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Daily Forex News by XtreamForex.com

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Bank of England’s Monetary Policy Committee Preview

The Bank of England’s Monetary Policy Committee will meet tomorrow to decide on interest rates. The MPC meeting will be sandwiched between FOMC rate decision that will have taken place today, and the ECB rate decision that would follow an hour and a bit later. The GBP/USD, EUR/GBP and FTSE will be among the markets in sharp focus on the day.

The consensus is that the BoE will show the pace of hiking, as we are expected to see with the week’s other major central bank decisions. Economists expect the UK central bank to raise the benchmark interest rate by 50 basis points, which would bring the Official Bank Rate to 3.5%. If correct, this will mean the previous 75 basis point hike was just a one off.

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USD/CHF Could Extend Losses

USD/CHF declined below the 0.9400 and 0.9350 support levels.
A major bearish trend line is forming with resistance near 0.9320 on the 4-hours chart.
The Fed increased interest rate by 0.50 percentage point.
The BoE interest rate decision is scheduled today.

The USD started a fresh decline from well above the 0.9500 level against the Swiss Franc. USD/CHF gained pace below the 0.9400 and 0.9380 levels. Looking at the 4 hour chart, the pair settled well below the 0.9400 level, the 100 simple moving average and the 200 simple moving average.

It broke the 0.9300 level and tested the 0.9230 support zone. It is now consolidating losses and remains at a risk of more losses below the 0.9200 support zone. The next major support is near the 0.9165 zone. Any more losses might send the pair towards the 0.9120 support zone. On the upside, the pair is facing resistance near the 0.9320.

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Bank Of Japan Could keep same Policy

The Bank of Japan kept the same outlier as compared to the other major central banks which have been raising interest rates at a fast pace throughout this year in a synchronized attempt to bring the inflation down. This resulted in a down yen and fording Japanese authorities to step in in the currency market in September and October. But, after hitting a 32-year low against the USD, the yen staged a comeback, with the BoJ coming under the microscope as investors try to figure out whether a policy tweak is on the cards sooner rather than later. The Bank meets early on Tuesday, but no policy action is expected.

Governor Kuroda has been strict on the need to maintain ultra-low interest rates and pushed back against calls for reviewing the policy framework. He has been also repeating that the rise in core consumer prices is driven mostly by surging import costs and that inflation would return back to 2% during the next fiscal year.

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RBA Board Considered Stop in December

The Reserve Bank Board considered three options in its deliberations at the December Board meeting. The options were: 50 basis point increase in the cash rate; 25 basis point increase; or no increase. This contrasts with recent meetings when only the 50 basis point and 25 basis point options were considered. Given consistent statement from the Bank about pausing it would come as no surprise that the Board did consider the pause. Indeed, it came as a bigger surprise that 50 basis points was still on the table.

The cause of pausing rested on the theme of placing further emphasis on the lagged effects of a large policy adjustment to date, and the value in proceeding cautiously in an uncertain environment. But this argument seemed to be quickly dismissed, noting that the Bank’s forecasts in the November SOMP were that, despite further increases in interest rates, “inflation was expected to take several years to return to the target range”.

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Canada:- Inflation Tiptoes in the Right Direction in November

Consumer price inflation took a small step down in November, to 6.8% YoY, after holding steady at 6.9% through September and October.

Canadians got some relief at the pumps in November, with prices down 3.6% m/m, after prices surged 9.2% in October. However, gasoline prices are still up 13.7% versus a year ago.

Food inflation was back on the rise in November, up 10.3% y/y, up from 10.1% in October. Food purchased from stores was up even more versus a year ago at 11.4% y/y.

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Japanese Yen Steady Ahead of CPI

The Japanese yen has edged higher on Thursday. In the European session, USD/JPY is trading at 132.09, down 0.27%.

The dust has settled after Tuesday’s dramatic events, when the yen shot up 3.7%. This followed the Bank of Japan’s shocking announcement that it would widen its yield curve control on 10 year bonds from 25 bp to 50 bp. The markets were completely blindsided, which could very well be what Bank of Japan was hoping for.

The markets hadn’t expected any policy moves until after Boj Governor Kuroda ends his term in April, but now there is talk of major policy moves before then, such as raising interest rates out of negative territory. The BoJ released minutes yesterday, but these are minutes of November meeting.

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The Euro:- An Uncertain Path

Euro fell below parity with the USD in October. Since then, it has rebounded, but hasn’t returned to the levels at the start of the year. Naturally, the question is whether the pair will continue the trend higher, or turn around for another run at parity. And what does this mean for Euro crosses.

One of the main drivers of the fluctuation in the shared currency last year is likely to be the theme for next year as well. At least through the first half. And that is the ECB’s unique approach to a unique challenge facing the Euro. Other currencies operate within a single economic jurisdiction, but the ECB has to balance the fiscal policy of 19 different countries.

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USD/JPY:- Christmas Week Recovery Rally May Soon Stall Out

Beginning of last week, forex traders were expecting to ease into the holidays with relatively low volatility trade until BOJ Governor Kuroda fired off big of a monetary policy decision, tweaking the central bank’s yield curve control program and effectively raising interest rates by 25bps. This marked a potential sea change for the BOJ and is seen as a precursor to normalizing monetary policy after a decade of ultra-easy policy.

Based on the initial market reaction, one of Japan’s most prominent monetary policy academics, Takashi Ito, noted earlier today that Kuroda’s bazooka ‘may have hit its mark’ and that the BOJ could start ‘hitting its inflation target on a more sustainable basis ‘ in 2023 and beyond.

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EUR/USD Slides to three week low

The US dollar is showing strong gains against the majors yesterday, with the exception of the Japanese yen. EUR/USD has tumbled by 1.27% and is trading at 1.0528 in Europe.

EUR/USD is sharply lower, despite a very light economic calendar. The only release of note is German CPI, which was released yesterday. Despite the lack of fundamentals, the USD is taking advantage of risk aversion in the markets. There are headwinds everywhere we look. The war in Ukraine, the threat of recession in the US and the eurozone and China’s slowdown all make for a gloomy outlook as we start the new year.

Germany’s inflation has been falling, and the downtrend is expected to continue. The consensus for December CPI is 9.0%, compared to 10.0% in November. If the consensus proves accurate, it could put further pressure on the euro, as the ECB may have to reconsider its hawkish stance on rate policy.

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The Minutes from the December FOMC meeting

The Minutes from the December FOMC meeting showed that Fed members observed that a slowing of interest rate increases would allow the central bank to assess the progress on inflation and employment. Recall that the FOMC slowed the pace of interest rates increase to 50bps from 75bps the prior four meetings. However, that didn’t mean they were happy with the current situation. Powell mentioned in his press conference that they “Welcome the reduction in the monthly pace of price increase, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

In addition, the summary of economic projections showed that no one expects rate cuts in 2023, as the median forecast for rates increased from 4.6% to 5.1%. As a result, participants felt that ongoing rate increases are “likely appropriate”. The committee also noted the need for flexibility and optionally in policy decisions and that unwarranted easing in financial conditions could complicate their effort to restore price stability.

The US Dollar Index barely moved on the release of the Minutes, remaining within a range between 104.24 and 104.31.

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Decent US Data ahead of Payrolls | Xtreamforex

Today brings this week’s most important data releases both from the Euro area and the US.

In Euro area, flash inflation print for December will be released. Individual country data released thus far suggest that while headline inflation probably continued to decline in December, underlying price pressures remain strong. Consensus is looking for core inflation to have picked up from 5.0% in November to 5.1% in December. Going forward, interpretation of euro area inflation data will become more and more cumbersome as country-specific fiscal measures that compensate households for the rising energy costs will also affect consumer price developments.

In the US, it is time for December payrolls. Consensus expects 200k new jobs while a figure around 100k would be consistent with demographic developments and any higher number implies labor shortages are likely to prevail in US jobs market, upholding wage and price pressures. We will also get IMS Services index where consensus looks for a decline to 55.0 in December from 56.5 in November. Factory orders are also expected to have declined in November.

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Gold & silver Struggle Despite Weak US dollar

Gold came off its earlier highs while silver turned a touch lower in what has been a quietish day. The US dollar fell further lower, extending it sharp losses from Friday when weak ISM data raised speculation that the Fed will be forced to cut interest rates again towards the back end of this year. But the dollar typically rises in Q1, which I something that could undermine the gold rally. In terms of the immediate term and this week, we have two key risk events that could move the dollar thus gold price.

Jerome Powell’s speech is expected while US CPI data for December will be released on Thursday. Both of these macro events have the potential to move dollar sharply again, after a double whammy of bearish news sent the greenback tumbling on Friday, and Monday.
 
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US CPI Preview:- Will lower inflation data cause the Fed to pause

In general, inflation has been slowing over the last few months. Tomorrow, markets will get a look at December’s CPI print. Expectations are that the headline print will continue to move lower to 6.5% YoY vs a November reading of 7.1% YoY. Last month’s reading was the fifth straight monthly decline after reaching a high of 9.1% YoY in June 2022. The print was also the lowest reading since December 2021.

Markets have also now seen that wage growth is slowing. Average Hourly Earnings for December slowed to 4.6% YoY and expectation of 5% YoY and a lower November revised print of 4.8% YoY from 5.1% YoY. The Fed has been worried about wage growth, and this data was the first sign that wages may be rising at a slower pace.

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GBP/USD Drifting: The British Pound Is Drifting

The British Pound is drifting for a third day straight. In the European session, GBP/USD is trading at 1.2161, down 0.09%. We could see stronger volatility from the pound before the weekend, with the release of the US inflation report and UK GDP on Friday, both of which are market movers.

There an secure expectation ahead of the US inflation report. Inflation is projected to drop in December, which would be music to the market’s ears. The forecast for headline inflation stands at 6.5%, following the November gain of 7.1%. The core rate, which is more important, is also expected o ease, with the forecast of 5.7% in December, compared to 6.0% in November. The inflation release should result in volatility from the US Dollar. If inflation, particularly the core rate, falls as expected or more, the US dollar will likely lose ground, as speculation will increase that the Fed may have to pivot from its hawkish stance and ease up on the pace of rates. Conversely, if inflation does not fall as much as expected, it would vindicate the Fed’s hawkish position, which the markets may have to grudgingly accept.

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Australian Dollar Bright Start in 2023

The Australia dollar has started 2023 strongly, rising above 70 cents to highs since August. A softer USD and improved China sentiment have been key. This week’s highlights include Australia’s jobs data, the Bank of Japan decision and US retail sales.

The SUD has risen about 1.6 cents or 2.3% so far in January, to just under 0.7000. Price action was quite mixed in the first few days of the year, the Aussie rally only igniting on 6 January when the USD slumped in response to soft data. While the US December payrolls gain of 223k was quite solid and unemployment rate edged down to 3.5%, there was a declaration in wages growth. Moreover, on the same day the US services ISM survey showed a shocking slide in the headline index, to 49.6 in December from 56.5 in November.

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GBP/USD: Pound Counts on the Best.

As in the US, retail sales in the UK also went down. They fell -1.0% in December, which is significantly lower than the forecast +0.5%. Analysts note that real spending in the country was significantly ahead of GDP in 2020-2022, but the rise in inflation led to a sharp halt in this process. And it is predicted that 2023 will be a period of retribution for this waste.

According to economists at HSBC, one of the world’s largest financial conglomerates, things are not so bad. “With UK inflation likely to have peaked and could potentially slow more than the consensus forecast,” a less aggressive tone of tightening from the BoE now could mean a less dramatic reversal later in the year. And this may eventually become a minor positive factor for the British pound in the coming months. The shift towards better-than-expected domestic data should also be positive for the British pound.

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25bp Hike from Bank Of Canada expected

The Bank of Canada are expected to hike interest rates by 25bp tomorrow according to market pricing and economists. The hike would see their benchmark rate rise to 4.5% – its highest level since October 2007 – and on par with the Fed yet above the RBNZ’s 4.25% rate. A 25bp hike would be the slowest pace since their first hike of this cycle in March 2022, after which they moved up 50bp increments, a 100bp hike and a 75bp hike along the way. The central bank will also provide minutes from the meeting on February the 8th, which is the first time in their history.

Money markets suggest an 80% chance of a 25bphike, whilst 25 of 26 economists polled by Reuters also anticipate the move. With a 25bp hike all but a given, it could take a surprise hold to start volatility for traders. But then looking through the latest business and consumer sentiment surveys suggest we could be fast approaching the BOC’s terminal rate.

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Australia CPI:

Headline CPI 1.9%qtr/7.8%yr; Trimmed Mean 1.7%qtr6.9%yr; Weighted Median 1.6%qtr5.8%yr. Hospitality services most important factor in the upside surprise in the December quarter but with the Trimmed Mean coming in broadly as expected this suggests the pace of core inflation is generally unfolding as we expected.

The CPI lifted 1.9% in the December quarter with the most significant contributions coming from domestic holiday travel & accommodation, electricity, and international holiday travel & accommodation.

The ABS noted that ‘strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares”. The rises seen for domestic & international travel were notably higher than the historical norm for the December quarter.

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Gold Steady and Dollar Undermined

After silver’s big plunge on Monday, both precious metals have managed to steady the ship, suggesting the move at the start of the week was probably a bear trap.

The US Dollar has come back against the Canadian dollar thanks to a 25- basis point rate hike from the Bank of Canada, with its governor saying that interest rates will be kept at its current level while the bank assesses the impact of the cumulative interest rate increases.

But elsewhere, the likes of the Pound, Euro and Yen all remain supported against the US dollar. This is helping to keep buck-denominated metals supported.

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