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Daily Market Notes by Tickmill.co.uk

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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:

 
Screenshot-2022-12-02-at-13-01-19.png


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:


Screenshot-2022-12-02-at-15-40-41.png
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.

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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:

Screenshot-2022-12-12-at-17-46-15.png

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:

Screenshot-2022-12-12-at-17-47-47.png

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.

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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:

Screenshot-2022-12-21-at-17-38-23.png

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.

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Is gold primed for a rally on expectations of central banks easing cycle in 2023?

Major European currencies ceded ground to dollar on Tuesday, EURUSD broke down 1.06 and GBPUSD 1.20 level. The start of European session saw major sell-off both in EUR and GBP:

 Screenshot-2023-01-03-at-17-32-36.png


Positive December price data from Germany failed to offset selling pressure in Euro, despite significant pullback in the rate of consumer price growth - from 10% to 8.6% in annual terms and from -0.5% to -0.8% in monthly terms. Data on the German labor market also provided little help to battered Euro, although the number of unemployed in the country fell by 13 thousand, and unemployment remained unchanged at 5.5%, contrary to the forecast of an increase of 0.1% to 5.6%.

There is an increased activity of buyers in the gold market which is a signal of major shift in real rate expectations or market perception of recession or geopolitical risks. The price continues to move in the upward channel and has gained more than 1% today on a powerful bullish impulse. Buyers tested resistance near the round level of $1850, however, after the pullback, aggressive gold bids resumed. Keep in mind that the price is approaching the upper limit of bullish trend channel, and the round $1850 level could be perceived by majority of players as a good level to take profits from 12% rally since the beginning of November. To understand why gold rises in prices, it should be remembered that in early November, market risk-free rates in the United States (government bond yields) reached their peak - one of the main factors of demand for gold. When they began to decline, gold began to rise in price:

Screenshot-2023-01-03-at-18-14-15.png
 

It was clear from the last Fed meeting that the tightening cycle is nearing its end, so expectations for a cycle of interest rate cuts are likely to be slowly building now. Accelerating gold growth without a corresponding reaction in bond yields indicates a high risk of a bearish correction in gold in the short term:
  
Screenshot-2023-01-03-at-17-46-58.png

Nevertheless, the medium-term trend for gold is definitely up and after a good downward movement, buying gold on expectations of policy easing by central banks looks very justified.

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.

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Market braces for EURUSD breakout of 1.08 as risk of inflation easing grows in US


Cautious optimism remains in the currency markets regarding the idea that signs of US losing growth momentum will force the Fed to tap the breaks on monetary tightening and prepare markets for an easing cycle. Easing Covid policy in China is also supportive for market sentiment as investors price in rising China demand for imports and recovery of the air travel sector. If these stories continue to evolve in a benign way, commodity market and EM currency sector will likely see major capital inflows. The focus today is on Powell comments and US NFIB data.

Risk assets started this year quite well with both stocks and bond rallying. Emerging markets saw increased demand too amid rumors that the Fed will end policy tightening in the first quarter and move on to cut rates as early as the third quarter of this year, and also thanks to supportive policy measures in China. AUD saw major capital inflows thanks to the easing China ban on coal imports while news about 20% increase in China oil import quotas underpinned oil prices yesterday.

The story with the Fed today will be supplemented with two new details: Powell remarks at Riksbank conference, as well as NFIB small business survey data. Watching near-term bonds and credit spread markets’ dovish reaction we can say that the market is increasingly betting on an early Fed withdrawal from the tightening cycle and rate cuts in 3Q. A major shift in expectations would come if Powell attempts to keep market focus on inflation risks and the need to keep raising rates. In this case, we will see a rebound in Treasury yields, and the dollar will “soar”. If it is clear from the comments that the Fed is indeed inclined to slow down the pace of tightening, or even foresees an early end, the reaction of the markets is likely to be limited - sellers will push the level of 103 on DXY, and the yield of 10-year bonds will head towards support at 3.5%.

In the NFIB report, the market will look for additional information on slowdown in the US economy, which was already eloquently reported by the ISM report last Friday (fall of the headline index from 55 to 49.6 points, industrial orders by 1.8% YoY):

Screenshot-2023-01-10-at-18-02-32.png

It will also be interesting to look at firms' plans to increase prices, as well as new orders (two leading indicators of economic expansion and inflation). It is important to understand that Friday's ISM report set the market to expect another CPI easing in December, so investors may now be inclined to reduce dollar positions ahead of the release of the report on Thursday.

Looking at EURUSD chart, the pair is approaching the short-term resistance level (1.08) and will probably test it with a breakdout. If the market manages to gain a foothold above 1.08 or wander around the level without a significant decline, this can be seen as a signal of continued rally towards 1.10 (medium-term support), where profit-taking from the rally from 1.05 is likely to take place, and there will also be an occasion for speculative bearish momentum on expectations of a pullback from the round level:


Screenshot-2023-01-10-at-17-52-46.png
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.

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EURUSD presses against 1.08 level, market anticipates benign CPI print as energy inflation drops

Risk appetite apparently grows in equity markets as Fed chief Powell did not take advantage of the Riksbank conference yesterday to repeat the recent mantra that a high inflation rate warrants further policy tightening. The market interpreted this as another signal that the Fed intends to slow down the pace of policy tightening, reaching “moderately restrictive level” in 1Q. The US market closed yesterday with moderate gains, futures continued to rally today, indicating potential bullish opening on the New York session today. Investors also increased demand for bonds, Treasury yields on the entire maturity spectrum trade slightly in the red today. The dollar index is clearly consolidating near the level of 103, buying interest remains low, there may be an attempt by sellers before the release of the CPI to press against the level of 103, and in case of bullish print, they may even break through the support and go towards 102.50 – 102 level:


 Screenshot-2023-01-11-at-14-27-10.png


The market is clearly inclined now to price in decreasing hawkish vector of the Fed policy. The reason for this is an unexpectedly dovish print of ISM index for US non-manufacturing sector that we saw on Friday. The headline reading plunged to sub 50 area, which basically means contraction in activity compared to November. Industrial orders also declined - by 1.8%, which was a big surprise. The Small Index Optimism Index released yesterday by the NFIB fell from 91.9 to 89.8 points driven by small business expectations in business climate. Key highlights of the report include a decline in the share of firms planning to raise prices (a leading indicator of inflation) by 8%, and a decline in the share of firms expecting sales growth in real terms by 2%. However, the proportion of firms planning to hire staff remained high at 55%, among which 93% reported that there were few or no suitably qualified candidates in the market.


The mood for the European currency and European assets is gradually improving. Goldman abandoned the previous forecast of a recession in the EU in 2023, and European Commission official Gentilloni said that while the forecast for GDP growth in the first quarter of 0.3% remains relevant, the risks of lower or negative growth in Q4 2022 and Q1 2023 have noticeably decreased. ECB officials Schnabel and Centeno also changed their rhetoric, focusing on the fact that the peak of the inflationary shock in the energy market has passed, and the ECB is also getting closer to the end of rate hikes.
The technical setup for EURUSD is presented below:


 Screenshot-2023-01-11-at-16-19-34.png


The chart shows that the market keeps consolidating in a rather narrow range near the zone where major sell-off started in June 2022 (zone 1.08). This fact allows us to consider it as an area of short-term resistance. A favorable CPI print (5.7% or below in core inflation) will most likely allow the market to break through 1.08 level, after initial profit-taking on bullish breakout, the upward movement will most likely resume with a target of 1.09 and above. Buyers' interest is likely to drop noticeably near the 1.10 level, where the main bearish speculative momentum will likely emerge.

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.

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Upbeat China data may unlock more upside in Euro and other pro-cyclical currencies


The unexpected rebound of Chinese economy as seen in the latest batch of Chinese data reinforced the idea that hidden China economic momentum will unlock the upside in pro-cyclical currencies, including the euro. The decline in natural gas prices pushes the idea of energy crisis deep to the sidelines causing revisions of growth prospects of energy importers to the upside. Today the market’s focus is on the UK employment data, German ZEW index, Canadian CPI and the US Empire State manufacturing index.

China statistics for December and 4Q2022 made somewhat displaced market fears that coronavirus restrictions left a scar on the body of the economy that will greatly hamper its recovery. GDP expanded by 2.9% in the fourth quarter (forecast 1.8%) while industrial production grew by 1.3% (forecast 0.2%) in December. The market missed the mark greatly in the retail sales growth forecast - the decline was just 1.8%, compared to the forecast of -8.6%. December data confirms the suggestion that, despite the increase in cases, the mobility story positively dominates China's consumer demand story.

Screenshot-2023-01-17-at-18-27-32.png

However, the release of Chinese data did not trigger any subsequent buying of the yuan or Asian currencies. This response could be attributed to the lull before the Chinese New Year starting next week and risk aversion before the BOJ meeting tomorrow.

The dollar remains broadly stable, moving in the 102-102.50 range in DXY. Tomorrow during the Asian session, a downside breakout could occur if the BoJ changes its 10-year JGB yield target again.

Growing signs of a slowdown in US price pressures, weakening business indicators, an improved demand outlook in China, and reduced risks of an energy crisis have all combined to reduce the huge imbalance between the growth outlooks of the US economy and its opponents that was a major investment thesis in 2022. EURUSD is clearly looking for an opportunity to break to new local highs, buyers' interest in the pair remains high. Target 1.10 for EURUSD remains relevant given that we saw decent USD consolidation after the steep decline.

The UK employment data and the ZEW business sentiment report pleased European currency buyers as they showed surprises on the upside. The ZEW sentiment index diverged especially strongly from the forecasts: despite expectations of a negative print, it entered positive area for the first time in many months:

Screenshot-2023-01-17-at-18-21-35.png

The Bloomberg report that ECB will follow the Fed's example and slow down the pace of rate hikes to 25bp in March caused some volatility in EURUSD and stripped somewhat of the near-term bullish momentum. However, the impact of this news is likely to be short-lived and the pair will soon resume its upward movement, as the dominant idea in the market remains the alignment of yield outlook in the US and outside of America.

The Bank of Canada (BoC) looks set to face an increase or no increase dilemma at its policy meeting next week (January 25). Signs of a slowdown in economic activity were included in the latest statement from the Bank of Canada and were clear in yesterday's Bank of Canada Business Outlook, where the index of future sales fell to its lowest level since the pandemic, and most of the firms surveyed said they expected a recession in Canada. However, employment figures in the December report turned out to be very strong, and high full-time hiring kept the unemployment rate at cyclical lows.

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.

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Dovish surprise in US retail sales leaves little to salvage dollar bulls


The Bank of Japan dismissed market rumors about further adjustments in yield curve control and left policy unchanged today, disappointing recent buyers of the yen. The report from Bloomberg released yesterday that the ECB plans to execute more caution in the rest of tightening cycle caused brief market embarrassment sending EURUSD to 1.08 and below, but later, as expected, bearish mood proved to be transitory. The dollar index, following a week of consolidation, traded below 102 points on signals of the growing slack in the US economy.

Dollar sentiment began to deteriorate yesterday after release of the Empire State manufacturing index. The headline reading plunged to -32.9 points vs. -9 points forecast, indicating a significant decline in business activity in the sector. The auction of 3- and 6-month Treasuries showed strong demand yesterday, indicating investors' preference to buy more fixed income in anticipation of weakening activity in the US, which should obviously be reflected in softer inflation figures.

Those greenback buyers that bet on rebound after consolidation, faced strong headwinds after release of the key for this week US eco reports. US retail sales report and PPI released today were noticeably worse than expected:

 
Screenshot-2023-01-18-at-17-31-28.png


Basically, dovish surprise in key consumption component and business activity prompted quick revision of US inflation forecast towards a faster decline and less hawkish Fed in 2023. The market reaction was clear: sell the dollar and bid stocks and bonds. As mentioned earlier, the dollar index fell below 102 points, while US futures posted a moderate increase within 0.5%. A significant reaction was observed in Treasuries - the yield on 10-year bonds fell to 3.45%, and two-year - to 4.08%. EURUSD broke through 1.0850 and the breakout of 1.09 is next, followed by a move towards 1.10, where the main resistance is expected:


 Screenshot-2023-01-18-at-17-29-21.png


Yesterday was a day of controversial headlines for the euro. In a lengthy interview with the Financial Times, Chief Economist Philip Lane provided detailed arguments in support of the ECB's recent hawkish rhetoric. Later in the day, however, a Bloomberg report quoted some ECB officials as saying that members of the Governing Council were actually considering a slower tightening (25bps). On this news, EUR/USD fell below 1.08, but today's data on the US formed the counterbalance and the pair quickly recovered.

This morning in the UK were published data on the consumer price index for December, which generally coincided with the consensus forecasts. Headline inflation fell from 10.7% to 10.5%, while core inflation remained at 6.3%. The peak appears to be behind us and headline inflation in the UK could return to 6% in the summer and 3.5-4% by the end of the year.

It is important to note that the rise in prices for core services accelerated from 6.4% to 6.8%, which the Bank of England should especially take into account, and when added to yesterday's wage data, the balance of risks should shift upward to a possible 50 bp tightening in February.

The EUR/GBP pair returned to pre-Christmas levels below 0.8800 thanks to some peculiar lagging of the euro and support of the pound. As discussed above, ECB-related euro weakness may not last long and EUR/GBP may struggle to trade sustainably below 0.8800 for now, also given the absence of strong bullish forces in the pound.

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.

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USD remains range-bound on dovish Fed rate hike outlook  


Asset markets are somewhat sluggish and reluctant to recover on Friday, following Thursday drop, which saw S&P 500 breaking through 3900 points. Dollar was slightly bid on the back of growing risk-off, however, during this week the DXY appears to remain in equilibrium in the range of 102-102.50:


 Screenshot-2023-01-20-at-15-47-32.png


Despite a slew of negative updates on the US economy for December (ISM indices, retail sales, industrial orders, etc.), the labor market continues to shine bright. Thursday data on unemployment claims showed that the number of applications not only did not increase, but even decreased, and significantly: initial claims from 205 to 194K, continuing claims fell to 1647K against the forecast of 1660K. Another positive aspect of yesterday's eco data was the pace of housing construction: housing starts declined in December, but were higher than estimates - 1.382 million against the forecast of 1.359 million.

On the side of US energy consumption, which is obviously correlated with the business cycle of the economy, there is a worrisome moment: both crude oil and gasoline inventories have been growing at a high pace for more than a week in a row. EIA data released on Thursday showed that oil inventories jumped 8.5 million barrels, indicating a sharp decline in oil refining, while gasoline inventories jumped 3.4 million barrels against a forecast of 2.5 million:

 
Screenshot-2023-01-20-at-17-14-38.png


The data will definitely raise the market's attention to any further signs of weakening activity in the US.

The ECB reacted sensibly this week to reports that a rate hike of just 25 basis points was being considered. Christine Lagarde repeated her recent hawkish rhetoric yesterday, and the minutes of the December meeting all but confirmed the growing pressure from hawks on the governing board. The details of the "deal" with a more moderate short-term outlook were quite clear: a conservative 50bp hike in December was acceptable only with a preliminary commitment of two increases of 50 bp in February and March. This is good news for the euro, and as long as the data from the US remains weak, EUR/USD should benefit from a rather favorable rate differential. A test of 1.0900/1.0950 is expected next week but things are pretty quiet today as the eurozone calendar is empty and Christine Lagarde shouldn't surprise with anything new as she speaks again in Davos.

The UK retail sales data for December was released this morning and was rather disappointing. The numbers are down about 1% m/m and follow another drop in consumer confidence, according to data released earlier this morning. GDP in the fourth quarter is unlikely to change. But continued weakness in consumption and some expected decline in other areas (possibly in construction/manufacturing) means GDP in the first quarter is likely to fall by more than 0.5%.

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.

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Weak UK PMI data points to further Pound weakness

Incoming data on the EU economy roughly correspond to the thesis put forward by the market that the bloc will be able to dodge a recession. The PMI index from S&P Global climbed into the positive zone in January, amounting to 50.2 points against the forecast of 49.8 points. Positive MoM dynamics is observed for the first time since June last year.

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A number of factors contributed positively to activity, from a faster slowdown in inflation and improved supply chains to mild weather that helped the EU avoid an energy crisis.

Activity indices in the EU's two largest economies, France and Germany, remained at levels below 50 points, but there was a surprising improvement in the service sector in Germany and in the manufacturing sector in France.

The ECB has already raised rates by 2.5% and is expected to make another 50bp hike next week. What happens after is unclear: some Governing Council officials suggest it may be appropriate to slow down the pace of tightening, others continue to insist on the need for significant increases. The hawkish ECB case in 2023 finds its justification mainly in a strong labor market: employment continued to rise in December, supporting high wage growth, which usually generates the lion's share of domestic inflation.

Unlike the EU, the situation in the UK is less rosy. The S&P Global PMI index for the British economy dived deeper into the recession zone, to 47.8 points in January against 49 points in December. This means that the rate of deterioration in activity has been accelerating this month:

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The negative momentum prevailed in the services sector, but manufacturers also reported that output declined in January at the fastest pace since the start of the pandemic. The pound fell by 0.6% after release of the index for January, market participants are beginning to price in the idea that the BoE will be forced to bring forward the point of time when it completes the tightening cycle. Traders are looking for another 50 bp hike, according to the current valuation in February and by 25 bp in March.

Additional pressure on the pound was also exerted by the publication of data on the UK budget deficit. It swelled by £27.4bn from a forecast of £17.3bn, an outcome that calls into question fiscal stimulus hopes, raising the risk of a UK recession in 2023.

From a technical point of view, GBPUSD has broken through the lower limit of the short-term range of 1.231 - 1.23, and now the next sellers' target is likely to be 1.2250. In the event that the price encounters weak resistance, there will be no potential bounce to 1.23 (which will already be a resistance zone) and the price will continue to move towards the main support at 1.22, as shown in the chart below:

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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.

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US data surprises helps USD to stage mini-rebound


Currency markets continue to remain in a relative equilibrium with FX majors fluctuating in fairly narrow ranges. US broad equity indices also lack direction, the key benchmark of the market, SP500, after two mini-selloffs to 3900 and 3960 in January, remains tied to the level of 4000 points. Oil (WTI benchmark) has been rising since the beginning of the year, but so far without serious prospects, facing strong resistance in the area of 82-82.5 dollars per barrel.

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The macro picture of the market suggests that investors are clearly waiting for the easing of the Fed's stance in the first quarter of 2023 in response to slowing inflation and somewhat deteriorating activity data, but doubt whether the reaction will be adequate to the risks that have arisen. On the one hand, if the Fed gets worried and signals a quick end to the tightening cycle, risk assets will continue to rise, and the dollar will go to new lows. On the other hand, if fears of an “inflation comeback” and confidence that the economy is strong enough outweigh among the policymakers, markets will likely price in Fed’s policy error that will accelerate the onset of recession, what will clearly be risk-negative event. Hence the absence of pronounced trends in the market, since it is not clear what the Fed will put at the forefront in this situation. This uncertainty will likely be the key near-term trading theme until the middle of next week, when the Fed will hold a meeting on monetary policy.

Thursday's economic calendar contained some interesting surprises, including unexpected strong growth in January in US durable goods orders (5.6% YoY growth, 2.5% forecast) and fourth-quarter GDP (2.9% QoQ, 2.6% forecast). Employment in the US continues to inspire calm, initial applications rose by 186K against the forecast of 205K. Slightly higher than the forecast were long-term claims for unemployment benefits - 1.675 million, the forecast was 1.659 million:

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Despite waves of sales, the dollar index is offered quite solid support at 101.50. It is worth noting that buyers' confidence in the dollar's rebound is falling, which can be seen from the gradual decrease in the amplitude of upward corrections in January, which forms the “triangle” pattern. This figure in a downtrend is often interpreted as a trend continuation pattern:

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Today's data helped USD to stage a mini-rebound that reflects reducing bets on a dovish outcome of the Fed meeting in February. However, the dollar index is unlikely to move into an uptrend now: bullish momentum can definitely lead to a breakout of the level of 102 with an upside correction to 102.2-102.3, however, the market is unlikely to take medium-term direction before the FOMC meeting outcome. A short-term tactic in this situation may be to short EUR, GBP and USDJPY with positions covered closer to the middle of next week.

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.

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EURUSD consolidates ahead of the FOMC meeting

The dollar index started the week on a rather pessimistic note, trading below 102 points, suggesting that the market is setting low expectations for a hawkish Fed outcome on Wednesday. A moderate correction is taking place in the risk assets as a reaction to a possible turbulence due to a series of central bank meetings this week. Major European indexes and futures for US indices are in the red on Monday. The price of gold, which has been a pretty good proxy for expectations for the Fed's interest rate path since the beginning of this year, is consolidating around $1925, also indicating relatively mild expectations for a dovish Fed surprise.
The dollar could come under pressure, with EUR/USD above 1.10 if the Fed makes a big surprise, in particular by saying that any additional rate hike after 25bp this week will depend on incoming data. However, the chance of such an outcome is low. It is more likely that the Fed will reject market expectations of a 50 basis point rate cut in the second half of the year, in which case the dollar will move into a short-term rally.


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             Potential EURUSD reaction following FOMC decision


In addition to the FOMC meeting on Wednesday, there are two important reports on the US economy on the US data calendar. First, the Fourth Quarter Labor Cost Indicator (ECI) is one of the Fed's preferred measures of price pressure in labor markets. This indicator rose to 1.4% in the first quarter of last year from the previous three months, but is expected to fall to 1.1% in the fourth quarter from 1.2% in the third. Any surprise upside here could see expectations shift towards a more hawkish FOMC decision. And on Friday, the US jobs report for January comes out.


Clearly this is a busy week for FX and perhaps most of the volatility will come from the results of Wednesday night's FOMC meeting and the ECB/BoE decision on Thursday. The opening of Chinese markets after the public holiday of the Lunar New Year should also add some volatility to Asian markets price action. Investors are very optimistic about China reopening its doors and will need more data this week to see if the potential recovery momentum in the Chinese economy remains. Tomorrow we will see the Chinese PMI for January, where a significant rebound is expected to support the bullish positions on Chinese risk assets.
The main view of the ECB meeting is that the central bank will remain hawkish and resist the 2024 easing. This should see EURUSD's 2-year swap differentials continue to narrow and be positive for EUR/USD. The narrowing of the swap differential is the main market factor in the EUR/USD appreciation.


Before the ECB meeting on Thursday, euro zone economic confidence figures for January will be published today. They are expected to improve slightly, but any upside surprises will fuel the hypothesis of lower energy consumption and strong fiscal stimulus to ensure recessions, if any, are mild.


A 50 basis point rate hike by the Bank of England could provide moderate support for the pound sterling. The base scenario for a 50 basis point upswing is not fully priced in by the market. And with wage pressures lingering and the impact of a low base not leading to a significant decline in the consumer price index until the second quarter, it looks like it's too early for the Bank of England to relax on the predictability of inflation. Depending on the state of the dollar after the FOMC meeting, by the end of the week GBP/USD may rise to 1.2500.

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.
 

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