official Daily Market Notes by Tickmill.co.uk

[tickmill-analytics]

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.

[tickmill-analytics]

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.

[tickmill-analytics]

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.

[tickmill-analytics]

Dollar Faces Resistance Amid Oil Price Swings

The rapid bullish advance of the greenback in the past few days has confronted some selling pressure near the 105 level on the US Dollar Index (DXY). Today, the index is treading water amid a pullback in oil prices following yesterday's OPEC+ decision. It's worth noting that currencies of energy-importing nations entered downside in response to rising oil prices, as the market factors in slower growth in the respective economies (mainly the EU, the UK, and Japan) due to increased base costs (fuel prices) and potential shift in trade balance towards deficit due to rising import prices. These are two fundamental factors that prompt investors to sell EUR, JPY, and GBP, as they did in the second half of last year during the energy crisis. Near the $90 per barrel level for Brent, prices have encountered some resistance, presuming that this level will stay intact for a while, dollar peers will likely regain ground temporarily as the odds of technical pullback will increase. In this scenario, a temporary correction of the dollar index to the 104-104.50 range seems quite likely:

Saudi Arabia and Russia have announced the extension of voluntary oil production cuts by 1.3 million barrels per day for another three months until the end of this year. Prices have surged, but it should be kept in mind that along with rising energy prices, growth forecasts will likely be revised downside. The current consensus suggests that the global economy has already passed its peak in the current business cycle and is now entering a period of moderation or, in the worst case, contraction. Therefore, rising base costs will be seen more as an additional burden rather than an indicator of expansion. Additionally, the fact that the market equilibrium is shifting due to supply side adjustments rather than demand growth underscores the vulnerability of the current oil rally:

In contrast, expecting a dollar turnaround in the immediate future is dependent on a dramatic, adverse market reevaluation of the pace of the US economy's development. In this regard, special attention will be given to today's US ISM Services PMI. As usual, the focus will be on the headline reading, as well as price and employment sub-indices. The overall index is expected to nudge down from 52.7 to 52.5 points, which would suggest a slight improvement in overall service sector activity compared to the previous month. However, if the index unexpectedly falls below 50 points, the bullish prospects for the dollar could be in jeopardy.

Regarding the European Central Bank's policy, the market is currently pricing in only a 25% probability of a 25 basis point rate hike next week. With the rising oil prices, the probability is likely to be revised upward as the meeting date approaches next week. Nevertheless, speculative positions on the Euro (a noticeable excess of long positions according to CFTC data, which may be liquidated) and the situation in the energy sector make the Euro vulnerable, and the EUR/USD pair could easily fall below the support level around 1.0700, heading towards 1.0650 intermediate support zone.

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.
 

[tickmill-analytics]

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.

[tickmill-analytics]

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.

[tickmill-analytics]

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.