Daily Market Analysis & Trading Ideas

[Analytix]

Rising Treasury Yields and Labor Market Resilience: Shifting Tides in U.S. Financial Markets



Yields on Treasury bonds have revisited recent local highs, compelling equity investors to reassess their discounted cash flow stock valuations. The yield on the 10-year bond touched 4.99% on Thursday, while the 2-year bond yield advanced to 5.25%. The market capitalization of major U.S. stock indices dipped by 1-1.5% yesterday, and today, there's cautious growth. However, the risks are skewed toward further declines.

Several robust macroeconomic reports on the U.S. economy today included initial claims for unemployment benefits, which increased by only 198,000, close to the current business cycle's low of 182,000, which began post-pandemic:

In the U.S., individuals classified as unemployed are those who have been unable to find work for more than four weeks. Thus, a decrease in initial claims for unemployment benefits suggests that finding employment has become easier. This aligns with the growth in job vacancies reported by the JOLTS agency. The latest figures indicated a sharp rise in job openings compared to the previous month:

When the influx of unemployed individuals slows down, it generally reflects increased household confidence in future income, leading to higher consumer optimism and a greater willingness to spend rather than save. In turn, this fuels economic growth.

Reduced initial claims for unemployment benefits also mirror increased corporate confidence, reflecting business owners' expectations regarding changes in demand for their goods or services. If they anticipate higher demand, they are more likely to increase their workforce.

However, the shift in U.S. Treasury bond yields does not entirely resemble a mid-term Fed cycle reassessment. Data on U.S. government debt ownership shows that China is actively reducing its holdings of U.S. debt obligations, with its share shrinking by another $16 billion in August:

Since the beginning of 2022, China has sold $235 billion worth of U.S. bonds. There is a risk that at some point, the correlation between U.S. Treasury bond yields and the U.S. dollar will shift from positive to negative. For now, though, investors are focused on incoming data on the U.S. economy and the Fed's response to this information.

Considering that the incoming data is increasing pressure on the Fed to signal another rate hike to the markets, there's a growing risk that the upward movement of the dollar will persist, and risk assets will face even greater pressure. Regarding the S&P 500, the risk of a retest of the lower trendline of the ascending channel is rising, as the initial failed attempt did not lead to a sustainable rebound and a return to an upward trajectory:

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.

 

[Analytix]

US Treasuries Surge as Yields Reach Critical 5% Level




US Treasuries Surge as Yields Reach Critical 5% Level

In a surprising turn of events, US Treasuries witnessed a sharp rise in demand, driving the 10-Year US yield to a key psychological level of 5%. The sudden surge was not attributed to any specific catalysts, such as new economic data or statements from Federal Reserve officials. Instead, it appears to be a technical pullback, where market participants on both sides recognized the critical importance of the 5% level.

Bill Ackman's comments, suggesting that the US economy might be weaker than it seems, played a role in bolstering the argument for Treasuries. Additionally, according to him, there is a growing sense of key risks accumulating on the downside. Another contributing factor to the Treasuries' rally is the pressure from foreign Treasury holders, who are slowly offloading their holdings, possibly in anticipation of a deterioration in US credit ratings or public finances.

As Treasuries surged, other asset classes responded. The US dollar index dropped to the vicinity of 105.50:

However, the dollar started to recover on Tuesday, causing the EURUSD pair to drift closer to 1.06, while GBPUSD moved to 1.22. USDJPY has been consolidating near the 150 level, a crucial threshold where the Bank of Japan (BoJ) or the Japanese government may initiate interventions to protect the yen.

Gold Corrects Despite Rising Yields

Despite rising yields, gold experienced a correction after nearly touching $2,000 per troy ounce. The price of gold tends to move inversely to yields, as it is a zero-yield asset. However, geopolitical tensions have been the driving force behind gold's rise, and there are no imminent signs that this trend will reverse.

Oil Markets and Currencies

Oil prices are teetering around the $90 mark on Brent, which is considered a significant resistance level. Lower oil prices provide relief for currencies of oil-importing nations, aiding them in their battle against the strong US dollar.

Equity Markets Show Signs of Recovery

US equities and European markets are showing signs of recovery, though gains remain limited to around half a percent. The S&P 500 (SPX) closed yesterday at its lowest level since early June and is currently trading below its 200-day Simple Moving Average (SMA), a key technical support level. This is the second test of the 200-day SMA, indicating that there may not have been enough bullish pressure to initiate a reversal from this critical level.

European PMI Indices Disappoint

European economic data added to the day's uncertainty, with German services PMI falling below 50 points to 48, and European services PMI dropping to 47.8, well below the forecast of 48.7 points. These weak data releases seem to coincide with the decline in EURUSD, suggesting that the market may be reacting to the incoming data. The increased risk of stagflation in the European Union creates additional dilemmas for the European Central Bank (ECB), complicating its monetary policy decisions. In PMI data, the 50-point mark divides contraction from expansion.

Dollar Index in a Descending Channel

Despite the apparent strength of the US Dollar (DXY), a closer look at the Dollar Index on the daily timeframe reveals a clear descending channel since it reached its high in early October. Considering market sentiment, there is a possibility that the price may gravitate towards the 105 level, where the lower boundary of the channel currently resides:

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.

 

[jjerrybm]

Global Economic Snapshot: China's Resilience, Surprising US Data, and UK Inflation Shockwaves


Significant improvements were seen on the macroeconomic front on Wednesday following the release of data from China. The third-quarter GDP growth came in at 4.9% on an annual basis, surpassing expectations of 4.4%. Industrial production (4.5% versus a forecast of 4.3%) and even often-underperforming retail sales (5.5% versus 4.9%) also exceeded expectations. Official unemployment in China has dropped to 5%. Among the key implications for global markets, we can consider improved forecasts for energy consumption (China being the second-largest net oil exporter) and a revision of growth forecasts for all major economies. This is because the growth of the Chinese economy largely reflects external demand for Chinese goods and services. Following this news, oil prices rose by more than 1%, with Brent crude testing the $93 per barrel mark, its highest since early October. Since the escalation in the Middle East, prices have risen by nearly 10%, putting pressure on countries heavily dependent on energy imports:

In the United States, retail sales figures released yesterday also exceeded expectations. September's growth compared to the previous month more than doubled forecasts. US industrial production also surprised on the upside, with a month-on-month increase of 0.3%. The Federal Reserve is striving to keep its policy flexibility, stating that more time is needed to assess the possibility of another rate hike this year. Richmond Fed Chief Barkin made this announcement yesterday. Meanwhile, US Treasury yields reached local highs today, with the yield on the 10-year bond reaching 4.85% and the 2-year bond hitting 5.24%, its highest level since 2006:

Today's inflation data in the UK also surprised on the upside, increasing the likelihood of a tightening by the Bank of England in the upcoming meeting. Core inflation came in at 6.1% (forecast 6%), while headline inflation reached 6.7% against a forecast of 6.6%. The report prevented the British pound from falling, and GBPUSD is consolidating near the opening level (around 1.22). However, the price remains within a descending channel with attempts by buyers to take the initiative:

From the chart, it's evident that the short-term resistance level for the pair will be around 1.2250. If it breaks and holds above 1.225 for at least a few days, the pound is likely to attract more buyers. However, if sellers manage to defend this level, pound weakness from a technical perspective may intensify, and the pair could head toward the recent low at 1.20.

The dynamics of European currencies are now heavily influenced by the conflict in the Middle East. Markets vividly remember the recession in developed countries caused by the energy crisis of 1973 when Arab OPEC members sharply reduced production to influence global prices in their favor. The markets are likely to be inclined to consider this risk now, preparing for further rallies, and the likelihood of this scenario increases with each new escalation.



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.

Thanks pok! the best

 

[Analytix]

Daily Market Update: US PMI Surprises, Currency Market Reactions, Oil Retreats, and Fed Chair's Balancing Act



US Dollar Resilience Amid Surprising PMI Data

The US Dollar, often at the center of the currency markets, exhibited resilience in the face of mounting bearish pressure. This defiance was fueled by the release of Composite PMI data from S&P Global, which exceeded expectations by rising to 51 points in October. This figure indicates a slight MoM expansion in both the manufacturing and services sectors in the United States, even as multiple headwinds and downside risks persist. The Services PMI, in particular, delivered a positive surprise, climbing from 50.1 in September to 50.9 in October, surpassing the consensus estimate of 49.8 points:

PMI data is a vital leading indicator for investors, providing valuable insights into economic health and potential trends. The Purchasing Managers' Index (PMI) measures business conditions, and a reading above 50 signifies expansion, while a reading below 50 suggests contraction. Investors closely monitor PMI data as it offers a glimpse into the direction of economic growth and can significantly influence financial markets.

Australian Dollar's Rollercoaster Ride

The Australian Dollar experienced a rollercoaster ride as inflation slowed less than expected in the third quarter, dropping from 6% to 5.4% year-on-year, slightly missing the estimated 5.3%. The initial optimism surrounding the possibility of RBA tightening gave way to the broader strength of the US Dollar, causing the AUDUSD to erase its gains. Compounded by a lackluster performance in commodity markets and renewed concerns over China's economic performance, commodity-based currencies like the AUD and NZD faced downside pressure.

Oil Prices Extend Retreat Amid Easing Geopolitical Concerns

The retreat in oil prices continued as the escalation of Middle East tensions began to ease, alleviating market concerns about OPEC supply disruptions. WTI oil prices found support near the $83 per barrel mark, effectively erasing previous gains that were driven by geopolitical instability. Market focus is now shifting toward data that may impact the outlook for oil demand.

Gold's Dance with Uncertainty

Gold, often seen as a safe-haven asset, exhibited a swift rise amid the Middle East crisis, which had driven investors toward safety. However, in recent days, Gold has been moving within a descending channel as buying pressure wanes, though sellers remain cautious:

Uncertainty surrounding the ongoing crisis continues to hang over the market, preventing a clear direction for this precious metal.

Germany IFO Business Climate Report and Its Impact on EURUSD

Germany's IFO Business Climate report exceeded expectations with a headline reading of 86.9 points, surpassing the estimated 85.9. However, despite this positive news, the Euro faced headwinds due to Dollar strength, driven by robust US data and rising yields. This dynamic played out as EURUSD struggled to sustain upward momentum.

Equity Markets and the Bond Yields Conundrum

European stocks and US equity futures remained under bearish pressure on Wednesday. Concerns about the potential rise in market interest rates (bond yields) were reignited by positive US data updates and the de-escalation of geopolitical tensions. While US stocks managed to stage a bounce on Tuesday, the influence of US rates may soon reassert itself.

Bond yields affect equity prices through the discount rate. When bond yields rise, it makes alternative investments, like bonds, more attractive compared to equities, which can lead to lower stock prices.

Fed Chair Powell's Balancing Act

The day ahead holds a significant event in the form of Fed Chair Powell's speech. Powell faces the challenging task of balancing the strong US data that implies the need for interest rate hikes with the Fed's desire to remain patient and gather more data. There is a recognition of the potential for policy transmission lags, which can skew the true impact of high interest rates and make additional rate hikes potentially harmful to the economy.



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.

 

[Analytix]

Market Update: Bond Yields Recede, Dollar Faces Downside Risks, and Labor Market Signals



Bond Market Dynamics: Yields Retreat and Fed Speculation

In the last couple of sessions, bond yields have been on a roller-coaster ride, witnessing declines both at the short and long end of the curve. The 10-year bond yield, which peaked at 5% last week, has now retreated to 4.62%, while the 2-year bond yield has fallen from 5.24% to 4.98%. These movements have significant implications, primarily due to their impact on the market's perception of the Federal Reserve's monetary policy.

The market has effectively priced out the possibility of a rate hike from the Fed in December, while expectations for rate cuts in 2024 have increased. This shift is attributed to the market's dovish interpretation of the recent Fed meeting. Chairman Jerome Powell's stance during the meeting raised doubts about the need for further tightening, given the batch of weaker-than-expected fundamental data on the U.S. economy this week. Key data points from the first half of the week, such as Manufacturing PMI, ADP jobs data, and an unexpected uptick in initial claims data, have all added to the argument against imminent tightening.

For instance, the unexpected cessation of the recent downward trend in unemployment claims data is noteworthy. The headline reading revealed 217K new claims, slightly missing the consensus estimate of 210K. The previous week's figure was also revised higher to 212K. Continued claims, an indicator of people remaining unemployed, ticked higher to 1818K, surpassing the 1800K estimate. Continuing claims has been on the rise from September indicating that difficulty in finding new job increases:

This rising trend in unemployment claims may signify a deterioration in the labor market, which, in turn, could have a dampening effect on inflation. The link between rising unemployment claims and the labor market's health is crucial. As more people struggle to find employment, it can lead to reduced consumer spending and demand, thereby acting as a potential brake on inflation.

Dollar's Bullish Momentum and Overbought Status

The U.S. dollar has displayed bullish momentum, reaching its highest level since late November 2022. However, it's essential to consider that the dollar could be considered overbought, especially given the Federal Reserve's proximity to the end of a tightening cycle, as indicated by Powell during the last meeting. This scenario suggests that the risks for the dollar are currently skewed towards the downside:

Non-Manufacturing PMI and NFP

Today, essential reports to watch are the NFP and the PMI report for the non-manufacturing sector from the Institute for Supply Management (ISM). The services sector, accounting for nearly 70% of U.S. output, is a vital indicator for measuring the overall health and direction of the U.S. economy. The consensus estimate stands at 53 points, slightly lower than the September reading of 53.6 points. This report, along with two additional PMI reports from S&P Global, though less crucial than the ISM's report, will collectively provide investors with a clearer picture of the U.S. economy's performance in October.

Consensus estimate for growth in jobs count is 180K, significantly less than stellar September print of 336K. The range of estimate is 125K – 300K. A reading below 100K should be the clear signal for dollar fall, however if jobs growth will be in line with estimates or slightly weaker, we are unlikely to see significant dollar downtrend. Wage growth is expected to decelerate from 4.2% to 4.0% and unemployment to remain unchanged at 3.8%.


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.

 

[Analytix]

US Market Rally Faces Crucial Test as S&P 500 Nears 4500 Points


S&P 500 and other US stock indices closed with a solid gain on Friday. After breaking through the bearish channel last week, the SPX index spent most of the week consolidating near the 4350 level, but on Friday, it made a confident leap, surpassing the 4400 mark. The rally since early November has been quite impressive, with SPX showing intraday growth, resulting in a 6.5% increase in its market capitalization, excluding two trading days. Such episodes in the index's history have been no more than 10.

The outlook for the continuation of the US market rally will depend on the upcoming economic data this week. Comments from Federal Reserve Chair Powell and other officials last week suggest that the Fed could raise rates again in December if the data indicates the need for such a move. Key reports this week include the Consumer Price Index on Tuesday, retail sales data on Wednesday, unemployment claims on Thursday, and housing construction data on Friday.

Expectations for headline US inflation MoM in October are set at 0.1%, while core inflation is expected to be at 0.3%, following the previous 0.3% in October. The sharp drop in gasoline prices this month is likely to trigger a "domino effect," reducing inflationary pressure in other categories, potentially keeping the overall Consumer Price Index and Producer Price Index near the previous month's level:

Preliminary statistics indicate a decline in car sales in October, and credit card spending has also fallen short of expectations, indicating a potential slowdown in consumer spending. US industrial production is also facing a downward impetus, as evidenced by the weak ISM index in the manufacturing sector, which is likely to impact the Producer Price Index (PPI) published on Thursday. Risks are also growing in the construction sector, considering that mortgage rates have risen to 8%, apparently acting as a catalyst for a significant slowdown in potential buyer traffic.

Regarding core inflation, market participants are likely to focus on two main components: service inflation and rental inflation (Shelter). Despite moderate overall figures last month, markets viewed changes in the CPI as a hawkish risk, given the accelerated inflation in the services sector.

As the SPX index approaches the key psychological resistance level of 4500 points, market participants may use the incoming data this week to secure profits, likely causing a slight correction before the market can readjust for a pre-holiday rally with a potential test of the 4500 level as a breakout point. A correction in the stock market would be a positive development for the dollar, which could strengthen up to the upper limit of the current bearish channel, corresponding to the 106.30 area:

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.

 

[Analytix]

US Inflation Report for October Alters Dollar Outlook


The latest US inflation report for October appears to have cast doubt on the prospects of a strengthening dollar in the medium term. Details from the report revealed that two crucial components of the index – the service sector and rental rates – experienced a sharp slowdown in price growth. Alongside the production price index, which indicated monthly deflation, these data significantly reduced the likelihood of a December Federal Reserve rate hike (futures are currently pricing in a 0% probability). Additionally, the market has begun factoring in the scenario that the Fed's rate cut in 2024 may commence earlier, with the overall size of cuts for the year exceeding previous expectations (now around 100 basis points). Despite a positive retail sales report, the situation failed to recover, leading to a dollar and Treasury bond yield collapse. The US dollar index has clearly formed resistance around the 104.50 level in the latter half of this week:

Unexpectedly weak initial jobless claims data were released on Thursday – a high-frequency indicator allowing assessment of the weekly pace of layoffs in the US economy. The number of initial claims rose to 231K, while long-term unemployment claims also increased more than anticipated, indicating that the job search difficulty for the unemployed continued to rise:

Following the release of weak labor market statistics, the dollar index fell to 104 but rebounded by the end of the day. Today, towards the end of the week, the downward movement resumed, though the 104 level is likely to hold. There was a surge in buying in both short-term and long-term Treasuries at the beginning of the European session, triggering dollar sales. However, closer to 104, selling pressure noticeably diminished.

Today also saw disappointing retail sales data in the UK and the Eurozone's second estimate of inflation, which met expectations. Considering the openness and size of the US economy, markets are likely to begin factoring in deteriorating economic data in EU countries, the UK, Japan, and other developed nations. The ongoing downward trend of the dollar, without clear signals from the Fed indicating a pause, will likely need to be accompanied by stability in economic indicators in those countries or positive surprises in the data. In this regard, attention should be directed to next week's Eurozone PMI data, scheduled for Thursday, and Japanese inflation figures, set to be released 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.

 

[Analytix]

Currency Market Analysis: Dollar Weakness, Bond Auction Strength, and Global Economic Signals



The dollar index continues its search for lows this week; however, seller activity has diminished as the market overall remains relaxed, given that this week marks Thanksgiving in the United States:

It is worth noting that the price has dropped below all three key moving averages (50, 100, 200-day), increasing the likelihood of a rebound next week.

The auction of 20-year US Treasury bonds showed strong demand on Monday. The fact that investors have shown increased interest in these securities, even after a sharp decline in yields over a short period and despite the uncertainty related to partisan opposition regarding the government budget (which undermines the impeccable credit rating of the USA), has become a signal for the market to buy bonds across all maturity spectrums. As a result, almost the entire US yield curve decreased by an additional 4-5 basis points yesterday, weakening the dollar.

Today, the market will trade the report on existing home sales in the US and the minutes of the FOMC meeting on November 1. According to the initial report, the consensus forecast is 3.88 million units, which, by the way, is the lowest value since 2010. The basis for such weak figures is the relatively high mortgage rate (around 8% for 30 years) and a low level of mortgage applications in October. Weak data will confirm that the high Fed rate is beginning to fully impact key macro variables.

The market is also focused on the yuan's revaluation, actively supported by Chinese authorities. Although China is trying to avoid its excessive devaluation, the rapid strengthening of the yuan, in pure economic terms, will not necessarily be beneficial, given the significant role of exports in the economy. Nevertheless, authorities actively support its strengthening, and today they set the reference rate stronger than expected – close to 7.14. A strong yuan pulls up the entire Asian currency bloc, which, in aggregate, may also have a negative impact on the dollar.

For EURUSD, today presents an opportunity to break through 1.10 on the potentially weak report on existing home sales in the USA, but consolidation is unlikely. To achieve this, we probably need to see a decisive reduction in the interest rate on the two-year US Treasury bond, which continues to stubbornly hold near 5%, even after a series of recent soft US data. Upward movement is also temporarily hindered by concerns that several European PMI indices due on Thursday will remind us that the weakness of the European economy has not disappeared and may have even intensified.

The Canadian dollar is awaiting an inflation report. A slowdown in growth from 3.8% to 3.2% is expected. Today, USDCAD is slightly in the negative against the backdrop of calm trading in the currency market overall. On the daily chart, technical figures formed by the pair resemble preparation for a downward breakthrough – a triangle near the lower boundary of the main upward trend. The inflation report may well contribute to this today:

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.

 

[Analytix]

Dollar Under Pressure: Assessing Markets and Trends in Light of Key Developments



Major currency pairs are treading water this Monday as markets gradually get back into the swing of things following the Thanksgiving Holiday last week. The AUDUSD saw a slightly more noticeable upward push, climbing 0.3%, exerting pressure against the 0.66 round level—the highest since August. The bullish sentiment on the pair is underpinned by better-than-expected data from China last week and signs of persistent price pressures in the Australian economy.

European equities kicked off the week on a weak note, with key EU stock indices drifting lower by 0.2-0.3%. US futures are also on a downward trend, although losses are capped at 0.5%. Equity markets seem to be taking cues from the crude oil market, where prices slumped due to concerns that OPEC may not reach an agreement on production quotas during the Thursday meeting, conducted remotely. Key crude oil benchmarks, WTI and Brent, both erased more than 1% on Monday. The decline may be associated with a worrisome demand outlook, adding pressure on risk assets.

Gold prices broke through the key psychological mark of $2K per troy ounce, continuing their upward march with a 0.6% gain. As mentioned last week, the breakout resulted from the second retest of the round level since October. The US interest rate outlook is turning more dovish due to the waning economic expansion momentum seen in the latest US data, leading to expectations of a less hawkish stance by the Fed. Gold prices are inversely related to expectations of real interest rate in the US as the demand for it is a function of the level of overall uncertainty about growth outlook and opportunity cost from not investing into risk-free assets (US inflation-indexed bonds, TIPS).

The US Dollar has retreated by 3.5% from its October peak, driven primarily by market perception that the Fed is nearing the end of its tightening cycle. This sets the stage for risk-taking behavior in equities, easing selling pressure in bond markets, allowing investors to put money to work in fixed income. Note that seasonal factor comes with minus sign into dollar equation in November and December which also an important technical bearish signal. As we noted in our previous technical analysis update for USD, Dollar index after breakout of bearish channel consolidated in a triangle which was eventually broken on Monday:

The current short-term outlook for the dollar suggests a heightened vulnerability to further decline, with the next significant support level anticipated near 102 level. This level could hold significance as it aligns with the upper bound of the previous medium-term bearish channel. The idea is that this bound will transition from strong resistance to support level.
It’s crucial for the markets participants to remain vigilant, as a breach of this level could signal a continuation of the downward trend, while its successful validation as support may introduce a shift into current trajectory.

The economic landscape this week appears relatively calm, with a scarcity of events that might attract widespread attention. Scheduled are comments from Fed speakers tomorrow (Waller, Bowman, Barr, Goolsbee), on Wednesday (Mester), on Thursday (Williams), and on Friday (Powell). Thursday will also bring unemployment claims, Beige Book, and Core PCE reports, while Friday sees ISM releasing the PMI report for the US manufacturing sector. Additionally, Thursday will feature flash estimates of Eurozone inflation, with the core figure likely decreasing from 4.2% to 3.9%, potentially lifting the Euro even higher against the 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.

 

[Analytix]

EURUSD at Crossroads Amid Economic Signals and Central Bank Developments


The EURUSD is approaching the 1.10 level, but a decisive upward breakthrough requires a change in the yield spread of short-term bonds between U.S. Treasuries and Eurozone securities. Despite the Euro strengthening against the dollar, the spread between 2-year Treasuries and German Bunds continues to consolidate within a range:

For the spread to start decreasing, incoming U.S. data must unequivocally indicate that the American economy is on a downward trajectory. So far, this hasn't happened; economic activity data has been mixed, despite signs of easing price pressures in the U.S.

Since the start of the week, the dollar has remained under pressure due to increased demand for U.S. bonds, increasing the supply of cash. Federal Reserve interest rate derivatives suggest the possibility of a rate cut in June 2024. Yesterday's U.S. home sales data allowed dollar sellers to focus their efforts, as the indicator fell short of forecasts, fueling concerns that high rates are starting to have a more noticeable restraining effect on economic activity in the U.S.

The dollar is likely to be sensitive to today's release of the Consumer Confidence Index from the Conference Board and the industrial index from the Richmond Fed. Several Fed officials, including Goolsbee, Waller, Bowman, and Barr, will also provide comments today. While the market has generally ruled out a rate hike in December, it's essential to note that the recent softening of the Fed's stance was aimed at dampening the rise in Treasury bond yields, which the Fed deemed excessive and tightening on the economy. As yields eventually pulled back (the 10-year bond yield dropped about 0.5% from its peak of 5% to 4.5%), the Fed's position must also "normalize" - officials will seek to maintain flexibility, resisting premature market expectations that the central bank will start tapering. This, in turn, could be a bullish factor for the dollar.

ECB President Christine Lagarde fueled expectations that the central bank would soon reconsider its bond reinvestment strategy during her speech to the European Parliament yesterday. Current hints from the ECB suggest that its pandemic bond-buying program (PEPP) will remain in the reinvestment phase until the end of 2024. However, there is a growing desire within the Governing Council to begin quantitative tightening, i.e., selling bonds from the balance sheet.

Tighter financial conditions usually have a positive impact on the currency, but this specific discussion about PEPP reinvestment may have an undesirable impact on the yield differential of Eurozone peripheral countries. The yield spread between Italian BTPs and 10-year German bonds is more than 25 basis points below the threshold of 200 basis points, but there are risks for Italian bonds in 2024 as fiscal austerity policies are reintroduced in the EU, slowing down the economy. The widening spread between "safe" German bonds and Italian bonds represents a key risk for the euro next year.

The Eurozone calendar is calm today, but there are several speeches by ECB representatives. Lagarde will present a pre-recorded message, and speeches by Pablo Hernandez de Cos, Joachim Nagel, and Philip Lane are also scheduled. The impact of ECB members' comments on the euro has been relatively weak, and the EURUSD exchange rate should remain almost exclusively dependent on the movements of the dollar and expectations of Federal Reserve interest rates. There aren't many catalysts for a break above the 1.10 level this week, and instead, the pair may dip to 1.09 before resuming its upward movement.


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.

 

[Analytix]

US Dollar Under Pressure: Analyzing the Impact of the Fed Statements



The statements made by the Fed officials on Tuesday prompted a mild sell-off of the dollar. At the beginning of Wednesday, the US Dollar Index (DXY) tested the 102.50 area, but during the day, it managed to recover from the decline, ending slightly positive. From a technical analysis standpoint, after breaking through the bearish channel, there could have been a speculative bearish momentum that is expected to dissipate near the 102 level:

Several Federal Reserve officials stated yesterday that there are signs of an economic slowdown, particularly in the deceleration of consumer spending growth. Indicators of activity in the US services and manufacturing sectors are also declining. Additionally, inflation is decreasing, but it's not enough to assert that the Fed has reached the peak of tightening. Clearly, past incidents of a resurgence in inflation after periods of slowdown compel officials to be more cautious in their statements and actions. However, these comments seem to have been sufficient to trigger another reassessment of inflation expectations and Fed rate expectations. From the second half of yesterday, the yield on the 2-year bond fell by about 20 basis points, and the 10-year bond by 15 basis points:

Powell's speech on Friday poses another bearish risk for the dollar and bond yields. Based on the tone of comments from other Fed representatives, it can be expected that Powell will also emphasize the need for a rate hike pause in December.

Against the backdrop of falling bond yields, gold gained further, aiming to test the next round level of $2050 per troy ounce. The S&P 500 futures also rose on Wednesday, approaching the 4600 level, the highest since August. Lower bond rates force investors to accept a lower expected return on stocks, leading to an increase in market capitalization.

The economic calendar on Thursday will be quite interesting: data on US inflation (Core PCE), Eurozone inflation for November, and Chinese PMI in the manufacturing sector will be released. The market will also pay attention to US unemployment claims 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.

 

[Analytix]

Eurozone Inflation Plummets: Euro and Pound Drop Amid Elevated ECB Rate Cut Expectations


The Dollar Index rose at the beginning of the European session, gaining about 0.3% in a short period, attempting to consolidate above the 103 level. The primary surge was driven by a decline in the Euro – EURUSD depreciated by approximately 0.5%. The pair is approaching the 1.09 level, having tested the 1.10 level yesterday but failed to hold. In the short term, the downward momentum is likely nearing exhaustion, as the price approached the lower boundary of a recently formed channel. Additionally, the RSI momentum indicator dipped into oversold territory:

However, upcoming reports from the U.S., particularly Core PCE and initial unemployment claims, could bring surprises given the recent increased volatility. It's advisable to await their release before relying solely on the technical picture.

On Thursday, data on China's manufacturing sector activity was released. The PMI indicator fell, contrary to expectations, with a slight worsening in industrial conditions – the corresponding indicator dropped from 49.5 to 49.4 points against a forecast of 49.7 points.

Data from the Eurozone on Thursday was mixed. Preliminary estimates for November showed a slowdown in inflation in France to 3.8%, below the forecast of 4.1%. However, October consumption dropped by 0.9%, contrary to the expected -0.2%. Unemployment in Germany increased by 0.1% to 5.9%, against an expected 5.8%. Headline inflation in the Eurozone slowed from 4.2% to 3.6%, and the core price growth decelerated from 2.9% to 2.4%, surprising the market with a lower-than-expected figure than 2.7% forecast. These inflation figures prompted a reassessment of expectations for the timing of the ECB's interest rate cuts, with the possibility of an earlier policy easing cycle. This, in turn, increased the attractiveness of the Euro against the Dollar, as expectations on Fed policy are a little bit less dovish. Some U.S. central bank officials even hinted yesterday at the possibility of another rate hike if incoming data necessitates it.

The weakened Euro also affected the British pound, as expectations for the British economy shifted towards a faster slowdown in inflation. The pound fell against the dollar by approximately 0.5%.

Later today, the Core PCE indicator will be released, and it could influence the position of European currencies if it indicates a faster-than-expected decline in inflation. The expected baseline is 3.5%, which is 0.2% lower than the previous value.

The market should also pay attention to initial unemployment claims, a key U.S. labor market indicator at the moment. An increase from 209K to 220K is expected. Last week, this indicator sharply declined against expectations of further growth, supporting the dollar as markets factored in inflationary consequences and a slower shift in the hawkish stance of the Fed towards a more dovish one. This week's figure will show whether the surprise of the previous week was significant or if the trend of rising unemployment in the U.S. is gradually gaining momentum.

During the New York session, Federal Reserve official Williams will attempt to influence the market, and increased volatility may be observed during the release of U.S. Pending Home Sales data, with an expected 2% decline in monthly terms.



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.

 

[Analytix]

Currency Shifts, Oil Decline, and Speculative Assets: Analyzing Market Trends and Powell's Impact in the Week Ahead


European currencies experienced a continued decline on Monday, with EURUSD finding support around 1.0850, and GBPUSD sliding from its recent peak of 1.27 to 1.2650. Both currency pairs have been consolidating near their local highs since the beginning of last week as the wave of selling the dollar started to taper off. This shift was prompted by changing expectations regarding the actions of the European Central Bank, following the recent EU inflation figures that indicated a significant decrease in price pressures across the bloc. Markets reacted by anticipating similar developments in the UK, putting a halt to the rise of the Pound. Additionally, relatively dovish comments from ECB officials on Friday suggested that, barring inflation shocks, the ECB's tightening cycle may be over, and the central bank could consider policy easing in 2024. The slowdown in EU inflation prevented interest rate differentials from narrowing, which would have favored the European currency. Over the past week, this spread increased by 10 basis points, rising from 1.8% to 1.9%. Interestingly, this spread has largely stayed within a corridor since September, despite the rise in the Euro, raising questions about the sustainability of the European currency rally.

The change in market expectations for short-term real yields in a country, all else being equal, impacts demand for its currency. When it declines, demand drops, and vice versa. However, it's crucial to assess the relative change in yield compared to the real interest rate in a country with similar investment opportunities. This is why the differential between EU and US expected real yields is crucial in evaluating the performance of EURUSD.

On another note, oil prices extended their decline on Monday, partly due to a disappointing OPEC agreement to extend production quotas released last week, indicating potential disagreements among OPEC members on production levels. Additionally, markets may be pricing in a European economic slowdown following unexpectedly dovish inflation figures, which could affect the energy market. From a technical perspective, prices are nearing the mid-November low, and the next support level will be the yearly minimums, particularly for WTI in the range of $68-70 per barrel.

Expectations that interest rates will soon fall have fueled bets on speculative assets like Bitcoin and safe-heaven Gold, which has an inverse relationship with rate expectations. Bitcoin surpassed the $40K resistance without significant resistance from sellers, while gold prices spiked and broke through the $2100 level, reaching an all-time high. Although gold prices later erased intraday gains, they continue to trade near all-time highs around the 2070 level. Remarks from Powell on Friday further supported gold, as he signaled the Fed's increasing confidence that no more rate hikes are needed to combat inflation, but they won't hesitate to act if inflation pressures rise again.

There's a growing consensus in the market that an inflation comeback is unlikely, and global central banks' monetary policies and credit conditions are expected to become softer in 2024. This environment is fertile ground for the rise of assets benefiting from declining investment opportunities and lower bond yields.

Looking ahead, this week is packed with fundamental data from the US. The market will be closely watching the ADP jobs report, services PMI from ISM, and the official unemployment report from BLS on Friday. The consensus estimate is 180K jobs, and a print near this forecast is expected to have a mildly negative impact on the dollar. A weaker-than-expected report could prompt a resumption of the upside trend in European currencies, with last week's decline seen as a pullback within the overall trend.

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.

 

[Analytix]

NFP preview: US employment resilience persists amid mixed labor market signals


In the latter half of the week, bearish pressure on European currencies has somewhat eased, with EURUSD consolidating in the range of 1.0750-1.08 and GBPUSD at 1.25-1.26. This hints that the upcoming direction may be influenced, to some extent, by the Non-Farm Payrolls, and the upcoming Federal Reserve meeting next week. Recent economic activity indicators in the EU have convinced the European Central Bank to signal that the tightening cycle is nearing its end.

Several officials from the Governing Council made unequivocal comments this week, stating that "further rate hikes are unlikely." However, market expectations for the ECB to shift towards rate cuts in March are deemed somewhat fantastical by one official. The market anticipates a 125 basis point reduction in the ECB interest rate by the end of next year, suggesting a relatively aggressive pace of rate cuts. From this perspective, the potential for further weakening of the European currency is limited, as incorporating anything more aggressive seems challenging.

The third GDP estimate for the Eurozone in the third quarter was revised downward again to 0%, contrary to the forecast of 0.1%. Weak growth was corroborated by EU retail sales for October, showing a year-on-year decrease of 1.2%, below the projected -1.1%. A surprising figure was Germany's factory orders, contracting by 3.7% on a monthly basis against the expected 0.2% increase. German economic exports also decreased by -0.2% in October, while a growth of 1.1% was anticipated for the month.

Shifting focus to the U.S. economy, all eyes are currently on the labor market as employment indicators are the only ones preventing markets to forget completely about the threat of inflation comeback. Alongside signs of weakening, some indicators are surprising on the upward side. One such indicator is initial claims for unemployment benefits, which, despite a gradual increase since mid-October, showed improvement in the latest report:

The extended claims for unemployment benefits, indicating the average duration of unemployment, sharply declined after a significant increase in the preceding week, from 1925 to 1861K against a forecast of 1910K. Earlier this week, market reactions were notable due to JOLTS job openings and ISM's services PMI data. While JOLTS indicated labor market weakness with a sharp decline in job openings (well below expectations), the services PMI surprised on the upside, with respondents noting an increase in hiring compared to the previous month.

Wednesday's ADP report showed modest job growth of only 103K, below the slightly higher forecast of 130K. Wage growth slowed, and weak job growth was observed in both manufacturing and services. Although the connection between ADP surprises and deviations from the unemployment forecast is weak, considering other indicators, risks for today's report lean towards a negative surprise.

What will happen to the dollar and risk assets if NFP job growth disappoints? A moderately lower-than-expected outcome will reduce divergence in the short-term policy stance between the ECB and the Fed, lessening the expected gap in the pace of monetary policy easing, providing clear support to European currencies. On the other hand, very weak or strong job figures may lead to dollar strengthening – the former due to risk aversion, where the dollar's role as a safe haven increases, and the latter due to an expected divergence in the pace of monetary policy easing between the ECB and the Fed.


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.

 

[Analytix]

Fed dovish pivot expectations shift to 1Q 2024 as November US CPI shows resilience

The foreign exchange market is churning today, with several key currencies experiencing volatility as investors digest the latest economic data and anticipate upcoming central bank decisions. Gold, the safe-haven asset, is feeling the heat after the release of US inflation figures, which reinforced expectations that the Federal Reserve won’t rush with much anticipated dovish pivot, preferring instead to leave this risk for 1Q 2024 meetings. This has boosted the US Dollar against a basket of currencies, while the UK Pound is under pressure following disappointing economic data. Meanwhile, the Japanese Yen is finding limited support despite improved business confidence, as risk-on sentiment prevails.

Gold Price Stumbles After US Inflation Data

Gold prices are struggling this Wednesday, losing its recent gains after the release of US inflation figures. While the 0.1% MoM increase was in line with market expectations, the annual figure of 3.1% suggests that inflation pressures in the US economy remain stubborn. This has somewhat provided floor for the USD, making gold a little bit less attractive as a hedge against inflation.

Fed Policy In Focus, USD Holds Firm

The US Dollar Index is hovering around 103.80, buoyed by the Fed's anticipated policy stance. While the central bank is widely expected to keep rates unchanged this week, market players are pricing in an 80% chance of a rate cut by May. This has pushed the US Treasury yields lower, but the USD remains supported in anticipation of the Federal Open Market Committee (FOMC) meeting and Chair Jerome Powell's comments.

UK Economic Data Dampens Pound Sentiment

The British Pound has taken a tumble after data revealed a sharper-than-expected contraction in UK GDP in October. This, coupled with a slowdown in wage growth (7.2% actual vs. 7.7% exp.), has fueled concerns about the country's economic outlook. Investors are now looking towards the Bank of England's monetary policy meeting on Thursday, hoping for clues about a potential shift towards a dovish stance.

JPY Struggles Despite Improved Business Confidence

The Japanese Yen is facing headwinds despite the release of positive Tankan survey data, which showed improved business confidence among large manufacturers. The prevailing risk-on environment is undermining the JPY's safe-haven appeal, while traders are also awaiting the Bank of Japan's monetary policy decision next week.

All Eyes on Fed and BoJ Meetings

The global forex market will remain fixated on central banks this week, with the Fed's policy decision and Chair Powell's press conference taking center stage today. The focus will be on the updated economic projections and any hints about the future path of interest rates. Investors will then turn their attention to the BoJ's meeting next week, seeking clarity on the future of the central bank's negative interest rate policy.
Overall, the forex market is navigating crosscurrents as investors weigh the latest economic data and central bank policies. While the US Dollar is finding support from the Fed's hawkish stance, the Pound and Yen are facing headwinds from their respective economic challenges. The upcoming central bank meetings will be crucial for determining the future direction of these currencies and the broader forex market.


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.

 

[Analytix]

Central Bank Meetings Overview: Igniting the Chase for Yield


This week saw a series of central bank meetings that delivered a plethora of surprises. In particular, the communication from both the Federal Reserve and the European Central Bank diverged from market consensus expectations. Strong data on the U.S. economy, including service activity indices (PMI), employment and wage growth in November, and changes in unemployment benefit claims in recent weeks, shaped expectations that the Fed would maintain a pause at its Wednesday meeting and initiate a discussion on monetary policy easing only in the first quarter of 2024. Additionally, there were hypotheses that the sharp decline in bond yields (risk-free rates, benchmarks for all other rates in the economy) in October-November would have a "heating" effect on the economy, delaying the onset of central bank rate cuts. However, the Fed didn't hold back; Powell, during the press conference, clearly stated that FOMC members had already begun contemplating and discussing how the rate would decrease in 2024. This became the first major surprise for the market. The updated central bank economic forecasts also worked against the dollar: Core PCE for 2023 and 2024 were revised downward compared to September, while real output increased for 2024. This provided an additional stimulus for market participants to increase demand for risk assets.

The second surprise was the signal of resistance from the ECB to market expectations of aggressive easing of credit conditions in 2024. Although the European Central Bank left the main policy parameters unchanged yesterday, Lagarde's statement at the press conference that the members of the Governing Council had not discussed rate cuts at all was a surprise. The element of surprise here was that incoming data on the European economy for October-November seemed to indicate a much more significant slowing impulse than in the U.S. For example, core inflation sharply slowed from 4.2% in October to 3.6% in November (forecast 3.9%), and GDP contracted by 0.1% in the third quarter. Considering that the ECB's sole mandate is to maintain price stability (inflation targeting), the fact that the sharp decline in inflation in November did not prompt a change in rhetoric became an additional argument in favor of the strengthening of the Euro yesterday.

One tangible result of the sharp shift in market expectations after the meetings of the two leading central banks was the decline in the spread in short-term bond yields between the U.S. and the EU, by more than 20 basis points over the last two days:

The pound sterling strengthened on Wednesday and Thursday by more than two percent after the Fed signaled a softer stance on rates ahead, while the Bank of England, at Thursday's meeting, emphasized that inflation risks persisted, so ruling out further rate hikes was not possible. Three officials out of nine advocated for a rate hike on Thursday, which was also a rather hawkish signal for the market (especially against the backdrop of the Fed decision). Both the bond market and interest rate derivatives revised their expectations for central bank policy easing in 2024 by approximately 7-10 basis points. This was enough to attract investors to British fixed-income assets, triggering an upward movement in GBP:

A highly successful combination for risk assets, particularly the U.S. stock market, was the combination of the Fed’s dovish signal and strong U.S. reports on Thursday. Retail sales in October grew by 0.3% for the month, beating the forecast of -0.1%, and initial jobless claims sharply fell again – to 202K against a forecast of 220K. The data unequivocally increase risk appetite in the market, and the prospect that this will be compounded by a chase for yield (i.e., speculative momentum) shifts short-term risks for the U.S. market towards further growth, at least until the end of the year.


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.

 

[Analytix]

Weak US GDP data points to dovish surprise in Core PCE report


The US dollar found itself on the back foot Thursday after a mixed bag of economic releases, including a downward revision to the third-quarter GDP growth estimate from 5.2% to 4.9%. The GDP Price Index also saw a downward adjustment, from 3.5% to 3.3%, indicating a smaller inflationary impact on growth than initially anticipated. While Initial Jobless Claims came in slightly below expectations at 205,000, the overall data failed to impress, contributing to a broad-based USD selloff in the afternoon.

EURUSD seized the opportunity to extend its recent rally, soaring above 1.1000 for the first time since early November. The softer dollar, coupled with growing expectations for a dovish surprise in the upcoming PCE data, fuelled the euro's ascent. Markets anticipate a smaller-than-forecast rise in the core PCE Price Index, potentially paving the way for a slower pace of Fed tightening and further euro gains. Should the data confirm these expectations, parity could be within reach for the EUR/USD pair.

GBPUSD fluctuated around 1.2700 after UK retail sales defied expectations with a 1.3% jump in November. This seemingly positive development was offset by a downward revision to Q3 GDP growth, which tempered sterling's enthusiasm. The pair's near-term direction likely hinges on the PCE data and broader risk sentiment. A dovish surprise from the data could lift the pound alongside global equities, while a hawkish tilt could trigger a pullback for GBPUSD.

The Japanese yen weakened after minutes from the Bank of Japan's October meeting reiterated its commitment to ultra-loose monetary policy. This stance, coupled with a modest dollar uptick, pushed USDJPY higher despite speculation about a potential policy shift in early 2024. The divergence in Fed and BoJ policy paths could cap further gains for the USDJPY pair, with yen bulls awaiting any hawkish signals from the BoJ in the coming months.

Gold prices climbed to a near three-week high above $2,055 before retreating slightly on a firmer dollar. However, the precious metal's appeal remains underpinned by the prospect of a global rate-cutting cycle in 2024, with the Fed potentially softening its hawkish stance after the PCE data release. Any dovish surprise could trigger a further rally for gold, while a hawkish tilt could lead to a temporary dip, presenting a buying opportunity for investors.

The Personal Consumption Expenditures Price Index takes center stage later today, with investors dissecting every detail for clues about the Fed's future rate trajectory. A dovish surprise could send the dollar tumbling and propel risk assets higher, while a hawkish tilt could trigger a reversal of recent trends. With central bank policies and economic data taking center stage across major economies, buckle up for a potentially volatile ride in global 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.

 

[Analytix]

Mixed Signals in the Markets: US Employment and PMI Reports Shake Things Up


The job report and Services PMI in the US gave the market a bit of a rollercoaster ride last Friday. The dollar flexed its muscles after the employment stats revealed the US added 216K jobs in December, beating the expected 170K. However, the November job figure got a downgrade to 173K. Unemployment held steady at 3.7%, defying expectations of a slight increase to 3.8%. The real surprise came with wage growth, shooting up by 0.4% for the month, outpacing the expected 0.3%. As we know, wage growth is a leading indicator for inflation, making the future outlook and the possibility of a Fed rate cut in March less clear-cut. Over the year, average wages in the US grew by 4.1%, beating the expected 3.9%.

But the dollar rally on the report was short-lived. EURUSD briefly dipped to 1.0880, but within an hour not only recovered but also trended upward. The US Services PMI report played a part in this turnaround. Service sector activity is a key leading indicator for economic expansion, responsible for about 70% of the US GDP and employing around 70% of the workforce. The overall Services PMI dropped from 52.7 to 50.6 points, but the hiring sub-index plummeted from 50.7 to 43.3. In other words, a significant number of respondents reported sharp hiring cuts in December compared to the previous month.

The component of new orders in the report also declined in December compared to November but remained in the expansion zone, i.e., above 50 points.

Analyzing the overall market reaction to Friday's stats, it seems the market put more weight on the PMI report. This isn't surprising, considering labor market indicators are lagging indicators – they reflect peaks and troughs later than business cycle indicators. On the contrary, survey indicators like PMI can preemptively signal a shift in a business cycle.

The mixed US stats were offset by Eurozone data. European inflation in December accelerated but less than expected – 2.9% against a forecast of 3.0%. Signs of slowing inflation increased the likelihood of the ECB adopting a softer policy earlier than anticipated, weakening the upward momentum of the euro. As a result, EURUSD continues to stabilize in the 1.09-1.10 range it occupied before the release of fundamental data.

An important event this week will be the release of the US inflation report on Thursday. The consensus forecast anticipates a slowdown in core inflation from 4 to 3.8% and an acceleration in overall inflation from 3.1% to 3.2%. Also, on this day, we'll get a batch of labor market data – initial claims for unemployment benefits. In recent weeks, their behavior has become ambiguous again – the weekly increase has started to decline and is nearing the minimum of the current business cycle:

As seen, US statistics remain quite contradictory, possibly because the disparity is evident when comparing leading indicators (survey data) and lagging indicators (such as labor market data). Therefore, markets are not rushing to reassess the chances of a Fed policy easing, which remains the main driver for all asset classes.

The dynamics of the dollar this week will likely hinge on the inflation report. Until Thursday, we can expect stabilization in current ranges. The EURUSD retest of the 1.10 level and the subsequent pullback vividly show that the market is not ready to determine the trend for the main currency pair just yet.


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.

 

[Analytix]

AUDUSD: Potential U-Turn at the Start of the New Year Fueled by Continued CPI Slowdown


The EURUSD's mid-term uptrend has hit the pause button, chilling in a tight range of 1.09-1.10 for the sixth day straight, hugging the lower edge of the trend channel:

Last Friday's dollar-buying signal, triggered by a robust NFP report that outperformed expectations in job growth, unemployment, and wage increase, got dampened by a pretty weak US Services PMI, especially the hiring component. It plummeted below 50 to 43.7 points, raising concerns that official labor market stats in the early months of the new year might take a hit (as PMI indicators are forward-looking). This, in turn, cranks up the pressure on the Fed to ease policy in March. So, last Friday, EURUSD reacted with a 'sawtooth' pattern, dropping to 1.0880 and later bouncing back to 1.10. This week's consolidation likely stems from uncertainty ahead of Thursday's US inflation report (CPI), which could set the forex trend for several days or even a week.

Technically speaking, the current EURUSD pattern – consolidation near the lower edge of a fairly lengthy uptrend (over two months) – often precedes a breakthrough below the lower boundary.

A slightly wider range is still forming for GBPUSD – the price has been waltzing between 1.26 and 1.28 for almost a month. The preceding trend to this range, like with EURUSD, popped up in mid-November when the market started to factor in a change in the Fed's QE stance in Q1 2024:

Today, the head of the Bank of England, Bailey, will speak, and the market will be watching to see if he leans towards taming inflation or preventing further economic slowdown. Recent economic output data showed that the UK teetered on the edge of a recession in Q3 2023 – GDP shrank by 0.1%. The BoE's latest communication expressed uncertainty about growth prospects in Q4, indicating rising pressure to shift the tone towards a more market-friendly monetary policy that boosts credit growth. However, compared to the EU and the US, inflation in the UK is higher, making the dilemma sharper for the BoE than for counterparts in other leading countries. Friday's data on monthly GDP changes, construction volumes, and trade balances in the UK should shed light on which alternative the BoE will ultimately lean towards.

A more intriguing situation is unfolding on the AUDUSD chart – since the new year kicked in, the price has switched to a downtrend, bouncing off a long-term resistance line:

Today, Australia's monthly CPI indicator was released – inflation continued to slow down in November, beating expectations at 4.3% on an annual basis against the forecasted 4.4%. In the recent RBA meeting, rate hikes were put on hold, citing the need to assess the effectiveness of the previous series of increases. The new price data increases the likelihood that the tightening pause will be extended, which should negatively impact the attractiveness of the AUD. Considering the technical aspect of the AUDUSD chart, the risks of further decline are growing.

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.

 

[Analytix]

US CPI: analysis of preliminary data points to potential upside surprise


The currency market and the US bond market are in a bit of a pickle, prices moving in tight ranges or resembling fading oscillations. It seems like all the hot info that came out recently is already baked into the prices:

Hopes for figuring out the next trend are pinned on today's US inflation report. Overall inflation is expected to pick up slightly, going from 3.1% in November to 3.2% in December. At the same time, core inflation (excluding food, fuel, and other volatile components), according to the consensus forecast, will continue to slow down, hitting 3.8% versus 4% last month. Markets are more sensitive to surprises in core inflation, as its changes have a stronger impact on the Fed's policy - central bank folks, including Powell, have pointed this out multiple times. The deal is, if you base monetary policy on highly volatile data, it's clear that the volatility of interest rates and other Fed policy parameters will increase. Clearly, this volatility will spill over into the economy and financial markets, which is definitely not in the interest of the central bank, whose task is to smooth out fluctuations. Check out the graph below showing overall and core inflation: the first one resembles swings around the trend, which is represented by core inflation.

To understand what to expect from today's report, consider the following points:

- The NFP report showed that wage growth exceeded expectations in December, coming in at 0.4% MoM compared to the forecast of 0.3%. Wage growth correlates with changes in consumer inflation.
- The New York Fed, which weekly forecasts the quarterly GDP growth of the US based on incoming stats, raised the forecast for the fourth quarter from 2.26% in early December 2023 to 2.54% at the beginning of January 2024.

Overall improvements in December data may indirectly suggest that inflationary pressure in the economy may have increased in December.

- Initial claims for unemployment benefits in December (an employment indicator) again fell in December.
- Consumer credit sharply increased in November - $23.75 billion (forecast $5.13 billion). This can be seen as a leading indicator of increased consumer spending in December.
- The University of Michigan Consumer Confidence Index jumped to 69.7 points in December - the second-highest reading for 2023.

Among the reports that could indicate a negative surprise in December inflation, only the US Services PMI stands out. The overall index dropped to 50.6 points, but a significant contribution to the decline came from the employment component, which plummeted to 43.7 points.

In general, preliminary data and the seasonal surge in consumer spending at the end of November and in December tilt the risks for the CPI report towards a positive surprise. However, in my view, this won't significantly and for long change the market expectations for the March easing of the Fed's policy: the market will prefer to wait for data for January and February. If the report disappoints, an asymmetric reaction is likely: the market will be much more willing to factor in a Fed rate cut in March. In this case, the dollar could start to decline intensively along with bond yields, and the search for yield will sharply intensify, allowing the US stock market to refresh recent highs: the S&P could head towards 5000 points.


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