Daily Market Notes Tickmill UK

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367

Hawkish ECB hints in Jackson Hole help EURUSD to regain ground above parity

Eurozone money markets on Monday point to a sharp strengthening of expectations that the ECB will raise rates by 75 basis points in September, as the ECB officials signaled over the weekend that they were ready to take a drastic step to quell inflation.
Among the ECB representatives who spoke at the Jackson Hole symposium, Isabelle Schnabel gave an important signal. She said there is a growing risk that public inflation expectations will deanchor (which would dramatically reduce effectiveness of the ECB monetary policy), while surveys show that high inflation is beginning to undermine credibility of the central bank policy.

Other officials noted that front-loaded rate hikes (rather than based on incoming economic data) are justified, and that the neutral interest rate (at which the tightening cycle should end) may be somewhere near 1.5% and should be reached by the end of this year or by the end of the first quarter of 2023.

Traders in the EU money markets factor in a policy tightening of around 67 basis points in September. This means that there is no doubt that the ECB will raise rates by at least 50 basis points in September, and the chances of a 75 bp increase are estimated at 67%. At the same time, on Friday, the chances of this outcome were only 24%.

Along with the strengthening of expectations that the ECB rate will increase rapidly, the yield of the EU’s key sovereign bonds - the German Bunds - also increased markedly. On Monday, two-year German bonds offered a yield of 1.16%, up 19 basis points on Friday, the highest since June 17. The far end of the yield curve also climbed, with 10-year bonds offering a yield of 1.54%, the highest level in two months:

Market rumors that the ECB will act decisively should offer solid support to European currency until September, so EURUSD move towards 0.95 will most likely hit roadblocks. The divergence in expected pace of policy tightening is clear from returns of EURUSD and GBPUSD in recent days: while the pound has dipped more than 1% against the dollar since the middle of last week, recovering somewhat later, the European currency has gained 0.6% over the same period:

The likely tightening of the ECB’s policy has also created additional strains in the EU sovereign debt market. A key indicator of credit risk in the bond market, the spread between Italian and German bonds widened to 2.36%, the highest in a month. In the event of an excessive increase in the spread, the ECB will have to use the monetary policy transmission protection mechanism (TPI), which consists in buying bonds of those countries of the block where yields grow excessively due to irrational reaction of investors. This measure will reduce the cost of borrowing for the countries of the bloc’s periphery, such as Italy, Greece, Spain, etc.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

368

There are few reasons to short greenback right now and here is why

The Eurozone economic sentiment indicator decreased modestly from 98.9 to 97.6 points in August. Both industry and manufacturing saw deterioration in economic activity. At the same time, expectations of a recession in the economy lead to more moderate forecasts for higher inflation on the back of consumer spending in the coming months.


Economic sentiment in the Eurozone fell in August

A recession is looming in the Eurozone and businesses are becoming increasingly pessimistic about how economic activity will develop further. Industrial output and services declined significantly in August, while leading indicators such as new orders are falling rapidly. Hiring rates have also slowed, which is also a clear sign of a slowdown in economic activity in the bloc. Although hiring expectations remain above the long-term trend, the economy will likely not be able to avoid a moderate recession this quarter.

Interestingly, producer and service price expectations have been declining for the fourth consecutive month in response to weakening demand, which may indeed indicate that inflation has peaked and will now decline due to declining consumer demand. The big question is the impact of electricity and fuel prices on the margins of firms, which in turn could make core inflation more sustainable, as producers will be forced to compensate for the pressure by raising or holding prices.

The Fed continues to tighten monetary policy in order to ease consumer demand pressure on goods and services markets which in turn should affect inflation, pushing it to a comfortable 2% level. The reaction of the stock market to Powell’s speech at Jackson Hole was basically a surge in concerns that signals of weakening growth in demand in the US economy and some slowdown in inflation will not be able to knock the Fed off course, which will continue to increase interest rate at quite a rapid pace. Following a 4% drop in major US equity indices, Neil Kashkari said he was pleased to see such a dynamic, hinting that the market decline would also dampen consumer demand through a welfare effect. This Fed stance suggests that markets should not hope for an easing of the pace of policy tightening, so the prospects for a new rally raise a big question, and if the upcoming earnings season won’t be as positive as expected, the bear market will most likely return. The main beneficiary of this situation is the dollar, so it is not worth shorting it now, the likelihood of a further rally is quite high. The Fed also doesn’t mind a strong dollar, as it helps fight import inflation, which is largely generated by high energy prices.

Strengthening dollar and equities downside due to rising yields in an alternative asset class - bonds - is only one side of the coin. The other side is the risks of a gas crisis in Europe and the depreciation of the yuan. USDCNY topped 6.92 pointing to problems in the Chinese economy, despite the lack of clear desire of PBOC to weaken the yuan.

Key reports on the economic calendar today will be the US consumer confidence report from the Conference Board and data on fuel prices in August. Against this background, the dollar index is likely to remain above the key short-term support zone (108.50):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

369

EURUSD remains glued to parity on expectations of uber-hawkish ECB this week

European asset markets started the week with a fresh round of downside as Gazprom said gas supplies via Nord Stream 1 pipeline would be suspended indefinitely. The currencies of the European continent expectedly came under pressure and the fiscal aid packages announced by the European governments are unlikely to reverse the bearish trend.

The end of last week looked encouraging after release of US labor market data, however, the announcement of Gazprom late in the evening that the gas supply via Nord Stream is being frozen for an indefinite period reversed the risk-on move. And although European countries have made some progress in filling gas storage facilities in preparation for winter, the signal of a complete shutdown of supplies means that the way up for gas prices is open, i.e. new shocks in the market are inevitable.

Over the weekend, the authorities in Sweden and Finland announced liquidity guarantees for large utilities companies, signaling that they do not want the fire in the energy market to spread to the financial sector. Indicators of financial stress in the EU, such as the spread between the interbank lending rate (Euribor) and
ESTR does not yet indicate an increase in risks in the market, being at a relatively low level. However, it is clear that international capital will rather try to avoid European assets.

Risk-free fixed income instruments, i.e. Treasuries are now offering 2.3%, while the energy risks for the US economy are low, due to independence from supplies from foreign markets, so it is clear where the focus of investors will be now. From here we can expect a stable investment-motivated demand for the dollar. The Japanese yen has lost the status of a safe haven, as the energy crisis has taken away from Japan the main argument why it is worth buying in yen at a time of instability - a trade surplus due to the rapid growth in the cost of imports and weakening of exports.

This week there are several significant events that can cause volatility in the market. These are the RBA meeting on Tuesday, speeches by a number of EU, UK and US central bank officials on Wednesday, the Bank of Canada meeting on the same day, the ECB meeting on Thursday, and inflation data in China on Friday. The ECB meeting deserves special attention as the market is discussing a possible rate hike of 75 basis points, which represents a very aggressive pace of tightening. The expectations of this outcome have not yet been fully factored in the market, therefore, if this outcome is realized, we can expect a positive reaction from EURUSD. A rate hike of 50 basis points is likely to disappoint, causing a fairly large decline (0.965-0.960):

Germany’s attempts to help the economy through a fiscal package of 2% went almost unnoticed by the market, since compared to the package of 15% of GDP at the height of the pandemic, this is a very insignificant amount.

GBPUSD fell below 1.15 and the March 2020 low was already in sight, when the rate was 1.1410 at the lowest point. Today the market will follow the appointment of a new prime minister - most likely it will be Liz Truss. She previously spoke of a £100bn fiscal bailout. In moments of crisis, loose monetary policy has a beneficial effect on the exchange rate, so now, if expectations of rate hikes rise due to the fact that the government with fiscal support has entered the game, they can, on the contrary, weaken the pound. In the near-term, from the point of view of technical analysis, a test of the March low (1.141) is possible, followed by a rebound to 1.15-1.1550:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

370

Fiscal packages in response to energy crisis untie the hands of ECB, Bank of England

Chinese renminbi, being in a free fall, started to worry China central bank, which eventually responded quite decisively, reducing reserve ratio for banks from 8% to 6%. The new policy change will come into effect on September 15. The lower RRR will free up additional liquidity for banks, allowing them to increase lending, thus boosting economic activity. In addition, this measure should spur the flow of foreign exchange liquidity to the currency market, which will reduce speculative pressure on yuan.
Since the beginning of August, the yuan has depreciated about 3% against the dollar, reflecting growing investor discomfort that weakening external demand for Chinese goods, costly measures to combat covid (large-scale lockdowns) will pressure local assets’ expected returns. This in turn, led to decline in investment demand for Renminbi. It is worth noting that this is not the first time this year that the PBOC has reduced the reserve requirement ratio. The last time it happened was on April 25, when PBOC cut the RRR by 1%, from 9% to 8% after the yuan collapsed against the dollar by 3% in one week.

Large US investment bank Goldman expects the dollar to rise further in the medium term. Along with systemic risks associated with an overheated real estate market in China and Covid restrictions, this should keep CNY under pressure and pushing USDCNY above 7.0 mark. In addition, according to the bank, PBOC may reduce interventions in foreign exchange market after the 20th Congress of the CCP, which will clear the way for further CNY devaluation.
European stock markets opened higher and European currencies bounced off their lows. The key driver behind the rally are measures being rolled out by European governments in response to unfolding energy crisis. Market sentiment has been buoyed by the plan to freeze utility bills at the current level outlined by the British Prime Minister Liz Truss yesterday. The new price containment mechanism won’t be operational until next month and will cost the government £130bn over the next year and a half. In addition to fiscal stimulus, the market is also pricing in the idea that the Bank of England will have more room to hike interest rate.

Germany, Sweden and Finland took a slightly different path. They saw main risks in the spillover effects on financial sector so their countermeasures are focused on isolation of the energy shock by introducing special credit facilities for enterprises that have been hit. Energy companies in these countries have received additional cheap funding that will allow them to stand on their feet and not provoke a cascade of margin calls in the financial market.

Against the backdrop of the measures taken, EURUSD and GBPUSD rose by an average of 0.4%, Cable traded against Dollar above 1.16, but then rolled back to 1.1550. There is still much potential for upside for European currencies in the short term as market is likely to price in less constraints on aggressive tightening by the Bank of England and the ECB. This should potentially help to narrow interest rate differential with the Fed and thus take away some advantage from the greenback. Looking at the GBPUSD technical picture there is clearly a room for fresh leg higher as the price broke through short-term downward channel and now look poised to test upper bound of medium-term bearish corridor:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

371

European countries untie the energy sector from gas

European markets trade moderately in the red on Wednesday, taking over the bearish baton from the US market, whose capitalization shrank on Tuesday. Investors are actively dumping European assets, as the threat is growing that the crisis in the gas market will spread to the financial sector, launching a wave of bankruptcies. European governments, probably with some delay, are developing mechanisms to isolate economy from the energy crisis, including: limiting the wholesale prices at which gas is purchased from Russia, a tax on excess profits or capping the prices of energy companies in the green energy sector that raise prices along with traditional producers, special credit facilities for electricity suppliers, facing soaring borrowing costs due to declining margins (due to fixed selling price in contracts), compensating utility bills to poor households, and energy rationing.

The pumping of gas through the Nord Stream pipeline has been completely stopped, given the ultimatum conditions of both parties, it is unlikely to resume in the near future. European countries have achieved some acceptable results in filling gas storages and preparing for winter. Consequently, the demand for European currencies becomes a function of the effectiveness of the actions of European governments in overcoming the existing imbalances in the energy system of the EU and the UK. In other words, investors are asking themselves a question if European countries will be able to prevent unforeseen bankruptcies that could shake the financial sector. It will take time to answer this question, so the credit risk premium in European assets is set to rise in the short term.

European currencies are under serious pressure, the British pound has suffered more than others, which collapsed to 1.14. Given that sellers are approaching the level for the second time, and uncertainty is growing, there is a high probability of a breakdown and a new low this week (1.13-1.1350). The fall of the Euro is constrained by expectations that the ECB will raise rates by 75 basis points on Thursday. Just under half of the economists surveyed by Bloomberg expect this outcome. Most expect the ECB to raise the rate by 50 basis points, but most likely EURUSD will fall to 0.96 on such a decision:

The yen is in free fall, USDJPY has crept close to the round mark of 145 yen per dollar. The Bank of Japan has not yet commented on the fall; however, the last few days of parabolic movement increase the chances of foreign exchange intervention, or at least verbal warnings about intervention in the foreign exchange market. In addition, the weekly chart shows that the price is approaching the level of 146 (the peak value of August 1998), which can work as a powerful resistance:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

372

Markets brace for bullish CPI but room for the risk rally is limited

Dollar retreat eased pressure on oil prices as Brent price flirted with $95/bbl level on Monday. Despite the bounce and momentum that may drive prices higher, there are clear bearish risks for the market. The key among these is China’s “Zero Covid” policy, which has been creating demand shocks, driving up price volatility.

The latest data on US strategic oil reserves showed that storage facilities were empty by 8.4 million barrels last week to 434.1 million barrels. This is the lowest stock level since 1984. The current plan to use reserves to smooth impact of energy price shocks will run until the end of October, then the question of extending the plan will arise, which the market will probably be watching closely. Gasoline and utility prices have already shown how they can accelerate headline inflation, thereby having a hand on shaping the Fed policy.

Europe, on the other hand, continues to develop a plan for interventions in the energy market and easing of imbalances. It will include energy rationing, a windfall tax on energy companies, utility bill offsets for individual consumers, and cheap lending facilities for vulnerable companies. The document is expected to be made public at the end of September and expectations that the EU will be able to demonstrate an effective reduction in dependence on energy imports from Russia may now act as a support factor for the Euro, as well as risk assets denominated in this currency.

The technical picture for oil indicates rising odds the price will retest the resistance at $100 per barrel on Brent. To do this, the price must rise and consolidate above the key trend line shown in the chart below:

The dollar continues to be under pressure ahead of the CPI release, while equities show a fairly confident growth. The S&P 500 posted its best four-day performance since June. The inflation report is expected to point to a slowdown in headline price growth and an acceleration in core inflation, which does not include prices for food, fuel and certain other commodities that fluctuate significantly from month to month. The market is also positively reassessing the risks of the energy crisis for the EU economy, which was triggered by the ECB’s optimistic forecasts for this and next year, published at the last meeting. The regulator ruled out a recession next year, predicting a modest 0.9% economic growth, which came as a big surprise.

The highlight of economic calendar next week will be the Fed meeting, and officials cannot comment on the week preceding it, so the markets will have to assess the impact of CPI on interest rate path and QT with officials’ clues. However, it is useful to remember, for example, Bullard’s statement that a good CPI report will probably not affect the outcome of the September FOMC meeting. An equally important source of policy-influencing data for the Fed - household inflation expectations – made another step in the desired direction, showed the report on Monday. One-year inflation expectations slowed in August to 5.75% (6.2% in July), three-year inflation expectations fell to a two-year low of 2.8% from 3.2% in July:

The futures market estimates the probability of a rate hike of 75 bp in 93%, the probability of a smaller increase (50 bp) is only 7%.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

373

Ways of inflation are inscrutable

The US inflation report came as a big surprise to many investors as despite solid signals for a drop below 8% (decline in new car sales, falling gasoline prices), headline inflation was quite persistent, inching lower marginally to 8.3%. Core inflation accelerated more than expected - from 5.9% to 6.3%, beating forecast of 6.1%. The report came as a shock to the market, with expectations of the Fed terminal rate (where the tightening cycle is expected to end) revised up by 25 bp to 4.3%. A pronounced reaction took place in forex and the stock market: the main US stock indices fell by 4-5%, the capitalization of Nasdaq, where assets are the closest substitutes for Treasuries in terms of duration (time-weighted cash flow for the asset), plunged the most. The index erased almost 6%.

The situation is increasingly reminiscent of the 1980s, when high inflation raged in the United States and the then head of the Fed, Volker, raised the rate to 15%, sending economy into recession. Of course, it is now difficult to imagine that the Fed rate could ever be above 10%, nevertheless, the impact of the CPI report on expectations for the Fed terminal rate was significant. The two-year Treasury yield rose to 3.8%, while ten-year Treasury yield advanced to 3.45%. These are the new yearly highs:

The idea that the Fed may be forced to remove monetary support at a more aggressive pace reinforces expectations that the US economy will face faster deceleration in growth rate, with growth risks spilling over to weaker economies as well. Rising dollar borrowing costs create downside risks for developing countries’ sovereign debt. Based on this, the forecast for developing currencies becomes less favorable - investors may begin to reduce exposure to EM sovereign debt in their portfolios with outflows putting pressure on national currencies.

One of the signs of the late phase in expansion - the yield curve inversion (the spread between the yields of 10 and 2-year Treasury bonds) reached a new extreme point after the release of CPI. The spread was down to -34 bp. The movement of the spread deep into the negative zone is usually accompanied by a strong dollar, as the demand of investors for the US currency as a heaven asset increases.

The release of the CPI made it virtually indisputable that the Fed will raise rates by 75bp in September. The market has even begun to price in an outcome where the Fed will raise rates by 100 bp! The chances of this outcome are now 36%:

Investors will also be on the lookout for clues as to how the pace of hikes will change at the meeting following the September decision. It is quite possible that the pace of tightening will remain at the current level of 75 bp.

Other central banks may have to work hard to outpace the Fed in terms of tightening and make local fixed-income assets more attractive to foreign investors. However, considering growth constraints in other economies this looks unlikely. This idea may be the key behind potential fresh leg of dollar rally. Therefore, it is highly likely that in the near future we will see a retest of 110 points on the dollar index (DXY):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

374

EURUSD eyes test of 1.02, the ECB meeting may be of help

Massive repricing of Fed rate path in 2023 saw dollar index falling to 110 points, EURUSD broke above parity while GBPUSD recovered above 1.15. The rally in the US market increased capitalization of key equity indices by an average of 1.6%. Investors also increased exposure to crypto assets, BTC price rose above 20K.

Rally of risk assets, barring a clear dovish shift in central bank policy stance, is difficult to consider as a sustainable, especially when the Fed acknowledges that the margin of patience for weak incoming data on the economy is quite large, so some market participants have decided to take profits today. European stock indices corrected lower today, futures for US stock indices also pulled back. S&P 500 futures gravitate towards 3800, but it is clear that a shift in market consensus regarding interest rate path will await confirmation/denial by the FOMC in November, so buying pressure at the dips near key round levels is very likely.

EURUSD has finally begun to respond to lower gas prices and improved positions in foreign trade. The pair returned to levels above parity, but a more important signal (in terms of technical analysis) was breakout of the bearish channel, which held the pair in the downside since the start of 2022:

The signal for upside is quite clear, in this regard, the ECB meeting tomorrow is of particular importance. The regulator is expected to raise the rate by 75 basis points and update forecasts for the further rate trajectory, guidance on preferential liquidity for banks (TLTRO) and less important technical policy adjustments. Judging by the technical picture of EURUSD, there is a growing possibility that the decision tomorrow will be positive for the Euro and the pair will be able to develop an upward momentum and test the resistance at 1.02.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

375

Deteriorating EU, China data spur bids on USD

The dollar saw renewed buying pressure at the start of the week, DXY rose by more than 0.7% to 111.50 points. Market participants accumulate their dollar positions in anticipation of a strong NFP report on Friday as well as against the backdrop of weak China and EU economic data. China’s manufacturing PMI failed to sustain uptick above 50 points in October, indicating that manufacturing activity declined compared to the previous month. For most of the second half of the year, the index has been staying below 50 points due to severe covid restrictions as part of the CCP’s “zero tolerance” for the spread of the virus, which significantly restrict mobility and cause business disruption:

The Eurozone economy is not approaching recession as quickly as expected, but inflation continues to accelerate. GDP growth in the third quarter slowed to 0.2% YoY, while core inflation accelerated to 5% in October from 4.9% in September, data showed on Monday.

The positive surprise in GDP is due to robust consumer spending in Germany, investment spending in France and rising tourism spending in Spain. However, the impact of these drivers is expected to continue to wane. The leading indicator of consumer confidence is close to historic lows, as is real wage growth. This has a significant impact on the consumption outlook, as evidenced by retail sales growth, which has been gradually declining over the past few months. Together with high interest rates, this leads to lower investment spending, and hence nominal wages and hiring rates are next in line to start to fall. When these two key macro indicators start to deteriorate, we can say that a recession in the EU economy is not far off.

Inflation jumped again in October, from 10.2% to 10.7%. Energy prices were the key sources of upside pressure in CPI. The decline in prices on the wholesale energy market has not yet seeped into the consumer level, any positive effect could be expected only in a couple of months. Food prices also continued to rise, as did the prices of other consumer goods, which rose at a smaller but also significant pace. In the services sector, inflation was 4.4%.

After two 75 bps ECB rate hikes, it’s clear that monetary policy fails to quickly suppress import inflation, so the pace of tightening will likely slow down to 50 bps in the next meetings. Expectations of the ECB’s stance easing, coupled with the threat of a recession, will keep the Euro under pressure, so extension of the EURUSD downtrend ahead of the NFP and the upcoming Fed meeting looks justified. Against the backdrop of incoming data, the likelihood is rising that the recent breakout of EURUSD bearish channel was false:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

376

US CPI report is the only hope for USD this week

The long squeeze in the dollar that began last Friday has continued this week – investors dumped US currency since the opening of European stock exchanges on Monday, which could signal that safe-haven demand for greenback has started to wane and that risk-adjusted yield outlook on European assets improved as well:

Dollar came under pressure after reports appeared that Chinese government was going to ease coronavirus restrictions and generally revise their health policy, reducing the role of lockdowns. Even Powell’s hawkish conference and last week’s hawkish NFP report could not help - as a result of these two events, market participants shifted the Fed’s terminal rate forecast by 5.1% while the divergence in expected pace of tightening by the Fed and other banks increased. In addition to the interest rate differential, large dollar gains were driven by perception of investors that the US is less vulnerable to risks of the energy crisis as well as geopolitical shocks. As soon as messages about easing China Covid stance hit the wires, dollar safe-haven premium began to decline rapidly, temporarily overshadowing the impact of other key drivers.

However, there are two events this week that could trigger a new dollar counter-rally after correction - the CPI report for October and the outcome of the congressional elections. The monthly change in the core CPI is expected at 0.5%, in annual terms - 6.5%, which is 0.1% below the inflation rate in September:

Surprises on the upside will dash hopes of investors for an early pause in the Fed tightening, leading to renewed selling pressure on fixed-income (Treasuries) and likely revaluation of the dollar. If Biden loses Congress, the dollar could face stronger selling as more corporate-friendly Republicans could increase pressure on the Fed to stop raising rates, while Congress’s ability to push a fiscal stimulus package would also be severely limited which historically had negative USD implications.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

377

US elections uncertainty prompts bids in Treasuries, dollar selling

Chinese foreign trade data for October, released on Monday, had dovish implications for the broad market as both imports and exports didn’t live up to growth expectations, declining YoY (-0.3% exports, -0.7% imports). Both indicators have been declining for several months in a row:

So far, the reaction to the data was muted as the focus of investors is on two key events in the US - the midterm elections to Congress and October CPI release.

Negative for risk appetite was the information that the daily increase in Covid cases in China amounted to 7,000 cases, a maximum of six months. In light of the fact that the market has been trading unconfirmed messages about the easing of coronavirus restrictions in China over the past few days, it is fairly possible that traders may prefer to dial back those expectations by selling risk assets and, in particular, shorting oil, which has shown its sensitivity to those rumors. Since the beginning of October, Brent quotes have added about $8 per barrel, running into resistance at $94 per barrel, the October high.

Goldman has said earlier that risks to oil prices are skewed to the upside as global reserves are depleted and spare capacity to increase production is limited. In general, the supply side sends positive signals for price growth, while the signals from the demand side continue to act as a deterrent to growth. Key among those is the China’s strategy to tackling Covid epidemic.

The overall market trend is moderately positive: Monday turned out to be a positive day for risk US assets, S&P 500 futures continued to rise on Tuesday, there is a slight upturn on European stock exchanges. Treasury yields nudged lower on US elections uncertainty.

The market held its breath ahead of results of the midterm congressional elections. Their importance to the market is due to the fact that if the Republicans win a majority in the lower and upper houses, the Biden administration will face great difficulties in carrying out its agenda. However, Senate bills can also meet with resistance from executive branch of the government, resulting in a situation known as a split government. With this outcome, the likelihood of new US fiscal stimulus will decrease, which has historically been negative for the dollar and positive for risk assets, as the political deadlock in some way removes uncertainty for investors, as large-scale changes in US policy will be difficult. Polls and asset returns show that the market is increasingly leaning towards an outcome where the Republicans will gain control of the Senate.

As for the dollar, from a technical point of view, the US currency index is consolidating near the key ascending trend line on the weekly timeframe, a breakdown and consolidation below the line may be a signal for further sell-off:


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

378

USD Correction may Have Legs as Economic Calendar is Light this Week

The euro and pound sterling pare down the intraday decline that took place during the Asian session as risk appetite remains high while the dollar repositioning continues. EURUSD consolidates around 1.03, GBPUSD trades slightly below 1.18 level. Data on industrial production in the EU for October added optimism; growth in annual terms amounted to 4.9% against the forecast of 2.8%:

The market is sensitive to this indicator, as it correlates well with the overall health of the EU economy. The EU’s share of exports in GDP is about 50%, while the industrial equipment takes about 13% of exports. In addition, the competitiveness of the European industry depends on stable and cheap energy supplies, so the increase in production volumes against the backdrop of the much-discussed energy crisis makes one wonder how much it has affected the economy.

The dollar index corrected 4% last week. The intensity of the correction largely stems from the fact that hoarding USD cash for several months was the most popular and crowded investment in the global community. At the same time, the share of equities in portfolios was at a relatively low level. The combination of a positive inflation report and the measures to support the economy in China became the catalyst for a large-scale short squeeze in risk assets. This week is quite calm in terms of events and reports in the economic calendar, so it cannot be ruled out that the bullish correction in stocks will continue. The dollar may also continue to decline, a move towards 105 on DXY is likely, where the price may find support.

It is rather difficult to estimate how far the correction can go, however, in the currency market, some movements look excessive. For example, the USDKRW has lost almost half of its rally in several sessions, even though the Fed has not yet signaled that it is starting to consider a pause in rate hikes. Fed official Waller said recently that it is too early to think about the end of the tightening cycle. This stopped the decline in Treasury yields. Overall, since the CPI report, Treasury yields have corrected only 20-30 basis points - not much by the standards of this year.

The focus of the market is the meeting of the US and Chinese presidents in Indonesia, as well as speeches by Fed officials Brainard (dove) and Williams (moderate hawk).

The dollar index is likely to wander in the range of 105.50-107.50 this week. EURUSD may test 1.05 given that the correction of excess shorts on the pair, which have been accumulating since the start of the year, continues. Nevertheless, it is premature to consider an upside correction as the beginning of a new rally. So, for example, ECB official Guindos said that the market reaction to CPI was probably excessive, hinting that it won’t be easy to persuade the Fed with incoming favorable inflation surprises.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

379

Another dovish surprise in US PPI boosts stocks and bonds, pressures USD

OPEC, citing significant economic uncertainty in the coming months, has lowered its oil consumption growth forecast for the 5th consecutive time since April. The adjustment was -100K b/d for 2022 and 2023. The last time OPEC revised its forecast at the last meeting, when it was decided to increase production by 2 million barrels per day. Among the main reasons for the negative change in the forecast, OPEC mentioned economic challenges in Europe and the still tight covid restrictions in China, which makes quite uncertain the path of economic recovery in China.

At the same time, OPEC believes that the weakening of inflation faster than expected will lead to a rebound in demand, as central banks will experience less pressure to tighten policy, and thus restrain the expansion of economies.

Data on Tuesday showed retail sales in China fell 0.5% year-on-year, while industrial production growth fell short of expectations:

Together with weak foreign trade data (YoY contraction of imports and exports in October), this raises the likelihood that the CCP will prepare new economic stimulus measures and move towards a systematic easing of covid restrictions. Upside potential on positive stimulus news from China remains high, in my view.

Japan’s GDP unexpectedly contracted in the third quarter, which added to the negative for the yen. However, a broad dollar retreat took over and USDJPY is down half a percent today.

European markets rose moderately, futures for US indices advanced through key resistance levels. The S&P 500 futures topped 4,000 after dovish US PPI report, which, like consumer inflation, surprised on the downside. The dollar collapsed on the data, indicating high sensitivity of the market to data on inflation pressures in the US:

Producer prices rose by only 0.2% m/m against the forecast of 0.4%, which was another argument in favor of the fact that the general trend of inflation in the US is now downward and the US Central Bank will soon move to softer rhetoric and policy actions.

For the British economy, the unemployment report came in worse than expected, the increase in the number of unemployed in October was twice as high as the forecast, while the average wage accelerated to 6% YoY (5.9% forecast).

The index of economic sentiment from ZEW in Germany turned out to be higher than expected, the index in October amounted to -36.7 against the forecast of -50 points. In the previous month, the reading was near all-time low at -59.2 points.

The markets continue to price in inflation slowdown in the US and cut excessive dollar cash longs on the US dollar, anticipating dovish policy tweak by the Fed in December. Bullish momentum in risk assets and bonds and downward pressure in USD will likely be extended in the run up to the upcoming FOMC decision.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

380

As market dials back Fed Pivot expectations, greenback has some room to rally

After shedding 4% last week, greenback was offered support near 106 level on DXY in the first half of this week and eventually rallied on Thursday:

The rally was likely driven by US October retail sales report. Headline reading beat estimates (+1.3% MoM), core sales also rose faster than expected (+0.9% MoM). The solid increase in consumption was combined with slowing price growth in October, which means that the chances of a “soft landing” for the US economy have increased. Treasury yields rose across all maturities, with a particularly clear uptick in short-dated 2Y bills, which are more sensitive to Fed policy expectations. It looks like the retail sales report has finally convinced the market that easing of inflation in October will not be a convincing argument for the Fed to soften the pace of tightening:

ECB top manager De Guindos also hinted at this earlier, saying that the market could have overreacted to the data.

If current uptick in yields and dollar rebound are driven by the traders dialing back their Fed easing expectations, general trend will likely become clear only after the FOMC decision in December, which will shed light on the key question whether October inflation print was a “turning point” for data-dependent Fed or more data is needed. This implies that upside and downside potential in greenback and equities is limited before the Fed meeting. The 105.50-106 zone on the dollar index (DXY), as the first half of the week showed, acted as a support area, now a short-term dollar rally may form the upper limit of the range. The resistance zone is likely to form at 107.20-107.50, which will correspond to 1.025-1.0275 support area in EURUSD.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

381

Oil prices plunge on hints OPEC may raise output

European bourses are down, STOXX 50 losing 0.6% amid reports of increased covid measures and new lockdowns in China, which increased market risk aversion. The yuan weakened again, USDCNY rate increased from 7.02 to 7.16 over the week. The Japanese yen cedes ground as well, USDJPY was up more than 1% today rising to 142 level. Liquidity will be less than usual this week, as the US market will be closed on Thursday and Friday due to Thanksgiving, so one should expect more than usual range of market moves.
Among the positive updates, we can note release of the PPI in Germany for October, which indicated a decrease in pipeline inflation pressure. On a monthly basis, producer prices decreased by 4.2% (forecast +0.9%):

Producer inflation is the leading indicator of consumer inflation for locally produced goods, as producers typically pass on cost increases or decreases to consumers with a lag. The decline in producer prices suggests that firms may lower final prices, which will favorably affect EU consumer price dynamics in the coming months.

Oil quotes fell almost 5% on Monday after a brief period of consolidation on reports that Saudi Arabia and other members of OPEC are considering output hikes by 500,000 b/d. Last week, the drop was almost 10%:

Goldman lowered its fourth-quarter oil price forecast by $10 to $100 a barrel, citing concerns about the COVID-19 measures in China. However, UBS forecasts oil prices to rise to $110 per barrel in 2023, expecting the pace of demand recovery to exceed market consensus.

Market risk aversion is also accompanied by a negative trend in Treasury yields, with yields falling across all maturities. This suggests that fears of a recession in the global economy are on the rise again. Nevertheless, central bank officials, in particular the Fed and the ECB, continue to insist that rates need to be raised. Fed spokesman Bostic said that the pace of the rate hike in December could be reduced to 50 bp and more tightening by 75-100 bp is required to achieve a level of restrictive policy that is sufficient to bring inflation back to the target level. Another Fed spokesman James Bullard expects the terminal rate to be somewhere in the range of 5-5.25%.

The upward correction of the dollar broke through the short-term range and rested on the bearish trend line. In case of breakout and consolidation above the line, we can expect a rally to develop to the previous medium-term support (109-110) which will now play the role of resistance:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

382

Hunt for yields pressures dollar as S&P 500 reclaims key 4000 level

Composite PMI index in EU remained in the zone of depression in November (47.8 points), slightly better than in October, but still pointing to a reduction in activity in the European economy. The good news is that inflationary pressures are fading as supply crunches ease, and the depth of expected recession may not be deep.

Although third quarter GDP data indicated a slight expansion (+0.2%), data such as PMI already suggests that a recession in the European economy is in full swing. The composite index for November slightly increased compared to the previous month (45.7 vs. 43.8 points), however, the index is below 50 points, which means there is a reduction in activity, only slightly less strong than last month:

New orders continued to decline, which means that the current volume of production is formed due to the backlogs of orders formed in previous months and in the following months this sub-index will likely disappoint with a low figure. In the services sector of the Eurozone, the decline in activity was approximately the same as in October, by historical standards, quite seriously. Here, too, new orders have been falling, meaning firms may be reluctant to increase demand for labor.
The only positive side of the report was the data on inflation. Weak demand, easing price pressure in the energy market and the normalization of supply chains have contributed positively to pipeline price pressures.

British PMI indices also pointed to the onset or development of a recession in the economy. The composite index rose from 48.2 to 48.3, which, however, is below the neutral level of 50 points.

Data on the US real estate market and orders for durable goods in October exceeded expectations, indicating a good pace of expansion of the US economy in the past month. The combination of declining inflation and strong demand and consumption data allowed the market to price growth in firms’ revenues, which was reflected in the rally of US stock indices. U.S. durable goods orders are on the rise for the third month in a row, with growth accelerating:

The search for yield picks up on Wednesday after the US market sent a favorable signal to close higher on Tuesday. The S&P 500 crossed 4,000 points. The dollar index turned into a large-scale decline on Wednesday, the largest gain among the major currencies is observed in the GBPUSD (+0.8%). Investors price in the decline in British bond yields. Oil quotes fell by 3% as speculations that OPEC will increase production are gaining momentum. Market participants are also penciling in the idea that lower prices in the energy market will also have a positive effect on cost inflation and oil-importing economies will finally be able to “breathe”.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

383

Powell and NFP risk may renew demand for battered USD

Intensifying yield curve inversion in the US (when short-dated bonds are cheaper than long-dated ones) and WTI price below critical $80 support level tell us that markets are becoming more worried about global demand prospects. The risks of an economic downturn in China due to restrictive Covid measures also affect investor sentiment, adding pressure mainly to commodity market prices.

At the beginning of the week, the market’s focus is on the situation in China. Local authorities try to curb the spread of the epidemic and are forced to introduce new lockdowns. Quotes of the main benchmarks of oil and industrial metals dived down on Monday, WTI trades below $75 per barrel, Brent defends the level of $81. And this is despite the fact that OPEC decided to cut production by 2 million b/d at the beginning of this month. The technical chart of Brent shows that the price, having tried to break through the main bullish trend line from the bottom up, bounced off and continues to move in the bearish channel, where the sellers’ target may be the level of $75 per barrel:

In the US, the spread between short-term and long-term bond rates continues to increase and has reached -80 basis points (yield on a 10-year bond minus a yield on a 2-year bond). This tells us that the demand for long-term bonds in relation to short-term ones continues to grow, which means that expectations that rates will decrease in the more distant future (or inflation will decrease) gain momentum. Essentially, investors are expecting the central bank to cut rates and inflation to slow down, which is indicative of an economic downturn or recession.

Fed Chairman Powell is due to speak on Wednesday this week and there is a risk that he will rebuke market expectations that signals of slowing inflation will force the Fed to slow down the pace of policy tightening as well. This assumption is due to the fact that earlier the Fed has repeatedly stated that it is not worth drawing conclusions about the trend from one or two positive inflation readings.

Markets will also focus on inflation data (Core PCE for October) on Thursday and the NFP report on Friday. Job growth is expected to slow from 261K to 200K, unemployment is expected to remain flat, and monthly wage growth is expected to slow to 0.3%. Given the impact of the seasonal component in November, retail may show good growth, however, in other sectors, an increase in the number of layoffs was observed, especially in tech sector. As a result, the market may react weakly to a upside surprise if the main contribution is made by the retail sector, which may sag in the coming months.

As for the EU economy, investors will follow the data on inflation. Inflation report in Germany for November will appear tomorrow. EU-wide inflation report is due on Wednesday. Markets price in 61 basis points of ECB tightening in December, with room for correction in both directions.

The upward correction for the EURUSD pair hit an important technical level - the 200-day moving average. Given the risk of Powell’s hawkish rhetoric and surprise in the NFP, breaking this line and trading above 1.05 before the end of this week is unlikely. The pair can go to the levels below and test support at 1.0350 and 1.03:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

384

Upside surprise in NFP will likely trigger rebound in oversold USD

Another batch of US macroeconomic data pointed to easing in inflation pressures - consumer spending index (Core PCE) rose by 0.2% in October against the forecast of 0.3%. US equities rose after the report, dollar dipped while Treasury bond yields retreated even lower, to the lowest level since early October. After the speech of Fed chai Powell on Wednesday, markets started to price in dovish pivot in the Fed policy, which is likely to be marked by a modest, by recent standards, rate hike of 50 basis points in December. In this regard, a strong Payrolls report can cause only a moderate correction of these expectations while weaker-than-expected prints of Payrolls and wages will only strengthen the chances of a dovish outcome of the December meeting.

Almost all major indicators of inflation pressure in the US economy - CPI, PPI, Core PCE, housing prices started to trend lower in October. There are more signs of persistence in wage growth, especially in the services sector, and today’s report will help to clarify if this persistence has finally started to ease. One of the important leading indicators of inflation - the plans of firms to increase prices signaled in October that the downward trend in inflation is likely to continue. The NFIB report showed that the share of firms planning to raise prices in the next three months has dropped sharply - from 50+ to 32%. Changes in pricing plans of firms often precede with some lag a similar change in consumer inflation rate:

The growth rate of economic activity in the US beats expectations and didn’t show signs of easing along with inflation, as it usually happens during the onset of a downturn. Consumer spending rose 0.5% in real terms in October, the strongest monthly gain since January. Black Friday/Cyber Monday sales volumes were also strong, meaning that quarterly consumer spending growth could be 4% year-on-year in Q3. In the absence of a strong positive surprise in the NFP today, the market is likely to take a stronger view that there will be a 50bp rate hike in December. Another 50 bp will follow in February and the Fed will most likely stop there. With US CEO confidence at its lowest level ever, and with the US real estate market starting to cool, there is no reason to expect further policy tightening.

Markets are approaching the NFP report today with dollar oversold and there is little room for the dollar to fall on the soft report. On the contrary, a strong report, in particular Payrolls beat, may correct expectations for the December FOMC meeting and may be a catalyst for a moderate greenback upside correction. The dollar index is trading just below the 200-day SMA and the 105 round support level, having corrected by 50% if we take the beginning of the year as the starting point. This is a good level to enter long positions, only a catalyst is needed, so the reaction to today’s report is likely to be asymmetric. If wages break above the 0.3% MoM consensus and job growth exceeds 200K, this may trigger some powerful bullish momentum in USD with DXY rising from 104.50 to 105.50-106 level:


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

385

FOMC meeting preview: dovish dreams may not come true

The Fed is expected to deliver a 50 bp rate hike on December14, continuing to meticulously dampen inflation pressure in the economy. However, the chances of a recession that markets price in continue to rise, as evidenced from bond prices recovery and dollar sell-off. This undermines the Fed’s efforts to ease price pressures. The Fed’s hawkish message is likely to go unheeded unless the data starts to prove the central bank right.

The market consensus for a 50bp tightening appears to be strong enough – fed funds rate futures price in this outcome with a 75% chance, while only 25% is given to aggressive 75 bp outcome:

After raising rates by 375 bp since March, including a series of 75 bp hikes, Fed stated that it made “substantial progress” in achieving its tightening goals and the time to slow down the pace nears. This wording was used in the minutes of the November Fed meeting. However, Fed chief Jerome Powell and his team have gone out of their way to point out that, despite smaller steps, “terminal rates should be somewhat higher than suggested during the September meeting.”

As such, the Fed should be concerned about the recent sharp drop in Treasury and dollar yields, coupled with narrowing credit spreads that make borrowing cheaper and thus fueling monetary expansion in the economy — the exact opposite of what the Fed wants to see as it tries to curb inflation. The market reactions described above came in response to relatively weak CPI growth in October, which was 0.3% m/m compared to consensus forecast of 0.5%. The Fed’s preferred measure of inflation, the core deflator for personal consumption spending, was even softer, rising just 0.2%. However, this is only one month of favorable data, while the market is already pricing in rapid decline in inflation on the horizon of one year so the risk of repricing of those expectations is high:

In order for inflation to be around 2% in a year, average monthly gain should be 0.1-0.2%. This is likely to be the key message that the Fed will try to convey to the markets at the upcoming meeting. With current market expectations, this could be interpreted as a hawkish message.

With this in mind, the Fed is likely to keep raising rates in 2023, and its new forecasts should point to a higher trajectory to 5%, with a possible slight upward revision in short-term GDP in nominal terms, driven primarily by inflation. But the adjustment will also be justified by real indicators - the consumer sector is holding up well, employment growth rate is definitely not a recession one, which supports incomes, and hence consumer spending.

The market will know about the November inflation on December 13 - the day before the FOMC meeting - and the result will be important for what the Fed says. If the core consumer price index turns out to be at or above the consensus forecast of 0.3% m/m, the market is likely to listen to the Fed’s message with more attention. If inflation softens and yields fall even further, then the Fed will have to act more decisively and perhaps start talking about accelerating quantitative tightening - selling assets from the balance sheet, in order to somehow convince the market. The Fed should now be inclined to stick to hawkish statements until it is sure that the specter of high inflation has completely disappeared.

The dollar has fallen significantly against a basket of major peers over the past two months. Negative and positive developments for the dollar had an asymmetric effect - surprises in inflation led to much stronger sell-offs than were rebounds on strong data such as NFP. The hope for the dollar bulls now is that the positioning is much better balanced after the 8% drop in the trade-weighted dollar and the 12% drop in USD/JPY.

The dollar did not nosedive, probably because expectations of further rate hikes remain priced in. The terminal rate is still estimated to be close to 5%, with only a 50 bps cut expected in the second half of 2023. If the Fed does not say that what will clearly signal the imminent end of the tightening cycle, the bottom of the dollar may already be somewhere close.

The EUR/USD pair is holding in the 1.05 area as the gap between markets expectations from the Fed plans is not wide. A more dovish reversal would be unexpected and seasonally adjusted against the dollar in December the pair could rise above the 1.06 resistance to the 1.07 area in low-liquid markets later in the year. At the beginning of next year, the EURUSD uptrend may finally start to reverse.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

386

The risk of more downside in USDJPY remain high on implications of BoJ major policy shift

FX market continues to digest BOJ’s hawkish surprise yesterday, USDJPY volatility remains elevated. The market reaction to the shocking move of the Bank of Japan delivered a crushing blow to JGB demand resulting in a massive dump of Japanese bonds by investors. In turn, this effect caused the yen to strengthen by more than 4% against the dollar. Today, the speculative demand for the yen declined and USDJPY rebounded from 130.50 to 132.5. Nevertheless, the risk of a new decline remains high for the simple reason that the policy of the Bank of Japan has the groundwork for a radical change, namely the transition to the gradual withdrawal of monetary stimulus. The current rebound may run out of steam at the level of 1.33-1.3350, after which downside may resume:

The Conference Board releases US consumer confidence data today, also the report on existing home sales is due.

The US data calendar for the second half of the week includes Personal Income, Personal Goods and Durable Goods Orders for November (December 23), and the Dallas and Richmond Fed Manufacturing indices for December 27-28. There are currently no scheduled speeches by Fed officials until release of the Fed minutes on Jan. 4. However, it is unlikely that this data will induce major moves in the low-volatility environment during the holiday period. Current major drivers of sentiment will likely be news from China and about the energy crisis. In China, a growing number of anecdotal reports suggest that the actual death toll could be significantly higher than reported: if supported by more evidence, markets may increasingly doubt the sustainability of China’s COVID-19 zero exit path with negative implications for yuan, Asian EMFX and currencies sensitive to global business cycle.
On the energy side, a potential Russian response to EU gas price caps, a possible re-escalation of the conflict in Ukraine, and news about the weather (which has been a key driver of gas prices recently) could have implications for the foreign exchange market. From this point of view, European currencies continue to look quite vulnerable.

The dollar index is likely to close the year at current levels. In line with its seasonal trend, December was a weak month for the dollar. However, already in January, seasonality can become a positive factor for the dollar as the US currency rallied in January in four previous years.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.