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427

Is dollar rally losing steam? New banking sector shocks prevent the Fed from rising too high and too fast

Contrary to expectations, the number of job openings per unemployed person in the United States increased again in April. JOLTS reported this yesterday:

After several months of decline, demand pressure in the US labor market starts to rise again. The previous reading has also been revised upward. Since Federal Reserve Chair Powell started focusing market attention on labor market imbalances as the primary source of inflation, the importance of JOLTS data has significantly increased. That’s why lower-than-forecasted readings in January and February induced a stock market rally and a decline in the dollar, while yesterday’s hawkish surprise led to a pullback in risk assets and some strengthening of the American currency.

However, despite the initial boost after the release, the dollar rally has started to lose momentum. The market paid attention to yesterday’s comments from a top Federal Reserve manager, Jefferson, which clearly attempted to shift expectations regarding a rate hike from June to July. The main arguments cited were conflicting statistics and vulnerabilities in the banking sector. This is how the situation looks on the hourly chart of the dollar index:

In the latter half of the two-week rally, the price began to press more closely against the trendline and eventually broke below it, followed by a retest from below. The double test of the 104 level marked it as a short-term support level.

Concerns about potential shocks to the banking sector are reflected in the correction of the financial sector of the S&P 500, which has retreated by 4% from its local peak set on May 22. The decline was also fueled by yesterday’s report from the FDIC that deposit outflows occurred at a “record” pace of 2.5% in the first quarter.

Interestingly, this decline coincides with the weakening of the dollar rally. Remember that new shocks in the banking sector are one of the main factors preventing the Federal Reserve from hiking too high or too fast:

Inflation data from France and Germany took away bullish interest from the Euro, as rumors circulated that a 50-basis-point tightening by the ECB, which was widely expected before, may be too much. Market sentiment has also been influenced by the weak activity in China’s manufacturing sector, with the corresponding PMI index falling deeper into contraction territory, from 49.2 to 48.8 points.

ADP and NFP reports are due today and tomorrow. Based on incoming information, if job growth and wages align with expectations, it may reinforce the belief that the Federal Reserve will postpone a rate hike. Hawks can only be saved by a significant surprise on the upside, particularaly in wage growth. However, JOLTS data allows for some hope in that regard.

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.

428

Dollar index: Bearish channel keeps short-term buying pressure in check

The dollar upturn eventually lost steam yesterday as there was no significant correction in risk assets following new local high in the S&P 500. The dollar index (DXY) dipped below 104 points:

A bearish correction channel continues to form, as mentioned in the previous article. However, the price is trying to press against the upper bound, as some investors are definitely hoping for a surprise from the Federal Reserve next week. This is also indicated by the technical chart of gold, where the price is pressing against the lower bound of the key channel:

The probability of a rate hike, according to rate futures, is decreasing. This week, the disappointing ISM report on the service sector contributed to this. There is hope that the inflation report for May (scheduled for release on June 13) will once again tilt the scales towards tightening:

Officials from the Federal Reserve (Richard Clarida) and the European Central Bank (Klaas Knot), who spoke yesterday, confirmed their intentions to tighten policy. Knot allowed for two more rate hikes in June and July, after which the course of policy will be determined by incoming data. Clarida stated that the tightening cycle is likely not over and that the rate is unlikely to be lowered before the beginning of 2024.

The Bank of Canada is expected to leave its policy unchanged today, but if there is a rate hike, it will be the second central bank, following the Reserve Bank of Australia, that is not hesitating to tighten. Considering the economic proximity between Canada and the United States, the market may interpret this event as a signal that the Federal Reserve will not lag behind, leading to dollar purchases.

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.

429

Dollar extends pullback but buying pressure may resurface in the run-up to May CPI report

The trend corridor for USDCAD held its ground despite the unexpected decision by the Bank of Canada to raise interest rates by 25 basis points at yesterday’s meeting:

Based on numerous touches of the lower boundary line, the range of 1.33-1.3350 has proven to be an area of increased interest for buyers, so sellers did not dare to push further. Uncertainty related to the June meeting of the Federal Reserve is also weighing on the market, as its outcome could boost the dollar.

The Canadian regulator justified the rate hike by noting that inflation has remained significantly above the target level, which is not desirable because anchoring high inflation expectations in consumer minds reduces the effectiveness of monetary policy. However, the accompanying statement no longer includes the formulation that the central bank is ready to raise rates further if necessary. The Bank of Canada expects inflation to slow down to 3% in the summer, but achieving the target level by the end of 2024 is once again in question as that corresponding wording also disappeared from the statement.

Two major central banks, the Bank of Canada and the Reserve Bank of Australia, have now re-engaged in the race for monetary tightening. Interestingly, after the Bank of Canada’s meeting yesterday, the likelihood of the Federal Reserve raising rates in June increased from 22% to 32%. Expectations for tightening by the European Central Bank also had to be revised:

As seen in the chart above, the yields on 10-year US and German bonds jumped by 10 basis points after the Bank of Canada announced the rate hike yesterday.

However, according to the latest Reuters poll, only 8 out of 84 economists surveyed expect a 25 basis point rate hike. The majority believe that Fed policy will remain unchanged in June.

The dollar is on the defensive today, but a key risk event, the CPI report, gives hope for a reversal closer to its release next Tuesday. Two critical levels where buyers may make their presence felt are 103.30 (June low) and 103 (lower boundary of the correction channel):

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.

430

Markets struggle to pin down a turning point in US expansion

The dollar hit a corrective low yesterday following release of US labor market data:

The US Dollar Index (DXY) fell below the 104.40 level, marking a low point in the retracement since the beginning of June, which sparked some buying interest around 103.30 as discussed in the previous article. Breaking below the horizontal low further “solidifies” the correction pattern, so the majority of buyers may now shift their focus to the lower boundary of the channel and start buying the dollar against major counterparts once it reaches that level. This coincides with the key round level of 103 points.

Unexpectedly, initial jobless claims rose from 233K to 261K (forecast was 235K), which intensified the sharp decline in the US currency yesterday (the magnitude of the drop exceeded 0.6%). Typically, the release of jobless claims passes unnoticed, even in the case of a surprise, but not this time. This, firstly, indicates an intensified search for a turning point in the trend of US economic expansion in the market and, secondly, reflects the lack of consensus regarding the upcoming FOMC meeting next week. The bond market also showed sensitivity to the report, with the yield on 10-year bonds decreasing by approximately 10 basis points after the release:

Next week, we can expect three key events: the US inflation report for May on Tuesday, the FOMC meeting on Wednesday, and the ECB rate decision on Thursday. The consensus for monthly US inflation is 0.4%, and anything higher could tilt the scales in favor of a hawkish decision by the Federal Reserve. Considering that the market currently prices in about a 33% chance of a rate hike, a reassessment could lead to a significant strengthening of the dollar and a rebound in bond yields, especially since the FOMC meeting follows the next day. The market also assigns a high probability of a 25 basis point rate hike by the ECB, so a bullish outcome for the Euro implies a clear hint from the ECB that it’s not done with tightening. It is worth noting that in the case of the Fed pausing and an uncertain forecast for tightening in July (the market consensus expectation), we may experience a significant decline in the dollar, as historically, after a pause, the Fed had mostly been cutting rates after some time. The case for a rate hike is supported by the labor market (+330K jobs in April), as well as unexpected policy tightening by the Bank of Canada and the Reserve Bank of Australia, which may indicate an underestimation by the market of rebound in global inflation. The case for a decline is supported by comments from top Fed officials suggesting that it may be prudent to get more information about economy’s response to policy tightening.

Among other major reports next week, US retail sales, industrial production, and consumer sentiment from the University of Michigan should be noted.

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.

431

Chances of a Fed June pause grow, focus shifts on July decision

The US inflation report for May could have caused serious market tremors yesterday, but this time the market’s forecast was accurate. Core inflation accelerated to 0.4% on a monthly basis, while headline inflation slowed down to 4.0%. Considering the market consensus that the FOMC will skip a rate hike in June unless there are surprises in the incoming data, the chances of this outcome increased, which actually weakened the dollar a bit. However, further trading showed that the equilibrium before the FOMC is at 1.08 for EURUSD and 103 points for the Dollar Index (DXY). On the daily chart, it looks like that Euro’s strengthening against the dollar is at its initial stage:

The overall market reaction to the CPI report can be characterized as an increase in risk demand, as G10 currencies sensitive to business cycle fluctuations showed the highest intraday returns yesterday. For example, NOK and SEK performed well, which usually happens during rotation in search of yield within Europe. At the same time, the yen weakened and, overall, it has not followed the general pattern of strengthening against the dollar since the beginning of June. The technical chart of the yen index indicates consolidation before a possible downward breakthrough:

For USDJPY, this will roughly correspond to the level of 141.80-142.00, which was the peak in November 2022. According to the previous currency intervention, the tolerance limit of Yen depreciation set by the Japanese authorities is 145 yen per dollar. The Bank of Japan’s meeting on Friday could be a potential catalyst for yen weakening, and the “suspicious” range of USDJPY, despite the dollar weakness, may indicate growing chances of disappointment with the decision on Friday, meaning that hawkish policy changes are unlikely to occur.

In addition to the FOMC statement and Powell’s press conference, the markets will likely pay attention to the Dot Plot (expectations of top Federal Reserve officials regarding interest rates in 2023, 2024, and the long-term period). If the median forecast indicates another rate hike in 2023, the chances of a July hike will increase, which should support the dollar. Currently, the chances of tightening on July 26 are estimated at 58.2%, while the chances of a pause are at 37.7%:

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.

432

ECB takes the mantle in policy tightening, opening door for Euro’s rise

The European Central Bank (ECB) managed to meet the market’s hawkish expectations at yesterday’s meeting. Like the Federal Reserve (Fed), the European regulator attempted to convey the message that interest rates will remain high for an extended period, opening the door for short-term yields to rise. However, whether central banks will stick to this narrative depends on incoming data.

Perhaps the main argument for the ECB to raise rates one more time before announcing a pause lies in the updated inflation and GDP forecasts:

The growth forecast for aggregate output has been revised down from 1.0% to 0.9% in 2023 and increased from 1.5% to 1.6% compared to the March meeting. At the same time, the ECB expects higher inflation in 2023 than before: 5.4% compared to the previous 5.3%. In 2024 and 2025, the inflation forecast has increased by 0.1% compared to March.

The need to respond to the intensified inflation challenge amid flagging growth prospects leads to a higher risk of a downturn priced in long-term bonds and a risk of a more aggressive stance from the central bank priced in short-term bonds. As a result, we witnessed a further inversion of the German bond yield curve yesterday, with the yield spread between the two-year and ten-year bonds narrowing by another 5 basis points, approaching the March 2023 low:

Overall, the ECB has taken the lead in terms of policy tightening ahead of the Fed, as the FOMC did not provide enough confidence at the meeting that the Fed was committed to a rate increase in July. At the same time, Christine Lagarde tried to convey the message that the ECB is confident that at least one more rate hike will be necessary. This is supported by the revised inflation forecasts.

From a technical perspective, the US dollar index chart indicates an increasing likelihood of a correction for the American currency next week, as the price has reached the lower boundary of the correctional corridor:

Expectations for the Fed have undergone a significant shift after the release of yesterday’s data on export-import prices for May, as well as initial jobless claims. Export prices declined by 1.9% month-on-month (forecast 0%), and more significantly, import prices, which are important for consumer inflation, fell by 0.6% in a month (forecast -0.5%). Initial jobless claims increased by 262K (forecast 249K). It is worth noting that this indicator has been disappointing for several consecutive weeks.

The Bank of Japan once again disappointed the hawks today by leaving its policy unchanged and ignoring market expectations that the range of long-term bond yields would be expanded (in which case the central bank would allow for a stronger sell-off before intervening). The USDJPY pair rose from 140 to 141.35 on the central bank’s decision before retracing. On the daily chart, this corresponded to a retest of the upper boundary of the ascending corridor:

In the absence of news from the Fed and the Bank of Japan, the only catalyst for a decline could be a correction in the US stock markets. If the price breaks the line, the next target will be the November 2022 high at the level of 142.50.

The key events of the following week will be the Bank of England’s meeting and Powell’s testimony in Congress.

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.

433

Yen left adrift as Bank of Japan’s dovish position holds steady

The dollar is gradually recovering after major losses last week:

The plunge occurred on Thursday following the release of US import price data. In May, import prices declined by 0.6% for the month, allowing market participants to reassess the level of expected US inflation and consequently the likelihood of a July tightening by the Federal Reserve (Fed). Previously, during the FOMC meeting, Fed Chair Powell stated that the central bank would increasingly rely on incoming data to make decisions. Such statements are typically made when the central bank anticipates an approaching turning point in the business cycle, in this case, a definitive shift to lower inflation trends. In other cases, central banks often resort to implicit guarantees (forward guidance) that they may continue to lower or raise rates for some time. Approaching a turning point consequently increases market sensitivity to the incoming data points, which often go unnoticed. In this case, it was import prices and initial jobless claims, which once again exceeded expectations.

From a technical analysis perspective, the dollar index is trading within a downward corridor. Last week, during the decline, the price confirmed the lower boundary of this corridor (at the level of 102 on the DXY) and entered into a bullish correction on Monday. The magnitude of movements is insignificant, reflecting the fact that the major events that could have influenced market expectations occurred last week.

The analysis of the Bank of Japan meeting, which took place last Friday, is also noteworthy as it may have serious consequences for the yen. The market was not expecting a rate hike since the central bank continues to use a more powerful easing tool by controlling the yield of long-term government bonds. When it approaches a certain upper boundary (in this case, 0.5%), the Bank of Japan begins to buy bonds, thereby preventing the yield from rising further. Thus, the cost of long-term borrowing in the economy is maintained at a very low level given the current circumstances. It looks like this:

The central bank was expected to allow for wider yield movements (declare an upper boundary above 0.5%), but it did not even do that. This further widens the policy gap between the Bank of Japan and other central banks that are raising rates, and the Japanese yen weakened against the dollar even during its steep decline last week. On the USD/JPY technical chart, it can be seen that the price tested the upper boundary of the channel multiple times and broke out of it last week. It is worth noting the flag pattern (rise + consolidation) before the breakout, which suggests that the decline of the yen will likely continue. Some resistance is likely to emerge near the November 2022 high (at the level of 142.50):

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.

434

Bank of England’s Underestimated Inflation Forecasts Expose Insufficient Policy Tightening

The surprise in UK consumer inflation for May was incredibly strong, raising concerns that the Bank of England’s may go into overdrive with the policy tightening. GBPUSD initially tried to gain strength, but it quickly became clear that additional tightening measures could hurt UK’s growth prospects, resulting in the Pound sell-off.

In May, UK consumer inflation reached 8.7%, surpassing the forecast of 8.4% (previously 8.7%). More importantly, core inflation continued to accelerate, hitting 7.1% in July, surpassing the projected 6.8% (previously 6.8%). This marks the second consecutive month of core inflation acceleration, jumping from 6.2% to 6.8% in April. Inflation in the services sector, known for its less volatile trends, exceeded the central bank’s forecast by 0.3%, significantly increasing the pressure on the Bank of England. If the bank’s response is perceived as too lenient, concerns may arise about their control over the situation. The market not only dismissed doubts about a 25 basis point rate hike at tomorrow’s meeting but also factored in a potential 50 basis point increase. Market participants may also expect the central bank to forecast a prolonged period of high interest rates.

From a technical analysis perspective, GBPUSD is likely to continue its decline, with sellers eyeing the 1.258-1.262 range. This area is significant as it intersects an ascending trendline and a former resistance line that could now act as support:

The decline in the GBPUSD pair may also be influenced by a stronger dollar. Market participants are increasingly betting on the dollar rebound ahead of Powell’s two-day testimony in Congress, starting today. Based on comments from Federal Reserve officials last week, Powell might take this opportunity to adjust market expectations, specifically addressing unwarranted expectations of rate cuts this year and emphasizing that the fight against inflation is far from over. Furthermore, the recent update to the Dot Plot indicated that officials anticipate two more rate hikes. However, the adjustment of derivative contracts sensitive to interest rates, particularly overnight interest rate swaps, did not reflect these expectations. The implied terminal rate is only 24 basis points higher than the current rate, which is well below two 25 basis point increases. This circumstance increases the likelihood of Powell engaging in hawkish verbal intervention today.

A crucial factor for a potential dollar rally will be breaking out of the bearish channel and establishing a foothold above the upper boundary, corresponding to a breakthrough of the 102.75 level on the dollar index.


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.

435

The flow of US data dashes hopes of a pause in the Federal Reserve’s tightening

Gold investors appear to have become weary of waiting for low interest rates (as central banks show no indication of halting their current tightening course), developments in the US banking stress narrative or geopolitical tensions that would ultimately validate their optimistic outlook for gold’s growth potential. On Wednesday, gold accelerated its decline, and the test of the $1900 per troy ounce level loomed on the horizon:

In early May, the price of gold rebounded from its historical peak, forming a double top. In mid-June, after a tense struggle between sellers and buyers, it exited the medium-term ascending channel (white parallel lines). Currently, a short-term bearish corridor is taking shape (red lines). The chart also reveals a broader ascending channel (orange parallel lines). Its lower boundary, intersecting with the lower boundary of the short-term bearish channel, which corresponds to approximately the $1880 per troy ounce area, may form an interesting support zone where the price could reverse and move upward again. Clearly, one of the three drivers mentioned earlier must come into play: stress in the banking sector due to growing interest rate disparity between banks’ assets and liabilities, signals of easing core inflation, or a new wave of geopolitical tensions.

Yesterday’s comments from ECB officials in Sintra showed that hoping for soft rhetoric today from the heads of the US, EU, and Japanese central banks is unlikely. The wording contained a very clear hint at a rate hike: signals of slowing core inflation in the EU are unconvincing, so a pause in July is unlikely. Based on this, one can assume that Lagarde, Powell, and the head of the Bank of Japan, Kuroda, will develop this idea today since core inflation is indeed currently holding at a relatively high level and receding slowly:

Incoming data from the US effectively quells the market’s concerns that central banks are making policy mistakes. Durable goods orders in the US (a strong indicator of household income expectations) rose by 1.7% in the month, surpassing the forecast of -1%. Consumer confidence was directly confirmed by the Conference Board’s index, which reached 109.7 points in June, surpassing the forecast of 104 points. Concerns about inflation were amplified by real estate market data: the price index increased by 0.7% in the month, exceeding the forecast of 0.3%. Additionally, API data showed strong demand for fuel as crude oil inventories declined by 2.4 million barrels, compared to a forecast of 1.467 million.

The dollar has turned higher against major currencies ahead of Powell’s speech in Sintra. On the technical chart, it can be seen that the dollar index exited the bearish channel, rebounded after reaching its upper boundary, and continued to rise. The medium-term resistance is located in the range of 103.50-103.70, where the corresponding trendline was previously formed by the price:

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.

436

US June CPI strips dollar of any support as odds of hawkish Fed outcome plummet

The US June CPI report left the dollar entirely defenseless, causing the US currency index to plummet to nearly 100 level:

As seen in the chart, this is the lowest level since April 2022, meaning the dollar index has not been in this area for over a year. Dropping below the 101 level, the dollar index broke through a support area that was formed by a double bottom in February and May 2023, so we are likely to see further downward movement as an important support level has been breached. To assess the potential decline of the dollar, it’s worth looking at the EURUSD chart, which provides more informative insights. There are two areas where dollar buyers may make their presence felt - 1.12500 and 1.15. The first level coincides with the upper boundary of the current ascending channel, while the second level aligns with a long-term resistance trendline that price tested in 2011, 2012, 2014, and 2021:

It should be noted that the US currency had been already in a downbeat mood before the CPI was released. The DXY had been on a slippery slope for the fifth consecutive day yesterday, largely influenced by the unexpectedly dovish rhetoric of two top Federal Reserve (Fed) officials, Daly and Bostic. They notably deviated from the central line of communication between the regulator and the markets by stating on Tuesday that monetary policy is already restrictive enough and that the Fed may need to take time to observe how the economy responds to policy tightening. Of course, such comments contradict Powell’s statements at the ECB Sintra symposium, where he said that no officials anticipate a rate cut this year and that the vast majority of FOMC members believe that the interest rate should be even higher.

Yesterday’s inflation report clearly shifted the balance of power in favor of the doves within the FOMC. Overall inflation declined to 3% (forecast was 3.1%), while core inflation, which excludes goods and services with volatile prices, slowed from 5.3% to 4.8% (forecast was 5%). The significant progress in core inflation, which FOMC officials referred to as the key variable determining short-term Fed policy, allowed the markets to reassess the likelihood of two rate hikes this year to the downside. If a week ago the probability of the Fed raising rates twice by the end of the year was 36%, it has now decreased to 13%. Consequently, the outcome with one rate hike has become the baseline, with the probability rising to 64%:

Today, the US producer inflation index for June is also due, and the markets are likely to pay some attention to it, considering that it is a leading indicator for consumer inflation. The indicator is expected to be at 0.2% MoM. The market may also pay attention to the data on initial and continuing jobless claims, the importance of which has significantly increased since the June NFP indicated the first signs of weakness in the labor market. The key report for tomorrow is the University of Michigan Consumer Sentiment Index for July, which is expected to be slightly higher than the previous month at 65.5 points.

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.

437

Is the Global Disinflation Wave Gaining Momentum? UK and US Inflation Data Suggest Yes

GBPUSD experienced a rapid decline on Wednesday after the release of British consumer price data, revealing an unexpected drop in core inflation from 7.1% to 6.9%. It became evident that disinflation is slowly spreading beyond the USA. The pound plummeted by nearly 1% against the dollar, breaking through the 1.30 level. From a technical analysis perspective, the price is still holding above the uptrend line, indicating potential for further upward movement. However, to confirm this, it would be beneficial to assess the buying initiative with a corresponding correction to the trend line. Based on the chart below, the target level for this correction could be around 1.282 (marked by the yellow circle). The main target within the upward trend since October last year is the level of 1.3450/1.35, where the major resistance trend line, formed by price extremes in 2015 and 2021, is located:

The British data did not go unnoticed in European trading, as market participants rushed to price in the risk of the rising wave of disinflation affecting the EU economy in the near future (or possibly already). Consequently, the ECB will likely have to temper its ambitions and hint at a pause after the July rate hike. This led to a temporary breakthrough of the EURUSD level of 1.12 and increased investor interest in short-term EU bonds at the start of the session, with 2-year German bond yields falling by approximately 12 basis points today:

Later on, the Euro and bond yields slightly recovered as the revised core inflation assessment for the EU in June showed a slight increase from 5.3% to 5.5%. Of course, compared to the US and UK data, the EU price data currently does not show any hint of disinflation. If this trend continues into July, the Euro would have a significant chance of strengthening its position against major rivals.

The retail sales data in the US for June added some intrigue to the upcoming Federal Reserve meeting in July. A consensus is rapidly forming that after the July rate hike, there will be an uncertain pause (or the end of the tightening cycle). The key indicator for the central bank’s policy, the core retail sales, exceeded expectations, increasing by 0.3% month-on-month (forecast was 0%). However, the overall retail sales figure was below the forecast, but this was due to demand fluctuations that do not reflect the main trend (as seen from the behavior of the core retail sales indicator). The dollar responded positively overall yesterday, even attempting to test the 100 level on the DXY index, which it succeeded in achieving today after the release of British inflation data. The DXY dollar index is reaching towards 100.50 and briefly touched 100.30 at the start of the European session.

Market participants also paid attention to the US construction data today, but it did not show any significant deviations. The number of building permits issued in June almost matched the forecast (1.44 million vs. forecast of 1.49 million). The pace of new housing construction slowed by 8% month-on-month.
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.

438

Dollar Rebounds on Positive US Data, EURUSD and GBPUSD Charts Show Potential Resistance

Labor market and consumer confidence data in the US, released yesterday, beat estimates, allowing the dollar to stage a comeback. EURUSD retreated into the range of 1.11-1.1150 in line with expectations, GBPUSD also extended its correction, driven by a weak inflation report, dropping to 1.2850.

Monthly charts of EURUSD and GBPUSD deserve attention:

It’s easy to spot potential resistance levels for the current upward trends. The resistance area for EURUSD is in the range of 1.15-1.16, while for GBPUSD it lies between 1.3450-1.355. It’s pretty easy to spot those areas, and in my view, the likelihood of self-fulfilling prophecy to play out (the key idea behind technical analysis) is high. Buyers will likely prefer to take profits upon reaching those levels, fearing a backlash, while sellers will jump in expecting buyers to temporarily stay out of the market. For this scenario to unfold, prices must at least reach these areas. Therefore, the current dollar rebound should be considered intermediate – it must return to a downward trajectory for a while so that we can observe how classic patterns of technical analysis work out. As I mentioned earlier, on hourly charts for EURUSD and GPBUSD, the areas where the downward correction is likely to peter out are 1.11-1.1120 and 1.28-1.2820.

Yesterday, the Philly Fed report also provided some support for the dollar. Despite a “red” value for the overall manufacturing activity index (-13.5 against a forecast of -10 points), the leading components of the index performed well – the expected overall activity index jumped from -10.3 to 12.7 in June, and expectations for future orders reached 38.2 points. Price pressure indicators in the sector also showed positive dynamics, maintaining their values below long-term averages.

Today’s inflation report in Japan caused the yen to plummet, with USDJPY surging more than 1%. Despite efforts by the Bank of Japan to curb borrowing costs to boost inflation through investments and a cheaper yen, consumer prices grew at a slower pace than expected in June – 3.3% versus a forecast of 3.5%. The last yen downward rebound occurred at the 145 level, which was also the point where the Japanese central bank announced currency intervention last time. It’s also the upper boundary of the current upward channel. The next target could be at the same level where the ascending corridor line intersects – at 146.80, as shown in the chart below:

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.

439

The Fed and Inflation: A Longer Road to Policy Shift

So, the FOMC day has arrived. The market has already priced in one rate hike (according to futures, with a 99% chance), and judging by the recent bullish rebound of the dollar, it doubts that the regulator will consider the June deceleration of core inflation as a starting point in its communication. The Fed could either discount the positive inflation developments or announce that future policy will be entirely data-dependent, which would be a strong bearish signal. In the first case, the dollar may not only sustain its growth at the beginning of this week but also gain some more ground (EURUSD may drop below 1.10). In the second case, it is expected that sellers will target levels below 100 in the DXY index, and EURUSD will return to considering a rally towards the multi-year resistance at 1.15.

Here’s one of the technical setups for the Dollar index:

The movements of major currencies in relation to each other in recent days exposed several intriguing trends. Optimism about China’s economy has strengthened, which also manifested in the successful resistance of export-dependent currencies (CAD, AUD, NOK) to the moderate dollar recovery. The Brazilian real and the South African rand also appreciated due to the strengthening of the Chinese currency, which have a significant positive correlation with renminbi. A slight negative reassessment of growth prospects for the EU (after the ECB’s bank lending survey and PMI activity indices) resulted in a 1.3% correction of the European currency against the dollar, which had a very steep ascent last week. The British pound is also struggling with growth ideas due to the shock caused by inflation figures for June.

The main short-term drivers in the currency market will be the Fed communication today, the ECB meeting on Thursday, as well as the story with fiscal and monetary stimulus in China, which urgently needs to return the economy to its targeted growth trajectory. As for the Fed, despite significant inflation progress, the regulator is unlikely to shed the mantra in its accompanying statement that further policy tightening “may be appropriate.” It is also worth paying attention to the potential reaction of the regulator regarding market expectations for the rate next year, which currently account for a 100 basis point rate cut. Overall, in my view, the Fed meeting will have positive consequences for the American currency, especially if we assume that the market showed an excessive reaction to the CPI report, after which the greenback depreciated by nearly 3%.

It is also worth noting the positive release of the Consumer Confidence report by the Conference Board yesterday. The index surged from 110 to 117 points, the highest level since July 2021:

Against the backdrop of solid labor market statistics, still healthy rate of US consumer spending, and optimism among American households, one cannot ignore the risk of a repeat acceleration of inflation or “sticking” near current levels, and the regulator is likely to take this risk into account in today’s 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.

440

Why US Treasury Yields Are Rising at Different Rates Based on Maturity - Understanding the Reasons Behind This Trend

On Friday, major currency pairs experienced limited price movements, with slight gains observed in commodity dollars such as the Australian Dollar (AUD) and Canadian Dollar (CAD), owing to moderate positive developments in the commodity market. US equities showed signs of weakness yesterday, as the S&P 500 index drifted towards 4500 points. However, today, index futures are attempting to rise, albeit with modest growth not exceeding half a percent. In contrast, European markets are witnessing a purely technical bullish rebound following a decline in the first half of the week, and European stock indices continue to consolidate near historical highs:

The US Treasury market remains highly volatile, with yields rising across the entire maturity spectrum, frequently setting new local highs and approaching the peak levels recorded this year. Not since 2007 has the market witnessed such levels. Investors are selling bonds, though the intensity of selling varies depending on the maturity period. For instance, comparing the yields of 2-year and 10-year Treasury bonds:

Since the third week of July, when robust data on the American economy began to emerge, yields across all maturity periods have been on the rise. However, long-term bonds have experienced more significant selling pressure, leading to faster growth in yields. In other words, the attractiveness of short-term bonds has increased relative to long-term bonds. Most investors had anticipated that a strategy of sequentially investing in a series of short-term bonds (lending for short terms and continually rolling over the investment) would generate higher overall returns than a strategy of purchasing long-term bonds (borrowing for a single long-term period).

When investors believe that the Federal Reserve is planning to excessively tighten its monetary policy, they sell short-term bonds (expecting interest rate hikes) and instead buy long-term bonds, anticipating that the Fed’s actions will prove to be a mistake and lead to an economic downturn or recession, along with corresponding fall in inflation rates. In such a scenario, buying long-term bonds becomes more advantageous compared to investing in a series of short-term bonds, as short-term interest rates are expected to decline in the future. Conversely, if investors believe that the Fed’s will undershoot with policy tightening due to the strong economy’s potential, they sell long-term bonds, expecting that the restrictive effect of high rates will be insufficient, leading to economy and inflation staying hot longer. In this scenario, a series of investments in short-term bonds appears more appealing, given the expectation that short-term rates will remain stable or potentially even increase.

In the first case, the spread between long and short-term bonds will go lower, while in the second case, it will increase. Currently, investors seem convinced that the Federal Reserve’s current policy outlook is insufficient to push inflation to its target level.

Signs that inflation is likely to persist emerged yesterday after the release of ISM data in the services sector. Although the overall index roughly met expectations (52.7 points, with a forecast of 53 points), the input price index surged from 54.1 to 56.8 points (the first time in several months):

This is indeed a very concerning signal that the Federal Reserve may once again be underestimating the potential for inflation.

Today, the market braces for volatility related to the release of Nonfarm Payrolls (NFP) report, with expectations of modest job growth of around 200К and a 0.3% increase in wages on a monthly basis. In my opinion, the current rally in yields likely already factors in a strong NFP report, leading to a potential asymmetric reaction: a robust report may have minimal impact on the market, while weak job growth, especially with modest wage increases, could trigger a retracement in the recent bond market trend. Consequently, the U.S. dollar is also expected to experience a tangible downward correction in case of a dovish report.

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.

441

Dollar gains ground awaiting inflation report as US labor market shows signs of weakness

The dollar recovers on Monday after mixed NFP report released last Friday. Job gains fell short of the modest forecast of 200K, coming in at 187K, which greatly disappointed fixed income bears who was dumping bonds throughout the previous week. Yields plummeted by more than 15 basis points after the release:

However bullish reaction in bonds proved to be transitory as the inflation part of the unemployment report still indicated that the labor market retains decent potential to generate price pressures. Wage growth beat forecast coming at 0.4% MoM vs. 0.3% consensus. Unemployment also decreased to 3.5%, and as it is known, the Fed uses the inverse relationship between inflation and unemployment to shape monetary policy.

In essence, if there was any negativity, it was minor, and on Monday, the dollar started to exert pressure again, with the dollar index recovering about half of its Friday decline. The price is just a bit shy of a retest of the upper bound of the medium-term bearish channel, making the idea of shorting the dollar much more appealing:

On the chart, the zone where the dollar could renew its medium-term decline is near the 103 level.

One source of dollar support could be the U.S. stock market, which, judging by the S&P 500 chart, is clearly developing a bearish momentum:

The price rebounded from the upper bound of the ascending channel, and it had been in a downturn for the previous four days. Of course, buying interest near the key 4500 level may prevent the market to push through it easily, but in my view, a significant portion of buyers will be waiting for convergence at least with the 50-day moving average. This is roughly around the 4400 level.

A trigger for such a correction could be the U.S. inflation report this week, scheduled for release on Thursday. A decrease in core inflation from 4.8% to 4.7% is expected, along with an increase in overall inflation from 3% to 3.3%. The focus, of course, will be on core inflation, which is “cleaned” of the influence of seasonal and other short-term factors. A substantial correction of risk assets is quite likely with a combination of a weak labor market report and more resilient core inflation than expected. It might be sufficient even if inflation exceeds the forecast by 0.1% and reaches 4.8%, as in this case, asset prices will start factoring in the risks of stagflation – long-term bond yields will decrease, short-term yields will rise, and risk assets will account for the risk that the “soft landing” the Fed is diligently working towards might break at some point.

If the inflation report aligns with the forecast, there’s a chance that the Producer Price Index (PPI), which will be published on Friday, will trigger a strong reaction. Last time, there was a significant response to the surprise, as PPI is a leading indicator of CPI, due to the fact that price pressure is transmitted from producer prices through costs to consumer prices.

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.

442

Dollar Rally Pause: What to Expect in the Near Future?

The dollar is attempting to consolidate its gains on Monday after breaking above the upper bound of a key bearish channel:

In the search for bullish entry points, attention should be paid to the same upper channel bound, which now has a high chance of acting as a support line. On the chart, this corresponds to approximately the 103.5 level on the dollar index. The development of an upward trend in the coming month seems to be the more likely scenario in my view, given that last week on lower timeframes, there was a battle to maintain trading within the channel (breakouts and subsequent pullbacks), which enhances the significance of this line as an important market reference point.

Powell spoke at last week’s Jackson Hole Symposium. Central bank heads generally deliver insightful remarks at this symposium, and this time was no exception. The market was overall satisfied with how the Fed chair tried to strike a balance between risks and the necessity for hawkish policy. This is evident from the positive closing of major indices on Friday, which, by inertia, passed on risk appetite to Monday’s trading. The Federal Reserve Chairman once again did not rule out further tightening and indicated that in the context of inflation forecasts, investors should keep an eye on the labor market. It was a fairly clear statement that the central bank will be waiting for weak labor market indicators before hitting on the pause button. Additionally, the Fed Chairman stated that officials are currently concerned about inflation in the non-housing services sector, which aligns with his previous remarks on the labor market, as labor is a more significant factor of production in the services sector than capital. Wage growth in this sector currently has a faster pace compared to the production sector, which underlies the primary inflation risks. In short, the slowing pace of job growth in the services sector and clear signs of inflation deceleration in non-housing services are what Powell recommended to watch in upcoming labor and inflation reports.

The U.S. Treasury bond market reacted unusually to Powell’s speech, with short-term bond yields rising while long-term bond yields remained steady or even slightly declined:

This suggests that the chances of near-term tightening have increased, while in the more distant future, the market has begun to anticipate a slightly faster inflation easing.

China rolled out new stimulus measures today, which also boosted risk appetite in markets, initially in China and then in financial markets beyond China.

Overall, lack of major market events and reports in the first half of the week favors the development of the bullish rebound in equities and the pullback in the dollar against other major currencies.

In the second half of the week, markets expect the Core PCE for July, which, despite it now being August, has the potential to surprise, as it did in June and July. On Thursday, the focus will be on the NFP report, as mentioned earlier, with an emphasis on employment in the services sector and, consequently, wage growth in it. For the EU, the market awaits inflation data for August, as well as labor market statistics for Germany. Also on Wednesday, China will release the official Manufacturing PMI, considering that China remains on the market’s radar after a series of recent negative news, a significant deviation from the forecast could also impact risk appetite in external markets.

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.

443

NFP report Analysis: Job Growth and Fed Policy Outlook

The US unemployment report for August showed modest job growth, a slowdown in wage growth, and a relatively sharp jump in the unemployment rate, all clear signs that the US labor market is normalizing. It’s challenging to expect inflation to accelerate in this context, so the likelihood of the Federal Reserve raising interest rates in September and possibly in November is diminishing.

Job growth in the US in August reached 187,000, slightly surpassing the modest forecast of 170,000. However, the previous two months were revised downward by a total of 110,000 jobs. The report adds weight to the argument that there is a sustained trend of weakening in hiring. In the private sector, the increase was 179,000, with 102,000 of those jobs coming from the private education and healthcare sector. A positive development in terms of its impact on inflation is the increase in the labor force participation rate – a measure calculated as the sum of unemployed and employed individuals as a percentage of the total working-age population. An increase in this rate means a “net” inflow into the category of those who are either employed or actively seeking employment, which should exert downward pressure on wages and, subsequently, consumer inflation in the US. The decline in this rate in 2020 led to the phenomenon of sustained inflation pressures, which the labor market continues to generate. With its return to normal levels, this effect is likely to be a deflationary factor:

Along with the rise in the labor force participation rate, wage growth is also starting to slow down, with August recording a 0.2% MoM increase compared to a forecast of 0.3%. This marks the first drop below 0.3% in over six months. The unemployment rate jumped from 3.5% to 3.8%, clearly indicating a slowdown in the pace of labor demand growth.

The probability of the Federal Reserve raising rates in September in the face of such soft figures is sharply decreasing, and the pause is likely to extend into November.

The markets did not see anything critical in the unemployment report in terms of recession risks in the US. Short-term Treasury yields returned to levels preceding the report release after a brief dip, and long-term bond yields even increased slightly, from 4.10% to 4.18% for 10-year Treasury bonds. Consequently, the report had no significant impact on the US dollar, which strengthened against major currencies after a brief bearish correction. The dollar index rose from 103.50 to 104 points, and the price formed a chart pattern rebounding from a support line, which previously acted as resistance, serving as a confirmation of bullish intentions:

This week, we can expect the release of the US ISM Services PMI on Wednesday, which will also include respondents’ assessments of hiring conditions and price pressures and is expected to be closely watched by the market. In Europe, the third estimate of second-quarter GDP growth will be released on Thursday, and Germany’s inflation report will be published on Friday.

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.

444

Risk Appetite on the US Stock Market Wanes Amid Inflation Concerns

On Wednesday, appetite for risk in US equities decreased, with major stock indices finishing the session slightly in the red. The American market successfully passed the bearish baton to Asian and European markets as investors gradually sold off stocks amidst rising oil prices. US Treasury bond yields increased as traders apparently factor in the risks of a potential inflation resurgence due to anticipated cost-push inflation impulse, particularly due to rising fuel prices. Yields for two-year bonds crossed the 5% mark, while ten-year bonds reached 4.25%. The spread between long-term and short-term bonds changed recent direction and moved lower. This may indicate a resurgence of speculation in the market regarding a Federal Reserve interest rate hike.

A significant event from yesterday was the ISM report on US service sector activity. It provided another mixed signal: the overall index rose from 52.7 to 54.5 points, beating expectations of 52.5 points. The ISM Prices sub-index left the market bewildered, as instead of the expected decrease, it actually increased from 56.8 to 58.9 points. This suggests that, according to respondents, price pressures may have increased at increasing rate compared to the previous month. This contradicts recent CPI and PCE inflation and wage data from the NFP report. It’s worth noting that the Federal Reserve’s number one goal is to reduce inflation in the service sector since its price pressures largely shape the overall trend of consumer inflation in the US. Additionally, the labor-intensive nature of the industry (high labor-to-capital ratio in its output) creates a positive feedback loop of “prices-wage-prices” which largely explains inflation persistence.

Short-term bond yields increased following the report’s publication, underscoring the market’s surprise at the unexpected new information:

Consequently, the likelihood of a Fed rate hike in November has also increased. If a week ago it stood at 37.1%, it now sits at 43.5%:

The US dollar index halted its recent downward correction and rose to the 105 level on Thursday. EURUSD continues to consolidate around the 1.07 level, with minimal attempts to stage a rebound:

This behavior near the round figure increases the likelihood of a bearish breakthrough on new information towards the 1.06 area. However, the ECB is due to hold a meeting next week, and based on the rhetoric of ECB officials, the regulator is set to hike interest rate further. The potential for hawkish surprises likely rules out a significant decline and even if a downward market breakout occurs, it will likely be short-lived.

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.

445

US Consumer Inflation Slightly Exceeds Expectations, ECB Prepares for Meeting: Market Overview

Consumer inflation in the United States in August came in slightly above expectations, as indicated by the report released on Wednesday. Core inflation, which excludes items or services with volatile prices, reached 0.3% for the month. While the deviation from the forecast (0.2% MoM) is not significant, it is likely enough to prompt the Federal Reserve (Fed) to maintain its projection of a single interest rate hike by year-end during the upcoming meeting.

Headline inflation deviated slightly more from the forecast due to a 10% increase in fuel prices in August, but the market had already priced in this development, reacting to the recent rally in the oil market.

The market reacted fairly indifferently to the acceleration in core inflation. This can be attributed to elevated market expectations, as the market had factored in the risk of fuel-related inflation driving up core inflation. Additionally, a slowdown in the growth of housing expenses (Shelter Inflation) from 0.4% in July to 0.3% in August played a role:

This component, which represents the most inert or “sticky” aspect of the Consumer Price Index (CPI) for services, closely reflects the underlying trend in consumer prices. The dynamics of this component could potentially offset the relatively minor acceleration in the overall core inflation figure, as it is clear that the trend is more important than month-to-month fluctuations driven by seasonal or transitory factors.

Today, the market is focused on the European Central Bank (ECB) meeting. According to interest rate derivatives pricing, the likelihood of a rate hike is estimated at around 65%. Therefore, an actual rate hike would come as somewhat of a surprise, potentially causing the European currency to strengthen and also lifting the British pound. The belief that the ECB will raise rates today gained momentum following a Reuters report suggesting that ECB economists are likely to revise their inflation forecast for the next year upward to 3%. However, it is worth considering that the cumulative tightening of policy expected by the market until the end of the year is only 23 basis points, which is roughly equivalent to a single rate hike. To drive sustainable euro appreciation, the ECB will likely need to convince the market that further tightening cannot be ruled out. The extent of dissent within the Governing Council regarding September’s tightening will be crucial. If the decision is made with only a slight and minimal majority, then Lagarde’s assurances that “there could be more” are unlikely to have much effect. Overall, the potential euro strength is likely to be short-lived and levels above current ones, say 1.08 for EUR/USD, could present an excellent opportunity to enter short positions ahead of the Fed’s meeting next week, where the potential for hawkish surprises is much higher.

The market is not anticipating a Fed rate hike next week, but it will be looking for potential surprises in the Dot Plot, which represents the rate projections of top Fed officials collected on a single chart. Signs of disinflation are likely to leave rate projections unchanged compared to the previous Dot Plot version (one more rate hike till the end of the year):

However, the economic resilience of the United States, evident in recent incoming data, could compel officials to push back the potential rate cut in the following year to a later date. This particular development could significantly impact the market (especially long-dated fixed income assets like 10-Year Treasuries) and contribute to further strengthening of the US dollar.

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.

446

Fed’s Meeting Outlook: Dollar Stability Hangs in the Balance as All Eyes Turn to the Dot Plot

EURUSD has stabilized around the 1.07 level, while the dollar index hovers near the 105 mark ahead of the Federal Reserve’s meeting scheduled for today. Markets are not anticipating a rate hike; however, the rhetoric regarding the November decision, which the market views as the most likely date for another, potentially final, rate increase this year, will have a significant impact on asset prices. A crucial piece of information regarding the November meeting will be the Dot Plot – the forecasts of top Fed officials regarding interest rates in 2023-2025 and the long-term period, all displayed on a single graph. Currently, it appears as follows:

The red dot on the chart represents the median forecast, indicating a rate of 5.50% for this year, which is 25 basis points above the current level.

Apart from the increase this year, there remains high uncertainty about the trajectory of rates next year. The market is concerned about when the Fed will start cutting rates next year, if at all. The Dot Plot will also clarify the Fed’s stance on this issue, so any change in the median forecast for the next year will have a strong impact on market expectations today.

If the Fed excludes a rate hike this year or the Dot Plot points to a lower median rate forecast for the next year, it will send a strong bearish signal for the dollar. In general, the forecast for 2024 could be an interesting point, especially in terms of its impact on the currency market. The median forecast is likely to remain unchanged at 4.64%, indicating a potential 100 basis points cut next year. Given the resilience of the U.S. economic outlook and the reinforcement of the “higher rates for longer” concept, there is a nonzero risk that the median forecast for 2024 could be revised upward. In other aspects, only minor changes in the statement are expected, maintaining a reference to further rate increases that “may be appropriate.” Additionally, Federal Reserve Chair Jerome Powell is likely to keep all options open during the press conference. Anticipate the usual resistance against rate cut expectations (which have recently been softened), especially if not signaled by a revision in the Dot Plot for 2024.

The overall message from the Federal Reserve should support the dollar: the Fed will hint at keeping the door open for further tightening if necessary and will do everything possible to undermine the idea that rate cuts are still a long way off. However, market expectations seem quite condensed around this scenario. As mentioned earlier, 2024 could be a point of greater uncertainty: leaving the Dot Plot for 2024 unchanged may not be enough to trigger a significant correction in the dollar’s exchange rate, but higher 2024 forecasts could lead to another leg up for the dollar. Beyond the short-term impact, this meeting is unlikely to be a game-changer for the dollar, as the focus will remain on U.S. economic data.

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.