factoring in today’s net decline of 0.02% or $0.30. Until December gold can effectively close above $1680 per ounce there is still an extreme danger that gold could drift lower if severe dollar strength as witnessed recently continues.

chart 4 USDX daily chart

Chart 4 is a daily chart of the dollar index in Heikin-Ashi format. It differs from a standard candlestick chart in that the open is fixed from the prior candle’s midpoint. It clearly illustrates a potential pivot looking at the third candle from the right which is green and has an extremely small real body and long upper and lower wicks. This is followed by the two green candles.

Chart 5 Gold daily chart

Chart 5 is also a daily Japanese chart in Heikin-Ashi format. It shows the opposite pivot with a series of red candles up until three days ago when the candle color changed from red to green with a small green real body with long upper and lower wicks. Both of these charts are indicating that on a technical basis we could see a short-term pivot with the dollar moving from extremely bullish to bearish, and gold moving from extremely bearish to bullish.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

Gold Price Forecast – King Dollar Lives On

The Fall in the Price of Gold During the Year

To say that gold has been struggling this year is an understatement. As the chart below shows, the price of the yellow metal declined from above $2,000 to below $1,700 (as of September 20). That slide occurred during the highest inflation since the great stagflation of the 1970s.

US Dollar Strength Was Crucial Pressuring Gold Price Lower

One of the headwinds blowing strongly in the gold market has been the strong greenback. As the chart below shows, the American currency has been appreciating since mid-2021. The broad U.S. dollar index rose from 110.5 in June 2021 to 124 right now, or more than 12%.

Wait, wait a second. The dollar strengthened during a period of high inflation (see the chart below) in which money is losing purchasing power. How could the currency gain and lose value at the same time? It doesn’t seem to make any sense.

Nevertheless, it does. Because of inflation, the dollar is losing its internal purchasing power, i.e., how many real goods and services can we buy with these green pieces of paper? However, the exchange rate is about external purchasing power, i.e., how many pieces of paper with different symbols and signatures issued by foreign central banks we can buy.

The answer is: more! As the chart below shows, the dollar is now near its highest levels in decades versus the British pound, the euro, and Japanese yen (please note that, for consistency, the chart paints the exchange rates as the dollar’s value in foreign currencies).

However, it doesn’t necessarily reflect the dollar’s greatness but the fact that other currencies have been even worse. As investors’ saying goes, the dollar is “the least-ugly mug in a beauty contest”. You see, the Fed was terribly delayed with its combat against inflation, but compared to other major central banks, such as the ECB and the Bank of Japan, it’s an uber-hawk that quickly stood up for a fight.

Remember that exchange rates are all about relative values. For example, inflation in the euro area surpassed 5% in December 2021 and by now it has increased to about 9%, but the central bank didn’t lift its interest rates until July 2022.

The faster and more decisive Fed’s reaction increased the divergence in monetary policies and interest rates (see the chart below) between the dollar and the euro, which strengthened the value of the former. The mechanism was simple: higher rates in America attracted money from all over the world, and as investors have been buying dollar-denominated assets, the value of the greenback has increased.

What Does a Strong Dollar Imply for the Global Economy?

Problems! Why? Well, maybe because about 30% of all S&P 500 companies’ revenues are earned abroad, a stronger dollar reduces the dollar’s value of these sales. Or maybe because many governments and companies have international debts denominated in dollars?

Hence, the stronger the dollar, the higher the debt to be repaid. According to the IMF, 60% of low-income countries are in or at high risk of government debt distress. Tighter financial conditions in the U.S. and a stronger dollar could only increase the pressure on countries with foreign debts.

The dollar is America’s currency, but the emerging market’s troubles. Egypt, Pakistan, and Sri Lanka have already asked the IMF for help – and others may follow suit.

Please also note that about half of international trade is invoiced in dollars, which means that importers are facing higher costs not only because of inflation and supply-chain disruptions but also because of the stronger dollar.

What Does the Strong Dollar Mean for the Gold Market?

It goes without saying that the recent appreciation of the greenback has weighed on gold prices. If not for the strong dollar, gold would have fared much better. Indeed, this year, the yellow metal lost about 6% of its value when measured in the U.S. dollar, but it gained 6.2% in euros and 9.3% in British pounds. Thus, maybe gold’s performance hasn’t been disappointing, but simply the greenback has been shining, and maybe gold is an inflation hedge, after all (but in other currencies than the US dollar)!

It gives hope that when the dollar weakens (for example, due to the start of the recession and the Fed’s pivot, or due to the end of the war in Ukraine), gold will start rallying eventually. It seems that the greatest part of the upward move in the greenback is already behind us.

The strong dollar could also trigger some economic turbulence, which could benefit the yellow metal. However, I wouldn’t bet that financial crises in emerging markets will induce a safe-haven demand for gold. Precious metals investors don’t care too much about other countries than the U.S. or Western Europe.

Bottom Line

There is a true silver lining for gold bulls: one reason behind the appreciation of the dollar. The Fed’s tightening cycle is only one driver, but another is safe-haven inflows. Investors have been moving to the U.S. dollar not because it is so strong, but because of economic turmoil and recessionary risk. If so, gold could at some point (perhaps when the Fed pivots and adopts a dovish policy again) start to move in tandem with the greenback.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

U.S. Dollar (DXY) Rebounds As PCE Price Index Exceeds Expectations

Key Insights

  • U.S. dollar moved higher ahead of the weekend. 
  • Commodity-related currencies are under pressure. 
  • USD/JPY is moving towards the important 145 level. 

U.S. Dollar Index Rebounds After Pullback

U.S. Dollar Index settled back above the 112 level and is trying to gain more ground as traders increase purchases of the American currency after the recent pullback.

Today, traders had a chance to take a look at Personal Income and Personal Spending reports from the U.S. Personal Income increased by 0.3% month-over-month in August, while Personal Spending grew by 0.4%.

PCE Price Index increased by 0.3% month-over-month in August, compared to analyst consensus of 0.1%. The higher-than-expected PCE Price Index report provided additional support to the American currency.

EUR/USD Pulls Back Below 0.9800

EUR/USD is moving lower after an unsuccessful attempt to get above the 0.9850 level. Currently, EUR/USD is trying to settle back below 0.9750.

Today, traders focused on the flash readings of the Euro Area inflation reports. The reports indicated that Euro Area Inflation Rate increased from 9.1% in August to 10% in September, compared to analyst consensus of 9.7%. Core Inflation Rate grew from 4.3% to 4.8%, compared to analyst consensus of 4.7%.

The reports show that inflation continues to grow at a robust pace. However, inflation data failed to provide additional support to EUR/USD as traders wanted to take some profits off the table amid rising geopolitical tensions.

GBP/USD Tests The 1.1200 Level

GBP/USD tested the 1.1200 level as the strong rebound continued. The final reading of the UK GDP Growth Rate report indicated that GDP grew by 0.2% in the second quarter, compared to analyst consensus which called for a decline of 0.1%. This report provided material support to the British pound.

GBP/USD

From a big picture point of view, GBP/USD needs to settle above the 20 EMA near the 1.1250 level to continue its rebound. At this point, it looks that GBP/USD will not be able to gain sufficient upside momentum for this move ahead of the weekend.

Commodity-Related Currencies Retreat As Risk Appetite Declines

AUD/USD declined to 0.6450 while NZD/USD pulled back to 0.5670 as traders focused on recession worries. Meanwhile, USD/CAD settled back above the 1.3700 level.

Commodity-related currencies remain sensitive to the dynamics of risk appetite. When demand for the safe-have dollar starts to increase, these currencies find themselves under pressure.

USD/JPY Stays Close To The 145 Level

USD/JPY continues to trade in a tight range below the 145 level. Fundamental reasons push USD/JPY higher. However, traders are worried that BoJ will intervene if USD/JPY crosses the 145 mark. Most likely, we’ll see a test of this level next week despite traders’ fears.

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

EUR/USD Return to Parity in the Hands of US Inflation and Fed Chatter

It was a busy start to the European session for the EUR. Before the European opening bell, French inflation numbers drew interest.

The French annual inflation rate softened from 5.9% to 5.6%, with consumer prices falling by 0.5% in September. Economists forecast an annual inflation rate of 5.9% and a 0.1% monthly decline in consumer prices.

However, eurozone inflation figures were the key stats of the day. According to prelim figures, the Annual inflation rate accelerated from 9.1% to 10.0%. Economists forecast an annual rate of 9.7%.

According to Eurostat,

  • Energy was the largest contributor, with an estimated annual rate of 40.8% versus 38.6% in August.
  • Food, alcohol, & tobacco had an estimated annual rate of 11.8% versus 10.6% in August.

In the month of September, consumer prices increased by 1.2% after rising by 0.6% in August. Economists forecast a 1.0% rise.

While the stats of influence, ECB member reaction to the latest inflation figures will also draw attention. Frank Elderson and Isabel Schnabel speak today.

EUR/USD Price Action

At the time of writing, the EUR was up 0.10% to $0.98254.

A mixed morning saw the EUR/USD fall to an early low of $0.97943 before rising to a high of $0.98538.

EUR/USD finds early support.
EURUSD 300922 Daily Chart

Technical Indicators

The EUR/USD needs to avoid the $0.9756 pivot to target the First Major Resistance Level (R1) at $0.9875. Hawkish ECB member chatter would support a breakout from the morning high of $0.98538.

However, risk appetite will need to improve throughout the session to support a EUR/USD return to $0.9850. In the case of a breakout session, the EUR would likely test the Second Major Resistance Level (R2) at $0.9935 and resistance at $1.00.

The Third Major Resistance Level (R3) sits at $1.0115.

A fall through the pivot would bring the First Major Support Level (S1) at $0.9696 into play. However, barring a market flight to safety, the EUR/USD pair would likely avoid sub-$0.9600 and the Second Major Support Level (S2) at $0.9576.

The Third Major Support Level (S3) sits at $0.9396.

EUR/USD resistance levels in play above the pivot.
EURUSD 300922 Hourly Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The EUR/USD sits below the 100-day EMA, currently at $0.98399. The 50-day EMA narrowed to the 100-day EMA, while the 100-day EMA fell back from the 200-day EMA, delivering mixed signals.

A EUR/USD move through the 100-day EMA ($0.98399) would give the bulls a run at R1 ($0.9875) to target $0.99. The 200-day EMA sits at $0.99384. However, a EUR/USD fall through the 50-day EMA would bring the support levels into play.

EMAs bearish.
EURUSD 300922 4 Hourly Chart

The US Session

It is a busier day ahead on the US economic calendar. Personal spending and Core PCE Price Index will be in the spotlight. While the consumption numbers will influence, inflation will be the market focal point.

A larger than forecast pickup in the annual inflation rate would deliver another dollar breakout session. Economists forecast the Index to rise by 4.7% year-over-year in August, up from 4.6% in July.

Later in the session, finalized Michigan Consumer Sentiment and Expectation numbers are also out. Any material revisions would influence the dollar.

FOMC member commentary will also draw interest, with members Bowman, Mester and Williams and Fed Vice-Chair Brainard speaking today,

A pickup in inflationary pressure and hawkish Fed chatter would likely see the Dollar Spot Index (DXY) resume its move towards 115.

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.

For more information visit FXTM.

GBP/USD Return to $1.13 in the Hands of US Inflation and Fed Chatter

It is a busy day for the GBP/USD. From the economic calendar, finalized Q2 GDP numbers drew interest ahead of the European opening bell.

The UK economy expanded by 0.2% (prelim: -0.1%) in Q2 versus 0.8% growth in Q1. Year-over-year, the economy expanded by 4.4% versus a prelim 2.9%. In the first quarter, the economy grew by 8.7%, year-over-year.

According to ONS,

  • Services output increased by 0.2%, with construction output also on the rise.
  • In Q2, services output was revised up from a 0.4% fall
  • However, production output declined by 0.2% in Q2, driven by a 1.1% fall in manufacturing output.
  • Real household expenditure increased by 0.1%.

Later this morning, the Bank of England’s Consumer Credit report for August is due.

From the Bank of England, there are no Monetary Policy member speeches on the docket to influence the Pound. However, more commentary from the UK government and the Bank of England is likely following government assurances on Thursday that the government is working closely with the Bank of England.

GBP/USD Price Action

At the time of writing, the Pound was up 0.09% to $1.11266.  A mixed start to the day saw the Pound rise to an early high of $1.12042 before falling to a low of $1.10696.

GBP/USD gives up early gains.
GBPUSD 300922 Daily Chart

Technical Indicators

The Pound needs to avoid the $1.0999 pivot to retarget the First Major Resistance Level (R1) at $1.1237. Following today’s GDP numbers, government and Bank of England chatter will need to continue providing Pound support for a return to $1.12.

In the case of another extended rally, the GBP/USD would likely test resistance at $1.13 and the Second Major Resistance Level (R2) at $1.1357. The Third Major Resistance Level (R3) sits at $1.1714.

The market focal point remains the Bank of England policy response to the UK Government’s fiscal measures. Despite Wednesday’s rally and this morning’s early gains, the MPC still needs to contend with a weaker Pound.

A fall through the pivot would see the Pound test the First Major Support Level (S1) at $1.0879. In the case of another extended sell-off, the Pound would test buyers at $1.08 before any recovery. However, the Pound should avoid sub-$1.08 and the Second Major Support Level (S2) at $1.0642.

The Third Major Support Level (S3) sits at $1.0284.

GBP/USD resistance levels in play above the pivot.
GBPUSD 300922 1 Hour Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 100-day EMA, currently at $1.10172.

The 50-day narrowed to the 100-day EMA, while the 100-day EMA flattened on the 200-day EMA, delivering mixed signals. A GBP/USD move through the 100-day EMA ($.11971) and R1 ($1.1237) would give the bulls a look at R2 ($1.1357). The 200-day EMA sits at $1.14351.

However, a fall through the 50-day EMA would give the bears a run at S1 ($1.0879).

EMAs bearish
GBPUSD 300922 4-Hourly Chart

The US Session

It is a busier day ahead on the US economic calendar. Personal spending and Core PCE Price Index will be in the spotlight. While the consumption numbers will influence, inflation will be the market focal point.

A larger than forecast pickup in the annual inflation rate would support another dollar breakout session. Economists forecast the Index to rise by 4.7% year-over-year in August, up from 4.6% in July.

Later in the session, finalized Michigan Consumer Sentiment and Expectation numbers are also out. Any material revisions would influence the dollar.

FOMC member commentary will also draw interest, with members Bowman, Mester and Williams and Fed Vice-Chair Brainard speaking today,

A pickup in inflationary pressure and hawkish Fed chatter would likely see the Dollar Spot Index (DXY) resume its move towards 115.

Gold Price Forecast – Albert Einstein Said Insanity is Doing the Same Thing and Expecting Different Results

Gold Price This Week

As of 4:21 PM EDT gold futures basis, the most active December futures contract is currently fixed at $1668.90 a net decline of 0.07% or $1.10. Gold futures did trade to a slightly higher high and a higher low than yesterday. However, yesterday’s relief rally took gold from a low of approximately $1622 and closed at $1670.

This indicates that some market participants took profits by short covering and other participants bought the dip under the assumption that gold prices were extremely oversold.

Gold daily chart

Rate Hikes Sent Gold Lower

The recent price decline in gold from $1820 to $1622 was fundamentally based on aggressive rate hikes by the Federal Reserve. More so, several officials of the Federal Reserve have made multiple comments that they are committed to continuing to use the U.S. Central bank to raise interest rates aggressively to battle inflation. Currently, inflation is at 8.3% vis-à-vis the CPI index, and over 6% based upon core inflation (which strips out food and energy costs).

While consumers have seen a tremendous price decline in the cost of energy, the same cannot be said for food and housing costs which continue to remain extremely elevated.

The Federal Reserve Still Has Two More Meetings This Year

The Federal Reserve will convene its Open Market Committee meeting two more times this year. First on November 2, and then the final FOMC meeting of the year in December. Currently, the Federal Reserve is on record wanting to end the year with its Fed funds rate somewhere between 4% and 4 ½%. Currently, the Federal Reserve has set its prime interest rate between 3% and 3 ¼%.

According to the CME’s FedWatch tool, there is a 57.7% probability that the Federal Reserve will raise rates to between 3 ¾% to 4% during their November FOMC meeting. This probability indicator is also predicting a 42.3% probability that the Fed will take interest rates to between 3 ½% to 3 ¾%.

As for the December 14, 2022, FOMC meeting the CME’s FedWatch tool is predicting that Fed funds rates have a 57.6% probability of reaching 4¼% to 4 ½% and a 42.2% probability that interest rates will be set at 4% to 4 ¼% by the end of 2022.

As the Federal Reserve acts by aggressively raising rates yields on U.S. debt instruments to rise as well. Higher yields in U.S. Treasuries take the U.S. dollar higher which in turn pressures gold to lower pricing.

Where the projections of the CME’s FedWatch tool get interesting is their probability assessment for 2023 beginning with the February FOMC meeting. According to this probability indicator, it is projecting a 53.8% probability that rates will rise to a high of 4 ½% to 4 ¾% and then begin to stabilize at approximately 4 ½%.

The Key Mistake of the Federal Reserve

The question becomes will rate hikes to the level of 4 ½% effectively reduce inflation that is above 8% based upon the current CPI index, with the core inflation index solidly above 6%? The short answer is no.

If history is any guide to what level the Federal Reserve must raise interest rates to at least the equal the current level of inflation.

The Federal Reserve initiated this major crisis by doing too little too late as they assumed that surging inflation hitting a 40-year high was temporary and would subside naturally over time. They are now assuming that they can reduce inflation using a technique that has never worked in the past.

Attributed to Albert Einstein, insanity is doing the same thing over and over and expecting different results.

I wonder what his take would be on expecting to achieve better results by using a technique that requires less energy than a proven technique that requires more energy to produce a defined result.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

Gold Enters the Last Quarter of 2022 Depressed

Ladies and gentlemen, please welcome the final quarter of the year! What were the first nine months of 2022 for the gold market? Well, in Q1 there was an impressive rally in gold, with the yellow metal staying above $2,000 for a while. However, the next few months brought a gradual decline in gold prices. After several weeks of being traded between $1,700 and $1,800 during the summer, in September, gold gave up and slid below $1,700, as the chart below shows.

The reason behind this bearish trend in gold is clear, and its name is the Fed, the hawkish Fed. The tightening of monetary policy by the U.S. central bank boosted the greenback, gold’s nemesis, and bond yields (see the chart below). The higher the interest rates, the less attractive gold is compared to interest-bearing assets. Unfortunately for gold, inflation stabilized somewhat, which – with the hikes in the federal funds rate – lead to the rise in the real interest rates that are key for the gold market.

What’s Next for Gold?

We know what happened, but the key question is what awaits us in the last months of the year. Well, I don’t have a crystal ball, but obviously gold could struggle more during this tightening cycle of U.S. monetary policy. Interest rates are set to continue higher until inflation retreats closer to the 2-percent target. The Fed could go all the way to 4.5%. The more hawkish the Fed and the steeper the expected path of the federal funds rate, the worse for gold.

However, everything passes away, and this applies also to gold’s disappointing performance (although please note that gold is still one of the best assets this year – just think about declines in equities – and gold fares much better in other currencies than the U.S. dollar). At some point, either inflation softens or a recession arrives. In August, Bloomberg’s US recession probability forecast increased from 40% to 50%, and according to the World Bank, “as central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023.”

Then, the Fed will likely reverse its course, and gold could rally again, especially if the economic downturn is accompanied by still high inflation. Gold has historically performed relatively well during stagflations and recessions (according to the World Gold Council, “gold’s median return during such periods has been 0.92%, higher than comparable major asset classes with the exception of US Treasuries and corporate bonds”).

What could also help gold a bit is the Ukrainian counteroffensive (it increases the odds of a resolution and a lack of the energy crisis in Europe during winter) and the continuation of the tightening cycle started recently by the ECB (it could reduce the divergence between interest rates across the pond).

Implications for Gold

Of course, waiting for the Fed’s pivot could be similar to waiting for Godot. In Beckett’s play, Godot never arrives, but we know that at some point, the Fed will at least stop raising interest rates. We just don’t know exactly when this will happen. However, it’s possible that we are already behind the peak of the Fed’s hawkishness and that the upcoming hikes will be smaller compared to those from September and previous months.

I also believe that the biggest increases in real interest rates and the U.S. dollar index have already been made. The full reversal in the Fed’s stance would be much better for gold, but such a moderation should be welcomed as well.

Hence, gold could find a bottom in the final quarter of 2022, although it could struggle until Q1 2023. Why? Well, inflation probably won’t moderate this year, and I expect more economic weakness that would finally force the Fed to make a policy shift.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

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Sunshine Profits: Effective Investment through Diligence & Care

U.S. Dollar (DXY) Heads Towards Yesterday’s Lows As Pound Rebounds

Key Insights

  • U.S. dollar is mostly flat in volatile trading. 
  • The rebound in GBP/USD continues. 
  • Commodity-related currencies are under strong pressure.

U.S. Dollar Index Settled Back Below 113

U.S. Dollar Index moved back below the 113 level as traders continued to take profits after the recent rally.

Today, traders had a chance to take a look at the final reading of the second-quarter GDP Growth Rate report. The report indicated that GDP declined by 0.6%, in line with the analyst consensus.

Initial Jobless Claims report showed that 193,000 Americans filed for unemployment benefits in a week, compared to analyst consensus of 215,000. Interestingly, the strong report did not provide additional support to the American currency as traders focused on the rebound of the British pound.

GBP/USD Continues To Rebound

GBP/USD moved towards the 1.1000 level as traders were ready to buy the British pound after the recent sell-off.

It looks that the Bank of England managed to calm traders with its intervention plans in the UK government bond markets. However, it should be noted that the yield of UK 10-year government bonds rebounded from 4.01% to 4.12% today.

GBP/USD

GBP/USD continues to move higher. RSI returned to the moderate territory, which indicates that GBP/USD may soon face more pressure. However, a move above the 1.1000 level may open the way to the test of the first significant resistance level at 1.1220. No material levels were formed between 1.1000 and 1.1220 so this move may be fast.

EUR/USD Stays Above 0.9700 After Germany’s Inflation Exceeds Expectations

EUR/USD is trading above the 0.9700 level after the release of disappointing economic reports. Euro Area Economic Sentiment declined from 97.3 in August to 93.7 in September, compared to analyst consensus of 95.

In Germany, Inflation Rate increased from 7.9% in August to 10% in September, compared to analyst consensus of 9.4%.

Germany’s inflation reports may provide some support to euro as they indicate that ECB will be forced to raise rates aggressively. While higher rates will certainly put more pressure on economic activity, inflation has reached unacceptable levels.

Commodity-Related Currencies Move Lower Amid Recession Fears

Commodity-related currencies gained strong downside momentum and are down by about 1% against the U.S. dollar.

AUD/USD declined towards 0.6450, while NZD/USD moved to 0.5665. Meanwhile, USD/CAD tested the 1.3750 level.

Commodity markets are mostly moving lower today, and it remains to be seen whether commodity-related currencies will get any support during today’s trading session.

USD/JPY Heads Towards The 145 Level

USD/JPY has recently managed to settle back above the 144.50 level. There are no signs of interventions from the Bank of Japan, so USD/JPY may try to test the key 145 level.

The pressure on the Japanese yen may increase after the better-than-expected U.S. Initial Jobless Claims report. The BoJ remains extremely dovish while the Fed will have to raise rates aggressively, which is bullish for USD/JPY.

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

EUR/USD Return to $0.99 Hinged on Hawkish ECB Member Chatter

It was a busy start to the European session for the EUR. Prelim September inflation figures from Spain and Eurozone consumer and business sentiment figures drew interest early in the session.

The stats were EUR/USD negative, with inflation pressures in Spain softening and business and consumer confidence waning.

In September, Spain’s annual inflation rate softened from 10.5% to 9.0% versus a forecast of 10.0%. The Eurozone economic sentiment indicator fell from 97.6 to 93.7 in September. Economists forecast a decline to 95.0.

While the stats weighed on the EUR early, ECB member chatter will also provide direction. De Guindos, McCaul, and Lane speak today. Following hawkish ECB chatter on Wednesday, the markets will look for more of the same to deliver EUR support.

EUR/USD Price Action

At the time of writing, the EUR was down 0.63% to $0.96701. A mixed start to the day saw the EUR/USD rise to an early high of $0.97383 before falling to a low of $0.96357.

EUR/USD under early pressure.
EURUSD 290922 Daily Chart

Technical Indicators

The EUR/USD needs to move through the $0.9673 pivot to target the First Major Resistance Level (R1) at $0.9810. Hawkish ECB member chatter would support a breakout from the Wednesday high of $0.97508.

However, risk appetite will need to improve throughout the session to support a EUR/USD return to $0.98. In the case of a breakout session, the EUR would likely test the Second Major Resistance Level (R2) at $0.9888 and resistance at $0.9900.

The Third Major Resistance Level (R3) sits at $1.0103.

Failure to move through the pivot would leave the First Major Support Level (S1) at $0.9595 in play. However, barring a market flight to safety, the EUR/USD pair would likely avoid sub-$0.9500 and the Second Major Support Level (S2) at $0.9458.

The Third Major Support Level (S3) sits at $0.9243.

EUR/USD support levels in play below the pivot.
EURUSD 290922 Hourly Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The EUR/USD sits below the 50-day EMA, currently at $0.97501. The 50-day EMA fell back from the 100-day EMA, with the 100-day EMA easing back from the 200-day EMA, delivering bearish signals.

A EUR/USD move through the 50-day EMA ($0.97501) would give the bulls a run at R1 ($0.9810) and the 100-day EMA ($0.98430). The 200-day EMA sits at $0.99460. However, failure to move through the 50-day EMA would leave the EUR/USD under pressure.

EMAs bearish.
EURUSD 290922 4 Hourly Chart

The US Session

It is a busy day ahead on the US economic calendar. Weekly jobless claims and Q2 GDP numbers will draw market interest, with FOMC member chatter also in focus. Later today, FOMC member Bullard will speak. However, following hawkish commentary from earlier in the week, Bullard will need to deviate from the script to influence the dollar.

Monetary policy divergence and sentiment towards the global economic outlook had supported a DXY return to 115 near-term. However, recent chatter from ECB members may have narrowed monetary policy divergence near-term.

GBP/USD Faces Sub-$1.05 as Bears Take Back Control

It is a quiet day on the economic calendar, with no UK economic indicators to provide the GBP/USD pair with a direction.

While there are no stats to consider, Bank of England Monetary Policy member speeches will remain an area of interest. MPC member Dave Ramsden will speak later today. The markets will be looking for any comments vis-à-vis monetary policy to align with Huw Pill.

On Tuesday, the BoE Chief Economist Huw Pill talked of a significant policy response to the government’s tax cuts but added that the Bank will wait until the November meeting to deliver a policy response.

With the Bank of England having intervened on Wednesday to placate the markets, the markets will be looking for the next steps to combat the UK government’s mini-budget.

GBP/USD Price Action

At the time of writing, the Pound was down 0.91%to $1.07888. A bearish start to the day saw the Pound fall from an early high of $1.08879 to a low of $1.07616.

GBP/USD under pressure.
GBPUSD 290922 Daily Chart

Technical Indicators

The Pound needs to avoid the $1.0781 pivot to target the First Major Resistance Level (R1) at $1.1023. However, with no economic indicators to shift sentiment, R1 would likely cap any upside.

In the case of an extended rally, the GBP/USD would likely test the Second Major Resistance Level (R2) at $1.1159. Bank of England actions and MPC member chatter will need to favor the Pound to support another breakout session. The Third Major Resistance Level (R3) sits at $1.1536.

The market focal point remains the Bank of England policy response to the UK Government’s fiscal measures. Following the market response to the mini-budget, the MPC still has a weaker Pound to consider.

A fall through the pivot would see the Pound test the First Major Support Level (S1) at $1.0645. In the case of another extended sell-off, the Pound would test the Second Major Support Level (S2) at $1.0403 before any recovery.

The Third Major Support Level (S3) sits at $1.0025.

GBP/USD resistance levels in play above the pivot.
GBPUSD 290922 1 Hour Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.10002.

The 50-day eased back from the 100-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals. A GBP/USD move through the 50-day EMA ($1.10002) and R1 ($1.1023) would give the bulls a look at R2 ($1.1159) and the 100-day EMA ($1.12123).

However, failure to move through the 50-day EMA would leave the Pound under pressure.

EMAs bearish
GBPUSD 290922 4-Hourly Chart

The US Session

It is a busy day ahead on the US economic calendar. Weekly jobless claims and Q2 GDP numbers will draw market interest, with FOMC member chatter also in focus. Later today, FOMC member Bullard will speak. However, following hawkish commentary from earlier in the week, Bullard will need to deviate from the script to influence the dollar.

Monetary policy divergence and sentiment towards the global economic outlook had supported a DXY return to 115 near-term. However, recent chatter from ECB members and the UK Government’s mini-budget may have narrowed monetary policy divergence near-term.

Gold Attempts a Relief Rally as the Dollar Falls From Its Highest Value Since May 1, 2002

U.S. Dollar Historical Analysis

Since May 2021 gains in the U.S. dollar can be best described as parabolic. The dollar index was trading at approximately 89.60 in January 2021, and in one year nine months have moved from just below 90 to 114.745 a total gain of 24.745 points. In other words, the dollar index when compared to a basket of six foreign currencies gained 21.91% in value.

The last time the dollar index was strong occurred in May 2002 as seen on the chart below labeled – Chart 1 – Monthly dollar index. The first time the dollar index closed above 114.75 was in October 2000 approximately 22 years ago.

Chart 1 – Monthly dollar index

The highest level the dollar index reached occurred just after the “great inflation” which began in 1979 and ended in 1983. During that time period, the United States had the highest level of inflation in history at approximately 14%. By 1983 aggressive action by the Federal Reserve headed by Chairman Paul Volker was able to take double-digit inflation down to an acceptable target of approximately 3.6%.

Chart 2 – Three Month dollar index

The chart above titled – Chart 2 – Three Month dollar index shows the highest level available in our database for the dollar index which was at 128.894 in November 1985. However, our database does not go back to February 1985 when the dollar index hit its highest value ever at 164.72. To view the dollar index at its all-time high we need to view a chart created and sourced from Stooq.com that can be seen below.

U.S. dollar index chart, source: Stooq

The point of viewing three extensive charts of the dollar index is to illustrate that its current value at 112.635 is most definitely at a 20-year high but far from the highest level ever seen in the dollar index.

Gold Today and Technical Analysis

Since gold is paired against the dollar index today’s decline of 1.24% in the dollar index was highly supportive of moving gold substantially higher. As of 5:34 PM EDT gold futures basis, the most active December futures contract is currently trading almost 2% higher (1.97%) which amounts to a net gain of $32.30 and is fixed at $1668.50.

Chart 4 – Daily december gold chart

Chart 4 (above) is a Japanese candlestick chart in which each candle represents three days of trading. We have created a basic Fibonacci extension from the low of $1170.50 that occurred on August 15, 2018, up to the record high of approximately $2088 that occurred on August 6, 2020. We have highlighted two key retracement levels; the 38.2% Fibonacci retracement at $1737.10 as well as the 50% retracement level at $1628.90.

We have also created a red horizontal line at $1680 which we believe is a key and critical level of former support that was taken out last week. Today’s strong $32 move in December gold took pricing from the low one dollar above the 50% retracement at $1622.20 and closed just off of the high today of $1671.60 at $1660.50.

Critical Support and Resistance Levels for Gold and Silver

Based on the technical studies we presented in charts one, two, and four we have derived the following support resistance areas for both gold and silver. First, December gold currently has support at the 50% retracement at $1628.90. We believe that any rally could easily be short-lived if as I believe the dollar will only briefly decline before returning to a rally mode.

Therefore, we see the first level of resistance at $1680 with major resistance at $1737 which is based upon the 38.2% Fibonacci retracement as seen in chart four. The 61.8% in the retracement set of the chart occurs at $1515 which I believe would be an unlikely point that gold would find support. It seems more likely that gold will find support between $1600 and $1620.

Although the dollar index is at a 20-year high as seen in the charts we have presented on a technical basis it could go much higher. Therefore, our technical studies indicate that major resistance occurs just above 120 in the dollar index based upon the highs first seen in October 2000.

Bottom Line

Today’s respectable gain in gold is most probably a relief rally based upon short covering and those market participants believing gold is so oversold that this is an opportunistic time to buy the dip. However, since gold prices are so deeply correlated to dollar strength or weakness, likely, further rate hikes or increases at the next two FOMC meetings this year could reignite dollar strength taking it passed its current high just below 115.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

U.S. Dollar (DXY) Retreats After Testing New Highs

Key Insights

  • U.S. dollar is losing ground as traders take profits off the table. 
  • GBP/USD is mostly flat after BoE decides to intervene in bond markets. 
  • USD/JPY faced resistance below the 145 level. 

U.S. Dollar Declines After Strong Rally

U.S. dollar pulled back after testing new highs as traders took some profits off the table after the strong rally.

Today, traders had a chance to take a look at Pending Home Sales report for August, which indicated that Pending Home Sales declined by 2% month-over-month. On a year-over-year basis, Pending Home Sales decreased by 24.2%.

The U.S. dollar is overbought, and the near-term dynamics of the American currency depend on the demand for safe-haven assets. In case the demand for safe-haven assets remains elevated, the U.S. dollar may get more support.

EUR/USD Continues Its Attempts To Rebound

EUR/USD moved back above the 0.9600 level as some traders were willing to bet on a rebound after the strong sell-off.

The fate of Nord Stream pipelines after explosions remains the key topic in the EU. Some reports indicate that Germany fears that these pipelines would never work again if they are not repaired quickly as salty water will lead to corrosion.

The EU is not ready to get rid of the Russian gas in the near term, so the elimination of Nord Stream pipelines will put additional pressure on the European economy. In the near term, EUR/USD may be sensitive to technical factors after the huge sell-off.

EUR/USD

From a big picture point of view, EUR/USD remains in a downside trend. However, it may gain upside momentum in the near term as it is oversold.

GBP/USD Is Volatile After BoE Decision To Buy Bonds

GBP/USD is mostly flat in volatile trading as markets react to BoE’s plans to buy UK government bonds. The recent surge in yields is forcing the BoE to act.

Obviously, starting a quantitative easing program at a time when BoE is raising rates does not look like a logical move. However, the situation is almost critical, so central bank has to do something to calm bond markets.

It remains to be seen whether the decision will provide support to GBP/USD in the near term. Currently, GBP/USD is trading above 1.0700 after testing support at 1.0550.

Commodity-Related Currencies Rebound

AUD/USD gained strong upside momentum as commodity markets moved higher. Currently, AUD/USD is trying to settle above 0.6470, while NZD/USD is moving towards 0.5670.

Canadian dollar also received support in today’s trading session, and USD/CAD moved back below the 1.3700 level. In case the rebound in commodity markets continues, commodity-related currencies will get more support.

USD/JPY Faced Resistance Below The Key 145 Level

USD/JPY failed to get to the test of the key 145 level and settled below 144.50. There are no signs of interventions from the BoJ, but it looks that traders are worried that Japan’s central bank will continue to defend the important level at 145.

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

Gold Forecast – Rising Rates Crushed Gold, Prices Could Soon Bottom

In March, Gold was above $2000 on its way to new highs. Prices did an about-face out of nowhere, and it’s been downhill ever since. What changed? Answer: An aggressive shift in Fed policy.

The Fed 9-months Ago

Back in January, the Fed was injecting $60 billion a month into the markets through Quantitative Easing (QE), Fed funds were between 0% to 0.25%, and the 2-year Treasury was yielding 0.78%; they expected just one or two 0.25% rate hikes in 2022.

The Fed Now

The Fed is removing $95 billion a month (QT), Fed funds are on pace to reach 4.00% by year-end, and the 2-year is yielding 4.30% (up 352 basis points). Their forecast for one or two 0.25% hikes in 2022 was laughable – they are on pace to reach sixteen (16) by year-end.

When Will Gold Bottom?

Gold is interest rate sensitive. With the Fed on the rampage against inflation, they have hiked rates more aggressively than at any other time in history. This destructive shift in monetary policy sent rates soaring and gold to fresh lows. For gold to bottom – interest rates need to stop rising. I think we are getting close (see below).

The 2-Year Treasury Yield

The best proxy for future Fed funds is the 2-year Treasury. The most recent Summary of Economic Projections suggests the Fed will stop hiking when they get to 4.60%, i.e., the terminal rate. With the 2-year recently hitting 4.30%, I’d say rates are getting close to the Fed’s target.

2 Year Treasury Yield

With the 2-year yield at 4.30%, and a Fed terminal rate of 4.60%, interest rates should be nearing a top. Of course, they could go a little higher, but the vast majority of the tightening seems to be priced in, and we should be on the lookout for a bottom in gold.

Gold Chart: It looks like we have a repeat of the 2018 bottom. Back then, the Fed was tightening, and the 2-year yield topped out in October/November. Gold figured out rates were peaking ahead of time and bottomed a few months earlier. I think we are seeing the same thing now.

Gold chart

Note – If gold bottoms here as forecasted, I’ll expect a breakout to new ALL-TIME highs in 2023 that extends into the first half of 2024 and the next 4-year peak.

Maximum Bearishness in Gold?

Below is a snapshot of the Wall Street Journal proclaiming gold Lost its Haven Status. This made the front page of the business section on September 20th. Bullish contrary indicator? I believe so!

Gold Loses Status as Heaven

In closing, I think gold is very close to a bottom. The next few weeks are crucial. The soaring dollar could stress financial markets a bit further, which could trigger a washout low in precious metals.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For regular updates, please visit here.

Mid-Week Technical Outlook: Dollar Dominates FX Space

Major currencies have been crushed by the dollar’s meteoric rise this month with the British Pound and New Zealand dollar shedding over 8%. Given how the dollar continues to draw strength from aggressive rate hike bets, geopolitical tensions, and positive US economic data – more upside could be on the cards.

With more Fed officials scheduled to speak this week, this may translate to more volatility on the dollar. Where there is volatility, there are potential opportunities.

Our focus today will be mainly on USD crosses with the tool of choice none other than technical analysis.

DXY Bulls Unstoppable?

The dollar’s appreciation over the past few days has been phenomenal. Bulls remain supported by key fundamental forces with the technicals signalling further upside. Prices are trading around 114.70 as of writing with the next key point of interest at 115.00. A strong breakout above this level may open the doors towards 115.34 and 118.75. Should 115.00 prove to be strong resistance, a decline back towards 113.30 and 111.60.

EUR/USD Eyes 0.9500

An appreciating dollar has dragged the EURUSD well below parity. Prices are heavily bearish on the daily timeframe with the candlesticks respecting a bearish channel. A strong breakdown below 0.9500 could open a path towards 0.9300. If 0.9500 proves to be tough support to crack, a rebound back towards 0.9900 and parity could become reality.

GBP/USD Preparing to Resume Selloff

It’s been a rough week for the GBPUSD. After hitting an all-time low on Monday, we saw the currency stage a sharp rebound. Nevertheless, prices remain heavily bearish with a break back below 1.0600 suggesting a decline towards 1.0520 and 1.0350, respectively. Should prices rebound back towards 1.0850, the currency pair could test 1.1000 and 1.1350.

AUD/USD Bears Eye 0.6200

Aussie bears remain in the driving seat as the currency pair descends lower with each passing day. There have been consistently lower lows and lower highs while the MACD trades to the downside. A strong breakdown below 0.6350 could encourage a decline towards 0.6270 and 0.6200.

USD/JPY Breakout on the Horizon

It’s all about the 145.00 level on the USDJPY. A stronger dollar could encourage bulls to conquer this resistance, opening the doors towards 147.00 and higher. Given how this level has stood the test of time. A rejection from this point could result in the USDJPY trading back within its current range.

NZD/USD Rebound in the Process?

After dropping over 500 pips this month, could the NZDUSD be preparing for a rebound? There have been consistently lower lows and lower highs while the MACD trades to the downside. Prices recently staged a strong rebound from the 0.5560 level with bulls eyeing 0.5720 and 0.5800, respectively, below 0.55600 – prices may sink towards 0.5500.

For more information visit FXTM.

EUR/USD to Target a Return to $0.97 on Hawkish ECB Chatter

It was a busier start to the European session for the EUR. Economic data included German consumer sentiment and French consumer confidence numbers.

The German GfK Consumer Climate Indicator fell from -36.5 to -42.5 in October. Economists forecast a decline to -39.0.

According to the GfK report,

  • Income expectations fell from 22.4 points to a record low of -67.7 points, which sent the headline figure into the deep red.
  • The propensity to buy fell for an eighth consecutive month. A 3.8-point fall left the indicator at -19.5 points, the lowest value since October 2008.
  • Economic expectations also hit reverse, falling 4.3 points to -21.9, its lowest value since May 2009.
  • According to the report, there is an increasing fear that the German economy will slip into a recession.

In France, the consumer confidence index fell from 82 to 79. Economists forecast a decline to 80.

While the stats drew interest, ECB President Lagarde also spoke this morning. Lagarde said,

“We will do what we have to do, which is to continue hiking interest rates in the next several meetings. Our primary goal is not to reduce growth, put people on the dole or create a recession. Our primary objective is price stability.”

Slovak central bank governor Peter Kazimir reportedly favored a 75-basis point rate hike at the next meeting. However, Kazimir caveated his comment by saying that it was also necessary to wait for fresh data.

Later today, ECB member Frank Elderson will speak. The markets will look for any comments on the economic outlook, inflation, and monetary policy. Sensitivity to central bank chatter has heightened, making the EUR/USD pair more sensitive to commentary from both sides of the Atlantic.

EUR/USD Price Action

At the time of writing, the EUR was down 0.45% to $0.95498. A mixed start to the day saw the EUR/USD rise to an early high of $0.96006 before falling to a low of $0.95358.

The EUR fell through the First Major Support Level (S1) at $0.9551.

EUR/USD under pressure.
EURUSD 280922 Daily Chart

Technical Indicators

The EUR/USD needs to move through S1 and the $0.9611 pivot to target the First Major Resistance Level (R1) at $0.9653 and the Tuesday high of $0.96708.

However, risk appetite will need to improve throughout the session to support a EUR/USD breakout from $0.9650. In the case of a breakout session, the EUR would likely test resistance at $0.97 and the Second Major Resistance Level (R2) at $0.9713.

The Third Major Resistance Level (R3) sits at $0.9814.

Failure to move through S1 and the pivot would leave the Second Major Support Level (S2) at $0.9509 in play. However, barring a market flight to safety, the EUR/USD pair would likely avoid sub-$0.9500. S2 should limit the downside.

The Third Major Support Level (S3) sits at $0.9408.

EUR/USD support levels in play.
EURUSD 280922 Hourly Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The EUR/USD sits below the 50-day EMA, currently at $0.97650. The 50-day EMA slid back from the 100-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals.

A EUR/USD move through R1 ($0.9653) and R2 ($0.9713) would give the bulls a run at the 50-day EMA ($0.97650). The 200-day EMA sits at $0.99614. However, failure to move through the 50-day EMA would leave the EUR/USD under pressure.

EMAs bearish.
EURUSD 280922 4 Hourly Chart

The US Session

It is a busy day ahead on the US economic calendar. Housing sector numbers are due out along with goods trade data. However, the stats are unlikely to influence the dollar or market risk sentiment.

Fed Chair Powell will be the key driver through the US session. Powell will deliver welcoming remarks at the 2022 Community Banking Research Conference.

Any comments relating to the economic outlook, inflation, and monetary policy will impact the global financial markets. FOMC members Bullard and Bowman will also speak today.

Monetary policy divergence and sentiment towards the global economic outlook support a DXY return to 115 near-term. The dynamic is unlikely to shift until a marked deterioration in US labor market conditions and a sharp slowdown in consumption.

Pound Hits All-Time Lows in the Wake of New UK Fiscal Measures

As investors began dumping their UK assets in a massive fire sale that started on Friday further crippling the pound – the currency hit an all-time low of $1.03528 on Monday, according to ActivTrades’ data.

The currency has since bounced back from this level, but some investors are wondering if the GBP/USD might reach parity any time soon. Today, the sentiment indicator shows that 61% of investors are buying the pair after the dip, while 39% of traders are still bearish.

Weekly GBP/USD Chart – Source: Online trading platform from ActivTrades, the ActivTrader platform

The New “Growth Plan”

The mini-budget includes what some opponents are calling “risky” adjustments to the country’s tax plan, including £45 billion in total cuts to stamp duty, the basic rate of income tax, and the cancellation of a corporation tax rise that was due next year.

These measures, which figure among the new government stimulus of around £60 billion promised to offset the rise of energy prices and cost of living crisis, have many experts questioning the method for funding the plan, as the country battles rampant inflation and economic uncertainty.

Chancellor Kwarteng was seemingly unmoved by the market turmoil. Speaking to Laura Kuenssberg of the BBC on Sunday, he said: “As chancellor of the exchequer, I don’t comment on market movements. What I am focused on is growing the economy and making sure that Britain is an attractive place to invest.”

Kwarteng’s plan is for more tax cuts to come in the future, with this current round to be broadly funded by a public borrowing plan. But at the same time, the BOE has had plans in place to sell around £80 billion in gilts to scale back its balance sheet over the next year.

10-year gilts have increased by 131 basis points already in September, an almost unprecedented increase, suggesting that the market may expect the BOE to be more aggressive with interest rate rises to reduce inflation in the future.

In the policy statement from the UK Government website, a target trend rate of 2.5% growth has been set, among other various reforms that would allow businesses and individuals to keep more of their earnings and stimulate the economy.

We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone,” Kwarteng proclaimed in the statement.

Parity with the USD Looking More Likely by the Day

Bloomberg reports a 60% chance that the pound will reach parity with the dollar before the end of 2022 if current trends continue without intervention.

While the USD on its own has been growing in strength in recent months and benefits from being seen as a safe haven during economic uncertainty, the sterling has also been gradually growing weaker against other currencies at the same time, such as the euro. Some economists are predicting that the Bank of England, or the government, may need to intervene at some point to reassure the market.

The last time the pound performed this poorly against the dollar was back in 1985 when Margaret Thatcher was in power in the UK. A few years beforehand in the US, President Raegan had instigated large tax cuts, which boosted the economy, and then the Federal Reserve increased interest rates and prompted many investors to purchase US assets. This pushed the pound to around $1.05.

Back to 2022, and despite the point that the US has not battled with the same energy crisis and other economic difficulties such as growing trade deficits that Great Britain has, the Fed has still increased headline interest rates this year quicker and heavier than the UK to tackle rising inflation, with a total of 300 basis points so far and a forecast for more 75 basis point moves to come. In contrast, the BOE has lifted rates by just 215 basis points.

As the interest rate differential continues to grow between the two major economies, investors will tend to move their capital to higher-yielding assets, such as those in the US, as their rates continue to climb. Foreign investors must sell their own local currency in order to purchase USD for their investments, which leads to more demand for the USD and less supply. The price of the USD will then be pushed higher as a result.

The difficulty that the central banks all face is that if they continue to raise rates too high and too quickly in the fight against inflation, they will, in turn, cool the economy too much and send the country into a recession. It’s a tightrope that the US seems to have navigated somewhat well so far, as most of the economic data in recent months suggest that the economy is still able to cope with further interest rate hikes.

An analyst told CNBC on Monday, there was a strong likelihood that the BOE would have to hold an emergency inter-meeting rate increase to reduce pressure on the pound.

GBP/USD at Risk of Retesting Buyers at $1.05 as Risk Aversion Bites

It is a quiet day on the economic calendar, with no UK economic indicators to provide the GBP/USD pair with a direction.

While there are no stats to consider, Bank of England Monetary Policy member speeches will continue to draw interest. MPC member Jon Cunliffe will speak later today. The markets will be looking for any comments vis-à-vis monetary policy to align with Huw Pill.

On Tuesday, the BoE Chief Economist Huw Pill talked of a significant policy response to the government’s tax cuts but added that the Bank will wait until the November meeting to deliver a policy response.

GBP/USD Price Action

At the time of writing, the Pound was down 0.73% to $1.06537. A mixed start to the day saw the Pound rise to an early high of $1.07405 before falling to a low of $1.06307.

The First Major Support Level (S1) at $1.0640 limited the downside early on.

GBP/USD under pressure
GBPUSD 280922 Daily Chart

Technical Indicators

The Pound needs to move through the $1.0739 pivot to target the First Major Resistance Level (R1) at $1.0831 and $1.09. However, with no economic indicators to shift sentiment, R1 would likely cap any upside.

In the case of an extended rally, the GBP/USD would likely test the Second Major Resistance Level (R2) at $1.0929 but come up short of $1.10. The Third Major Resistance Level (R3) sits at $1.1120.

The market focal point remains the Bank of England policy response to the UK Government’s fiscal measures. Following the market response to the mini-budget, the MPC also has a weak Pound to consider. As a net importer, the weaker Pound exasperates the inflation woes that have forced the BoE into action.

Failure to move through the pivot would see the Pound retest the First Major Support Level (S1) at $1.0640. In the case of another extended sell-off, the Pound would test the Second Major Support Level (S2) at $1.0548 and support at $1.05 before any recovery.

The Third Major Support Level (S3) sits at $1.0357.

GBP/USD support levels in play below the pivot.
GBPUSD 280922 1 Hour Chart

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.10517.

The 50-day slid back from the 100-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals. A GBP/USD move through R1 ($1.0831) and R2 ($1.0929) would give the bulls a look at the 50-day EMA ($1.10517).

However, failure to move through the 50-day EMA would leave the Pound under pressure.

EMAs bearish.
GBPUSD 280922 4-Hourly Chart

The US Session

It is a busy day ahead on the US economic calendar. Housing sector numbers are due out along with goods trade data. However, the stats are unlikely to influence the dollar or market risk sentiment.

Fed Chair Powell will be the key driver through the US session. Powell will deliver welcoming remarks at the 2022 Community Banking Research Conference.

Any comments relating to the economic outlook, inflation, and monetary policy will impact the global financial markets. FOMC members Bullard and Bowman will also speak today.

Monetary policy divergence and sentiment towards the global economic outlook support a DXY return to 115 near-term. The dynamic is unlikely to shift until a marked deterioration in US labor market conditions and a sharp slowdown in consumption.

US Dollar Supported as Fed Officials Call for More Rate Hikes to Fight Inflation

The U.S. Dollar is trading flat early Wednesday after posting a choppy, two-sided trade the previous session despite hawkish commentary from several Federal Reserve policymakers.

The greenback is edging lower against the Euro and Japanese Yen, but is slightly higher against the British Pound. The subdued price action is the result of traders monitoring central bank activity and the impact on the growth of the global economy from their aggressive efforts to drive down inflation.

At 23:52 GMT, December U.S. Dollar Index futures are trading 114.095, unchanged. On Tuesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $30.68, up $0.02 or +0.05%.

Daily December U.S. Dollar Index

Dollar Supported by Hawkish Fed Members

With the dollar index hovering just below a two-year high at 114.445, the trading activity suggests higher prices could continue especially with Federal Reserve officials ignoring the pain in the stock market while calling for the need of further rate hikes.

Minneapolis Federal Reserve Bank President Neel Kashkari was the latest hawk to voice his opinion when he said on a WSJ Live interview Tuesday that the Fed needs to keep tightening until it has evidence underlying inflation is heading down, then should pause and “let the tightening work its way through the economy” to see if it has done enough.

Early Monday, Susan Collins, the new president of the Federal Reserve Bank of Boston, endorsed Fed projections released last week that signaled its benchmark interest rate would rise to 4.6% by next year, up sharply from about 3.1% now.

Later, Cleveland Fed President Fed President Loretta Mester said, “When there’s a lot of uncertainty, it can be better for policymakers to actually act more aggressively, because aggressive action and pre-emptive action can prevent the worst-case outcomes from happening.”

Avoiding Recession Will Be a Challenge

The comments from the three Fed policymakers contributed to the ongoing debate about how badly the Fed’s rate hikes – the fastest in more than 40 years – will hurt the economy. By increasing its benchmark rate, the Fed is making mortgages, auto loans and credit cards more expensive for consumers and businesses.

Boston Fed President Collins acknowledges the rising worries about a recession, but she believes, “the goal of a more modest slowdown, while challenging, is achievable.”

Other Fed officials hope their rate hikes will achieve a “soft-landing” by slowing consumer and business spending enough to bring down inflation but not so much as to cause a recession. However, many economists are increasingly skeptical that such an outcome is likely. They think the U.S. could face a recession next year.

Fed Chairman Jerome Powell even acknowledged that “the chances of a soft landing are likely to diminish” as the Fed steadily raises borrowing costs.

“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Powell said.

Short-Term Outlook

There needs to be a slowdown in the economy to get inflation under control and the Fed sees rate hikes as the means to achieve this. This will be supportive for the U.S. Dollar until the Fed slows the size and the pace of the rate hikes, allowing other policymakers like the European Central Bank to catch up.

Even a U.S. recession is not likely to be enough to weaken the dollar because other economies are already headed there like the Euro Zone. Furthermore, a global recession will likely enhance the greenback’s appeal as a safe-haven asset.

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