Daily Market Analysis & Trading Ideas

[Analytix]

Better than expected China inflation hints US CPI report may deliver bullish surprise today


US bonds remain under selling pressure ahead of release of the US inflation report today. This makes it more difficult for yields to rise further in the event of a positive surprise, however, the near end of the curve may be more sensitive to the release, as the Fed, as we know, can only influence short-term market rates. In addition, inflation data may finally affect expectations regarding the Fed's decision to sell bonds from the balance sheet (quantitative tightening).

The first half of the week proved to be trendless for the dollar, the US currency erased gains fueled by the strong unemployment report published last Friday. There will be a major event today in terms of implications for Fed policy that is likely to be the most important not only this week, but even this month. The US CPI is expected to indicate a weakening in headline inflation and an acceleration of core inflation above 6% YoY.

Sustained high core inflation, which is more difficult to control via monetary tightening should be an argument in favor of the Fed's position, which says that much remains to be done to restore price stability. In addition, core inflation, in line with the forecast, should reinforce expectations that the Fed will raise rates by another 125 bps before the end of the year. If there is no significant acceleration above the forecast, which will be very unexpected, because preliminary data indicate a reversal in the price growth trend, then the impact of the report on the foreign exchange market will be limited to keeping dollar within its current range (106-107 on DXY). There is still a little more than a month before the Fed meeting in September, and if volatility remains low, interest in carry trading will additionally provide moderate support to the dollar due to the fact that the supply of low-yield currencies such as EUR and JPY will increase.

EURUSD continues to dangle near annual lows, and apart from an increase in expectations of easing of the pace Fed's tightening, there are no reliable fundamental grounds to hold bullish view on the pair. Geopolitical risks and uncertainty in the EU's energy security continue to be a source of significant premium in the common currency. Since there are no reports on the EU economy today, the movement in the pair will most likely be tied to the release of CPI. The decrease in potential volatility in currency options suggests that the market has no desire to test lower levels (1.00-1.01). At the same time, technical analysis indicates a gradual increase in pressure from buyers after the main rebound wave, which increases the chances of an upward breakout:

The decline in inflation in China in June, both manufacturing and consumer, increases the chances of seeing a favorable outcome for the markets of the US CPI release today. Today's report on China showed that consumer inflation was 2.7% against the forecast of 2.9%, manufacturing inflation - 4.2% against the forecast of 4.8% in July.


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 breaks bearish channel on the CPI report signaling about possible medium-term reversal



Equity markets made another leap upwards amid a buildup of expectations of a slight dovish shift in the Fed policy. This was facilitated by release of the US July CPI, which showed that inflation in July decelerated faster than expected. Core inflation remained unchanged at 5.9% (despite expectations of acceleration), headline inflation slowed down by 60 bp. to 8.5%. The main contribution to the easing in headline inflation was expectedly made by fuel and gasoline prices:

The decline in gasoline prices eased inflation pressure in transportation services as well, where prices declined 0.5% MoM. Some cooling of consumer demand occurred in the market of used cars, where monthly deflation of 0.4% was observed. Clothing prices inched lower by 0.1%.

The dollar lost about 1% yesterday against a basket of major currencies as the CPI report dented prospects of 75 bp rate hike in September. The odds, according to rate futures, have fallen below 40%, the base case is now a 50 bp rate hike. In the Treasury market, the shift in expectations did not last long, largely thanks to the comments from Fed officials (Evans and Kashkari), who, after the release of CPI, continued to develop the recent line of rhetoric of the Fed - the chances of US recession are low, the fight against inflation is not over and policy easing is not expected next year. Yield to maturity on two-year US bonds fell by 20 bp after the release, but recovered 15 bp towards the end of the day. Today the short-term bond trades at around 9 bp below the yield, which was before the release of CPI (3.28%).

A real shift in market expectations and the Fed policy should probably be expected after two key indicators of inflation trend - shelter prices and wages - show signs of slowing down. The first one is important because it is the most "sticky" among all inflation components, the second - because it is a leading indicator of cooling of consumer demand. As long as the imbalance in the US labor market persists, and it generates wage inflation, the Fed is unlikely to change its rhetoric, given how the central bank damaged its reputation with a belated start of tightening and huge underestimation of inflation persistence in the first half of 2022.

The next major event for those who follow the Fed's policy will be the Jackson Hole Symposium August 25-27, which is famous for central bank officials sharing their strategic views on how monetary policy should be conducted.

On the technical side of EURUSD chart, as expected, market made a breakout from the bearish channel following formation of the wedge pattern, and today a test of the key resistance line took place, which until the beginning of July acted as support (1.04). The prospect of EURUSD movement further up will be determined by a potential breakout of the line and the possibility of fixation above it:

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]

Three key factors of short-term support of the Dollar


Foreign trade indices of major energy importers continue to hit new lows and markets are increasingly focused on how governments will respond to rising natural gas prices. At the same time, the weakening of the yuan and a number of potential upside surprises for the US economy today decrease the odds of a bearish dollar correction after the rally.

There are now three factors of short-term support for the dollar. The first factor is the supply shock on the gas market, which drove up gas prices, due to which large importers (EU, Asian countries) are faced with a situation where import price increases significantly outpace export price growth, which is a negative income shock. Governments are expected to take measures to mitigate the blow to the economy and what they offer will impact growth outlook, and hence real yield outlook offered by domestic assets. In turn, these expectations will form the demand for national currencies. So far, there are no tangible support measures, so currencies such as the Euro, Pound Sterling and the Yen are again under serious pressure. The US economy is relatively insulated from a gas supply shock by being less dependent on external energy supplies, which is factored into additional demand for the US dollar.

The second factor is a signal from the Chinese Central Bank that the economy needs a weak yuan to stimulate the movement of the economy towards its goals. PBOC cut the medium-term lending rate by 10 bp, which was a signal for USDCNY buying. In a few days, the price added about 1% approaching 6.80 and now the attention is on whether the Central Bank will further weaken the reference rate:

Earlier in April, when USDCNY surged 6%, the dollar rose against a basket of major currencies by about the same amount as well, suggesting that the situation with monetary stimulus in China will also act as a support factor for the dollar.

Data on the US economy, which has been surprising on the upside in August, may also be an argument in favor of a strong dollar. Today and tomorrow the reports are due on industrial production and retail sales. Given that the sharp drop in gasoline prices is a positive shock to both supply and demand (lower costs, more consumer spending power), the risks on these two reports are skewed towards a positive surprise. The Fed will put out the Minutes of the last FOMC meeting, given hawkish FOMC members’ bias, despite favorable signals in inflation, a hawkish surprise tomorrow cannot be ruled out.

The news that the German government is imposing a gas levy suggests that the government doesn’t have enough means to smooth out the shock and also that inflation may be more persistent. In turn, this may require more tightening by the ECB, however raising rates in a period of fragile growth creates the risk of an accelerated slowdown in the economy. EURUSD is likely to retest 1.00 given the failed upside breakout of the medium-term bearish channel and subsequent downside breakout of the key short-term uptrend line that guided EURUSD recovery after the parity test, indicating that the next support should be expected at the level of 1.00:

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]

FOMC Minutes: strong dollar will help to weather tough period of high inflation


The level of 107 in dollar index (DXY) remains a hard nut to crack as a bullish retest failed yesterday, the Fed Minutes did not work as a catalyst for a sweeping move, although there were some solid grounds to expect an increase in hawkish rhetoric. Nevertheless, key takeaways from the report argue in favor of a strong dollar, which we will discuss below.

The minutes of the July FOMC meeting showed that the policymakers welcomed strengthening of the dollar, for the simple reason that it is a strong national currency that is an efficient way to contain import inflation. Given the negative US trade balance, the expensive dollar came in handy to keep inflation from accelerating even higher. The Fed does not think that a strong dollar is hurting the economy or somehow suppressing its growth. Therefore, it is now in the best interests of the Fed to shape policy so as to get through a period of high inflation with a strong exchange rate.

The report said that weakening euro was the key driver of dollar appreciation, which the Fed believes was the result of widening real yield differential. Nominal 2Y US-Bund yield spread rose to the highest level in three years with the yearly peak seen on August 1 (2.87%):

To expand room for maneuver, in case incoming US economic data warrants slowdown or pause in tightening, there was a mention in the report about the risk of overdoing rate hikes and QT. This, in fact, was behind dropping forward guidance at the last meeting - now the Fed is talking less about its medium-term tightening plans and instead urging markets to focus on incoming economic data in order to understand what to expect at the upcoming meeting. Essentially, this means a risk that the Fed can put less pressure on the brakes by slowing down the economy to dampen inflation, and given that this will happen in the world's first economy, growth in the rest of the world may also be suppressed to a lesser extent. Consequently, currencies that rise during the boom phase of business cycles gain a support factor.

There are three events ahead of us that will help to gauge the odds of 75 bp rate hike in September. These are the Jackson Hole Symposium (August 25-27), the August NFP (September 2) and the Inflation Report (September 13).

The exchange rate of the European currency, the pound and the yen has now become almost entirely a function of gas prices, which in turn depend on the level of tension in relations between Russia and the EU. A ceasefire or a truce in Ukraine will help reduce tensions, so markets can be very sensitive to any signals in this direction. Turkish President Erdogan has once again volunteered to extinguish the flames of the conflict, with reports that he will try to convince Ukrainian President to agree for a temporary ceasefire at a meeting in Lvov on Thursday and even try to revive the Istanbul negotiation process. The markets' attention may be focused on the news after the meeting.

The economic calendar today is not particularly interesting. The final estimate of inflation in the EU for July remained unchanged. US jobless claims data and business data from the Philadelphia Fed may draw some attention. Among them are indices of hiring, new orders, prices paid, and investments in fixed assets. The overall index of manufacturing activity is expected to rise from -12 to -5. Later in the evening, the speeches of the Fed officials, George and Kashkari, are due.

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]

Hawkish ECB hints in Jackson Hole help EURUSD to regain ground above parity

Eurozone money markets on Monday point to a sharp strengthening of expectations that the ECB will raise rates by 75 basis points in September, as the ECB officials signaled over the weekend that they were ready to take a drastic step to quell inflation.
Among the ECB representatives who spoke at the Jackson Hole symposium, Isabelle Schnabel gave an important signal. She said there is a growing risk that public inflation expectations will deanchor (which would dramatically reduce effectiveness of the ECB monetary policy), while surveys show that high inflation is beginning to undermine credibility of the central bank policy.

Other officials noted that front-loaded rate hikes (rather than based on incoming economic data) are justified, and that the neutral interest rate (at which the tightening cycle should end) may be somewhere near 1.5% and should be reached by the end of this year or by the end of the first quarter of 2023.

Traders in the EU money markets factor in a policy tightening of around 67 basis points in September. This means that there is no doubt that the ECB will raise rates by at least 50 basis points in September, and the chances of a 75 bp increase are estimated at 67%. At the same time, on Friday, the chances of this outcome were only 24%.

Along with the strengthening of expectations that the ECB rate will increase rapidly, the yield of the EU's key sovereign bonds - the German Bunds - also increased markedly. On Monday, two-year German bonds offered a yield of 1.16%, up 19 basis points on Friday, the highest since June 17. The far end of the yield curve also climbed, with 10-year bonds offering a yield of 1.54%, the highest level in two months:

Market rumors that the ECB will act decisively should offer solid support to European currency until September, so EURUSD move towards 0.95 will most likely hit roadblocks. The divergence in expected pace of policy tightening is clear from returns of EURUSD and GBPUSD in recent days: while the pound has dipped more than 1% against the dollar since the middle of last week, recovering somewhat later, the European currency has gained 0.6% over the same period:

The likely tightening of the ECB's policy has also created additional strains in the EU sovereign debt market. A key indicator of credit risk in the bond market, the spread between Italian and German bonds widened to 2.36%, the highest in a month. In the event of an excessive increase in the spread, the ECB will have to use the monetary policy transmission protection mechanism (TPI), which consists in buying bonds of those countries of the block where yields grow excessively due to irrational reaction of investors. This measure will reduce the cost of borrowing for the countries of the bloc's periphery, such as Italy, Greece, Spain, etc.

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]

There are few reasons to short greenback right now and here is why


The Eurozone economic sentiment indicator decreased modestly from 98.9 to 97.6 points in August. Both industry and manufacturing saw deterioration in economic activity. At the same time, expectations of a recession in the economy lead to more moderate forecasts for higher inflation on the back of consumer spending in the coming months.

Economic sentiment in the Eurozone fell in August

A recession is looming in the Eurozone and businesses are becoming increasingly pessimistic about how economic activity will develop further. Industrial output and services declined significantly in August, while leading indicators such as new orders are falling rapidly. Hiring rates have also slowed, which is also a clear sign of a slowdown in economic activity in the bloc. Although hiring expectations remain above the long-term trend, the economy will likely not be able to avoid a moderate recession this quarter.

Interestingly, producer and service price expectations have been declining for the fourth consecutive month in response to weakening demand, which may indeed indicate that inflation has peaked and will now decline due to declining consumer demand. The big question is the impact of electricity and fuel prices on the margins of firms, which in turn could make core inflation more sustainable, as producers will be forced to compensate for the pressure by raising or holding prices.

The Fed continues to tighten monetary policy in order to ease consumer demand pressure on goods and services markets which in turn should affect inflation, pushing it to a comfortable 2% level. The reaction of the stock market to Powell's speech at Jackson Hole was basically a surge in concerns that signals of weakening growth in demand in the US economy and some slowdown in inflation will not be able to knock the Fed off course, which will continue to increase interest rate at quite a rapid pace. Following a 4% drop in major US equity indices, Neil Kashkari said he was pleased to see such a dynamic, hinting that the market decline would also dampen consumer demand through a welfare effect. This Fed stance suggests that markets should not hope for an easing of the pace of policy tightening, so the prospects for a new rally raise a big question, and if the upcoming earnings season won’t be as positive as expected, the bear market will most likely return. The main beneficiary of this situation is the dollar, so it is not worth shorting it now, the likelihood of a further rally is quite high. The Fed also doesn't mind a strong dollar, as it helps fight import inflation, which is largely generated by high energy prices.

Strengthening dollar and equities downside due to rising yields in an alternative asset class - bonds - is only one side of the coin. The other side is the risks of a gas crisis in Europe and the depreciation of the yuan. USDCNY topped 6.92 pointing to problems in the Chinese economy, despite the lack of clear desire of PBOC to weaken the yuan.

Key reports on the economic calendar today will be the US consumer confidence report from the Conference Board and data on fuel prices in August. Against this background, the dollar index is likely to remain above the key short-term support zone (108.50):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Analytix]

EURUSD remains glued to parity on expectations of uber-hawkish ECB this week


European asset markets started the week with a fresh round of downside as Gazprom said gas supplies via Nord Stream 1 pipeline would be suspended indefinitely. The currencies of the European continent expectedly came under pressure and the fiscal aid packages announced by the European governments are unlikely to reverse the bearish trend.

The end of last week looked encouraging after release of US labor market data, however, the announcement of Gazprom late in the evening that the gas supply via Nord Stream is being frozen for an indefinite period reversed the risk-on move. And although European countries have made some progress in filling gas storage facilities in preparation for winter, the signal of a complete shutdown of supplies means that the way up for gas prices is open, i.e. new shocks in the market are inevitable.

Over the weekend, the authorities in Sweden and Finland announced liquidity guarantees for large utilities companies, signaling that they do not want the fire in the energy market to spread to the financial sector. Indicators of financial stress in the EU, such as the spread between the interbank lending rate (Euribor) and
ESTR does not yet indicate an increase in risks in the market, being at a relatively low level. However, it is clear that international capital will rather try to avoid European assets.

Risk-free fixed income instruments, i.e. Treasuries are now offering 2.3%, while the energy risks for the US economy are low, due to independence from supplies from foreign markets, so it is clear where the focus of investors will be now. From here we can expect a stable investment-motivated demand for the dollar. The Japanese yen has lost the status of a safe haven, as the energy crisis has taken away from Japan the main argument why it is worth buying in yen at a time of instability - a trade surplus due to the rapid growth in the cost of imports and weakening of exports.

This week there are several significant events that can cause volatility in the market. These are the RBA meeting on Tuesday, speeches by a number of EU, UK and US central bank officials on Wednesday, the Bank of Canada meeting on the same day, the ECB meeting on Thursday, and inflation data in China on Friday. The ECB meeting deserves special attention as the market is discussing a possible rate hike of 75 basis points, which represents a very aggressive pace of tightening. The expectations of this outcome have not yet been fully factored in the market, therefore, if this outcome is realized, we can expect a positive reaction from EURUSD. A rate hike of 50 basis points is likely to disappoint, causing a fairly large decline (0.965-0.960):

Germany's attempts to help the economy through a fiscal package of 2% went almost unnoticed by the market, since compared to the package of 15% of GDP at the height of the pandemic, this is a very insignificant amount.

GBPUSD fell below 1.15 and the March 2020 low was already in sight, when the rate was 1.1410 at the lowest point. Today the market will follow the appointment of a new prime minister - most likely it will be Liz Truss. She previously spoke of a £100bn fiscal bailout. In moments of crisis, loose monetary policy has a beneficial effect on the exchange rate, so now, if expectations of rate hikes rise due to the fact that the government with fiscal support has entered the game, they can, on the contrary, weaken the pound. In the near-term, from the point of view of technical analysis, a test of the March low (1.141) is possible, followed by a rebound to 1.15-1.1550:

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]

Fiscal packages in response to energy crisis untie the hands of ECB, Bank of England

Chinese renminbi, being in a free fall, started to worry China central bank, which eventually responded quite decisively, reducing reserve ratio for banks from 8% to 6%. The new policy change will come into effect on September 15. The lower RRR will free up additional liquidity for banks, allowing them to increase lending, thus boosting economic activity. In addition, this measure should spur the flow of foreign exchange liquidity to the currency market, which will reduce speculative pressure on yuan.
Since the beginning of August, the yuan has depreciated about 3% against the dollar, reflecting growing investor discomfort that weakening external demand for Chinese goods, costly measures to combat covid (large-scale lockdowns) will pressure local assets’ expected returns. This in turn, led to decline in investment demand for Renminbi. It is worth noting that this is not the first time this year that the PBOC has reduced the reserve requirement ratio. The last time it happened was on April 25, when PBOC cut the RRR by 1%, from 9% to 8% after the yuan collapsed against the dollar by 3% in one week.

Large US investment bank Goldman expects the dollar to rise further in the medium term. Along with systemic risks associated with an overheated real estate market in China and Covid restrictions, this should keep CNY under pressure and pushing USDCNY above 7.0 mark. In addition, according to the bank, PBOC may reduce interventions in foreign exchange market after the 20th Congress of the CCP, which will clear the way for further CNY devaluation.
European stock markets opened higher and European currencies bounced off their lows. The key driver behind the rally are measures being rolled out by European governments in response to unfolding energy crisis. Market sentiment has been buoyed by the plan to freeze utility bills at the current level outlined by the British Prime Minister Liz Truss yesterday. The new price containment mechanism won’t be operational until next month and will cost the government £130bn over the next year and a half. In addition to fiscal stimulus, the market is also pricing in the idea that the Bank of England will have more room to hike interest rate.

Germany, Sweden and Finland took a slightly different path. They saw main risks in the spillover effects on financial sector so their countermeasures are focused on isolation of the energy shock by introducing special credit facilities for enterprises that have been hit. Energy companies in these countries have received additional cheap funding that will allow them to stand on their feet and not provoke a cascade of margin calls in the financial market.

Against the backdrop of the measures taken, EURUSD and GBPUSD rose by an average of 0.4%, Cable traded against Dollar above 1.16, but then rolled back to 1.1550. There is still much potential for upside for European currencies in the short term as market is likely to price in less constraints on aggressive tightening by the Bank of England and the ECB. This should potentially help to narrow interest rate differential with the Fed and thus take away some advantage from the greenback. Looking at the GBPUSD technical picture there is clearly a room for fresh leg higher as the price broke through short-term downward channel and now look poised to test upper bound of medium-term bearish corridor:

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]

Markets brace for bullish CPI but room for the risk rally is limited


Dollar retreat eased pressure on oil prices as Brent price flirted with $95/bbl level on Monday. Despite the bounce and momentum that may drive prices higher, there are clear bearish risks for the market. The key among these is China's "Zero Covid" policy, which has been creating demand shocks, driving up price volatility.

The latest data on US strategic oil reserves showed that storage facilities were empty by 8.4 million barrels last week to 434.1 million barrels. This is the lowest stock level since 1984. The current plan to use reserves to smooth impact of energy price shocks will run until the end of October, then the question of extending the plan will arise, which the market will probably be watching closely. Gasoline and utility prices have already shown how they can accelerate headline inflation, thereby having a hand on shaping the Fed policy.

Europe, on the other hand, continues to develop a plan for interventions in the energy market and easing of imbalances. It will include energy rationing, a windfall tax on energy companies, utility bill offsets for individual consumers, and cheap lending facilities for vulnerable companies. The document is expected to be made public at the end of September and expectations that the EU will be able to demonstrate an effective reduction in dependence on energy imports from Russia may now act as a support factor for the Euro, as well as risk assets denominated in this currency.

The technical picture for oil indicates rising odds the price will retest the resistance at $100 per barrel on Brent. To do this, the price must rise and consolidate above the key trend line shown in the chart below:

The dollar continues to be under pressure ahead of the CPI release, while equities show a fairly confident growth. The S&P 500 posted its best four-day performance since June. The inflation report is expected to point to a slowdown in headline price growth and an acceleration in core inflation, which does not include prices for food, fuel and certain other commodities that fluctuate significantly from month to month. The market is also positively reassessing the risks of the energy crisis for the EU economy, which was triggered by the ECB's optimistic forecasts for this and next year, published at the last meeting. The regulator ruled out a recession next year, predicting a modest 0.9% economic growth, which came as a big surprise.

The highlight of economic calendar next week will be the Fed meeting, and officials cannot comment on the week preceding it, so the markets will have to assess the impact of CPI on interest rate path and QT with officials’ clues. However, it is useful to remember, for example, Bullard's statement that a good CPI report will probably not affect the outcome of the September FOMC meeting. An equally important source of policy-influencing data for the Fed - household inflation expectations – made another step in the desired direction, showed the report on Monday. One-year inflation expectations slowed in August to 5.75% (6.2% in July), three-year inflation expectations fell to a two-year low of 2.8% from 3.2% in July:

The futures market estimates the probability of a rate hike of 75 bp in 93%, the probability of a smaller increase (50 bp) is only 7%.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Analytix]

Ways of inflation are inscrutable


The US inflation report came as a big surprise to many investors as despite solid signals for a drop below 8% (decline in new car sales, falling gasoline prices), headline inflation was quite persistent, inching lower marginally to 8.3%. Core inflation accelerated more than expected - from 5.9% to 6.3%, beating forecast of 6.1%. The report came as a shock to the market, with expectations of the Fed terminal rate (where the tightening cycle is expected to end) revised up by 25 bp to 4.3%. A pronounced reaction took place in forex and the stock market: the main US stock indices fell by 4-5%, the capitalization of Nasdaq, where assets are the closest substitutes for Treasuries in terms of duration (time-weighted cash flow for the asset), plunged the most. The index erased almost 6%.

The situation is increasingly reminiscent of the 1980s, when high inflation raged in the United States and the then head of the Fed, Volker, raised the rate to 15%, sending economy into recession. Of course, it is now difficult to imagine that the Fed rate could ever be above 10%, nevertheless, the impact of the CPI report on expectations for the Fed terminal rate was significant. The two-year Treasury yield rose to 3.8%, while ten-year Treasury yield advanced to 3.45%. These are the new yearly highs:

The idea that the Fed may be forced to remove monetary support at a more aggressive pace reinforces expectations that the US economy will face faster deceleration in growth rate, with growth risks spilling over to weaker economies as well. Rising dollar borrowing costs create downside risks for developing countries' sovereign debt. Based on this, the forecast for developing currencies becomes less favorable - investors may begin to reduce exposure to EM sovereign debt in their portfolios with outflows putting pressure on national currencies.

One of the signs of the late phase in expansion - the yield curve inversion (the spread between the yields of 10 and 2-year Treasury bonds) reached a new extreme point after the release of CPI. The spread was down to -34 bp. The movement of the spread deep into the negative zone is usually accompanied by a strong dollar, as the demand of investors for the US currency as a heaven asset increases.

The release of the CPI made it virtually indisputable that the Fed will raise rates by 75bp in September. The market has even begun to price in an outcome where the Fed will raise rates by 100 bp! The chances of this outcome are now 36%:

Investors will also be on the lookout for clues as to how the pace of hikes will change at the meeting following the September decision. It is quite possible that the pace of tightening will remain at the current level of 75 bp.

Other central banks may have to work hard to outpace the Fed in terms of tightening and make local fixed-income assets more attractive to foreign investors. However, considering growth constraints in other economies this looks unlikely. This idea may be the key behind potential fresh leg of dollar rally. Therefore, it is highly likely that in the near future we will see a retest of 110 points on the dollar index (DXY):

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.

 

[sahdjaskdj]

Thanks for the analysis on oil I think it will be a down trend for a while but on the M1 time frame it appears to be a up trend

 

[andengireng]

USDCHF today as we see here, the trend is bullish, so it is good if you open buy position, you can open buy position when the price breaks resistance area at 0.9877 with potential target up to next resistance at 0.9958

 

[Analytix]

EURUSD eyes test of 1.02, the ECB meeting may be of help


Massive repricing of Fed rate path in 2023 saw dollar index falling to 110 points, EURUSD broke above parity while GBPUSD recovered above 1.15. The rally in the US market increased capitalization of key equity indices by an average of 1.6%. Investors also increased exposure to crypto assets, BTC price rose above 20K.

Rally of risk assets, barring a clear dovish shift in central bank policy stance, is difficult to consider as a sustainable, especially when the Fed acknowledges that the margin of patience for weak incoming data on the economy is quite large, so some market participants have decided to take profits today. European stock indices corrected lower today, futures for US stock indices also pulled back. S&P 500 futures gravitate towards 3800, but it is clear that a shift in market consensus regarding interest rate path will await confirmation/denial by the FOMC in November, so buying pressure at the dips near key round levels is very likely.

EURUSD has finally begun to respond to lower gas prices and improved positions in foreign trade. The pair returned to levels above parity, but a more important signal (in terms of technical analysis) was breakout of the bearish channel, which held the pair in the downside since the start of 2022:

The signal for upside is quite clear, in this regard, the ECB meeting tomorrow is of particular importance. The regulator is expected to raise the rate by 75 basis points and update forecasts for the further rate trajectory, guidance on preferential liquidity for banks (TLTRO) and less important technical policy adjustments. Judging by the technical picture of EURUSD, there is a growing possibility that the decision tomorrow will be positive for the Euro and the pair will be able to develop an upward momentum and test the resistance at 1.02.


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]

Deteriorating EU, China data spur bids on USD


The dollar saw renewed buying pressure at the start of the week, DXY rose by more than 0.7% to 111.50 points. Market participants accumulate their dollar positions in anticipation of a strong NFP report on Friday as well as against the backdrop of weak China and EU economic data. China's manufacturing PMI failed to sustain uptick above 50 points in October, indicating that manufacturing activity declined compared to the previous month. For most of the second half of the year, the index has been staying below 50 points due to severe covid restrictions as part of the CCP’s "zero tolerance" for the spread of the virus, which significantly restrict mobility and cause business disruption:

The Eurozone economy is not approaching recession as quickly as expected, but inflation continues to accelerate. GDP growth in the third quarter slowed to 0.2% YoY, while core inflation accelerated to 5% in October from 4.9% in September, data showed on Monday.

The positive surprise in GDP is due to robust consumer spending in Germany, investment spending in France and rising tourism spending in Spain. However, the impact of these drivers is expected to continue to wane. The leading indicator of consumer confidence is close to historic lows, as is real wage growth. This has a significant impact on the consumption outlook, as evidenced by retail sales growth, which has been gradually declining over the past few months. Together with high interest rates, this leads to lower investment spending, and hence nominal wages and hiring rates are next in line to start to fall. When these two key macro indicators start to deteriorate, we can say that a recession in the EU economy is not far off.
Inflation jumped again in October, from 10.2% to 10.7%. Energy prices were the key sources of upside pressure in CPI. The decline in prices on the wholesale energy market has not yet seeped into the consumer level, any positive effect could be expected only in a couple of months. Food prices also continued to rise, as did the prices of other consumer goods, which rose at a smaller but also significant pace. In the services sector, inflation was 4.4%.

After two 75 bps ECB rate hikes, it's clear that monetary policy fails to quickly suppress import inflation, so the pace of tightening will likely slow down to 50 bps in the next meetings. Expectations of the ECB's stance easing, coupled with the threat of a recession, will keep the Euro under pressure, so extension of the EURUSD downtrend ahead of the NFP and the upcoming Fed meeting looks justified. Against the backdrop of incoming data, the likelihood is rising that the recent breakout of EURUSD bearish channel was false:

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 report is the only hope for USD this week


The long squeeze in the dollar that began last Friday has continued this week – investors dumped US currency since the opening of European stock exchanges on Monday, which could signal that safe-haven demand for greenback has started to wane and that risk-adjusted yield outlook on European assets improved as well:

Dollar came under pressure after reports appeared that Chinese government was going to ease coronavirus restrictions and generally revise their health policy, reducing the role of lockdowns. Even Powell's hawkish conference and last week's hawkish NFP report could not help - as a result of these two events, market participants shifted the Fed's terminal rate forecast by 5.1% while the divergence in expected pace of tightening by the Fed and other banks increased. In addition to the interest rate differential, large dollar gains were driven by perception of investors that the US is less vulnerable to risks of the energy crisis as well as geopolitical shocks. As soon as messages about easing China Covid stance hit the wires, dollar safe-haven premium began to decline rapidly, temporarily overshadowing the impact of other key drivers.

However, there are two events this week that could trigger a new dollar counter-rally after correction - the CPI report for October and the outcome of the congressional elections. The monthly change in the core CPI is expected at 0.5%, in annual terms - 6.5%, which is 0.1% below the inflation rate in September:

Surprises on the upside will dash hopes of investors for an early pause in the Fed tightening, leading to renewed selling pressure on fixed-income (Treasuries) and likely revaluation of the dollar. If Biden loses Congress, the dollar could face stronger selling as more corporate-friendly Republicans could increase pressure on the Fed to stop raising rates, while Congress's ability to push a fiscal stimulus package would also be severely limited which historically had negative USD implications.


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.

 

[amr mady]

Developed economies keep competing in the pace of recovery. UK data showed on manufacturing activity rose to its highest in more than 26 years

 

[Analytix]

US elections uncertainty prompts bids in Treasuries, dollar selling

Chinese foreign trade data for October, released on Monday, had dovish implications for the broad market as both imports and exports didn’t live up to growth expectations, declining YoY (-0.3% exports, -0.7% imports). Both indicators have been declining for several months in a row:

So far, the reaction to the data was muted as the focus of investors is on two key events in the US - the midterm elections to Congress and October CPI release.

Negative for risk appetite was the information that the daily increase in Covid cases in China amounted to 7,000 cases, a maximum of six months. In light of the fact that the market has been trading unconfirmed messages about the easing of coronavirus restrictions in China over the past few days, it is fairly possible that traders may prefer to dial back those expectations by selling risk assets and, in particular, shorting oil, which has shown its sensitivity to those rumors. Since the beginning of October, Brent quotes have added about $8 per barrel, running into resistance at $94 per barrel, the October high.

Goldman has said earlier that risks to oil prices are skewed to the upside as global reserves are depleted and spare capacity to increase production is limited. In general, the supply side sends positive signals for price growth, while the signals from the demand side continue to act as a deterrent to growth. Key among those is the China’s strategy to tackling Covid epidemic.

The overall market trend is moderately positive: Monday turned out to be a positive day for risk US assets, S&P 500 futures continued to rise on Tuesday, there is a slight upturn on European stock exchanges. Treasury yields nudged lower on US elections uncertainty.

The market held its breath ahead of results of the midterm congressional elections. Their importance to the market is due to the fact that if the Republicans win a majority in the lower and upper houses, the Biden administration will face great difficulties in carrying out its agenda. However, Senate bills can also meet with resistance from executive branch of the government, resulting in a situation known as a split government. With this outcome, the likelihood of new US fiscal stimulus will decrease, which has historically been negative for the dollar and positive for risk assets, as the political deadlock in some way removes uncertainty for investors, as large-scale changes in US policy will be difficult. Polls and asset returns show that the market is increasingly leaning towards an outcome where the Republicans will gain control of the Senate.

As for the dollar, from a technical point of view, the US currency index is consolidating near the key ascending trend line on the weekly timeframe, a breakdown and consolidation below the line may be a signal for further sell-off:

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]

USD Correction may Have Legs as Economic Calendar is Light this Week


The euro and pound sterling pare down the intraday decline that took place during the Asian session as risk appetite remains high while the dollar repositioning continues. EURUSD consolidates around 1.03, GBPUSD trades slightly below 1.18 level. Data on industrial production in the EU for October added optimism; growth in annual terms amounted to 4.9% against the forecast of 2.8%:

The market is sensitive to this indicator, as it correlates well with the overall health of the EU economy. The EU’s share of exports in GDP is about 50%, while the industrial equipment takes about 13% of exports. In addition, the competitiveness of the European industry depends on stable and cheap energy supplies, so the increase in production volumes against the backdrop of the much-discussed energy crisis makes one wonder how much it has affected the economy.

The dollar index corrected 4% last week. The intensity of the correction largely stems from the fact that hoarding USD cash for several months was the most popular and crowded investment in the global community. At the same time, the share of equities in portfolios was at a relatively low level. The combination of a positive inflation report and the measures to support the economy in China became the catalyst for a large-scale short squeeze in risk assets. This week is quite calm in terms of events and reports in the economic calendar, so it cannot be ruled out that the bullish correction in stocks will continue. The dollar may also continue to decline, a move towards 105 on DXY is likely, where the price may find support.

It is rather difficult to estimate how far the correction can go, however, in the currency market, some movements look excessive. For example, the USDKRW has lost almost half of its rally in several sessions, even though the Fed has not yet signaled that it is starting to consider a pause in rate hikes. Fed official Waller said recently that it is too early to think about the end of the tightening cycle. This stopped the decline in Treasury yields. Overall, since the CPI report, Treasury yields have corrected only 20-30 basis points - not much by the standards of this year.

The focus of the market is the meeting of the US and Chinese presidents in Indonesia, as well as speeches by Fed officials Brainard (dove) and Williams (moderate hawk).

The dollar index is likely to wander in the range of 105.50-107.50 this week. EURUSD may test 1.05 given that the correction of excess shorts on the pair, which have been accumulating since the start of the year, continues. Nevertheless, it is premature to consider an upside correction as the beginning of a new rally. So, for example, ECB official Guindos said that the market reaction to CPI was probably excessive, hinting that it won’t be easy to persuade the Fed with incoming favorable inflation surprises.

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]

Another dovish surprise in US PPI boosts stocks and bonds, pressures USD


OPEC, citing significant economic uncertainty in the coming months, has lowered its oil consumption growth forecast for the 5th consecutive time since April. The adjustment was -100K b/d for 2022 and 2023. The last time OPEC revised its forecast at the last meeting, when it was decided to increase production by 2 million barrels per day. Among the main reasons for the negative change in the forecast, OPEC mentioned economic challenges in Europe and the still tight covid restrictions in China, which makes quite uncertain the path of economic recovery in China.

At the same time, OPEC believes that the weakening of inflation faster than expected will lead to a rebound in demand, as central banks will experience less pressure to tighten policy, and thus restrain the expansion of economies.

Data on Tuesday showed retail sales in China fell 0.5% year-on-year, while industrial production growth fell short of expectations:

Together with weak foreign trade data (YoY contraction of imports and exports in October), this raises the likelihood that the CCP will prepare new economic stimulus measures and move towards a systematic easing of covid restrictions. Upside potential on positive stimulus news from China remains high, in my view.

Japan's GDP unexpectedly contracted in the third quarter, which added to the negative for the yen. However, a broad dollar retreat took over and USDJPY is down half a percent today.

European markets rose moderately, futures for US indices advanced through key resistance levels. The S&P 500 futures topped 4,000 after dovish US PPI report, which, like consumer inflation, surprised on the downside. The dollar collapsed on the data, indicating high sensitivity of the market to data on inflation pressures in the US:

Producer prices rose by only 0.2% m/m against the forecast of 0.4%, which was another argument in favor of the fact that the general trend of inflation in the US is now downward and the US Central Bank will soon move to softer rhetoric and policy actions.

For the British economy, the unemployment report came in worse than expected, the increase in the number of unemployed in October was twice as high as the forecast, while the average wage accelerated to 6% YoY (5.9% forecast).

The index of economic sentiment from ZEW in Germany turned out to be higher than expected, the index in October amounted to -36.7 against the forecast of -50 points. In the previous month, the reading was near all-time low at -59.2 points.

The markets continue to price in inflation slowdown in the US and cut excessive dollar cash longs on the US dollar, anticipating dovish policy tweak by the Fed in December. Bullish momentum in risk assets and bonds and downward pressure in USD will likely be extended in the run up to the upcoming FOMC decision.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[Analytix]

As market dials back Fed Pivot expectations, greenback has some room to rally


After shedding 4% last week, greenback was offered support near 106 level on DXY in the first half of this week and eventually rallied on Thursday:

The rally was likely driven by US October retail sales report. Headline reading beat estimates (+1.3% MoM), core sales also rose faster than expected (+0.9% MoM). The solid increase in consumption was combined with slowing price growth in October, which means that the chances of a “soft landing” for the US economy have increased. Treasury yields rose across all maturities, with a particularly clear uptick in short-dated 2Y bills, which are more sensitive to Fed policy expectations. It looks like the retail sales report has finally convinced the market that easing of inflation in October will not be a convincing argument for the Fed to soften the pace of tightening:

ECB top manager De Guindos also hinted at this earlier, saying that the market could have overreacted to the data.

If current uptick in yields and dollar rebound are driven by the traders dialing back their Fed easing expectations, general trend will likely become clear only after the FOMC decision in December, which will shed light on the key question whether October inflation print was a “turning point” for data-dependent Fed or more data is needed. This implies that upside and downside potential in greenback and equities is limited before the Fed meeting. The 105.50-106 zone on the dollar index (DXY), as the first half of the week showed, acted as a support area, now a short-term dollar rally may form the upper limit of the range. The resistance zone is likely to form at 107.20-107.50, which will correspond to 1.025-1.0275 support area in EURUSD.

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.