Daily Market Analysis & Trading Ideas

[Analytix]

The flow of US data dashes hopes of a pause in the Federal Reserve's tightening



Gold investors appear to have become weary of waiting for low interest rates (as central banks show no indication of halting their current tightening course), developments in the US banking stress narrative or geopolitical tensions that would ultimately validate their optimistic outlook for gold's growth potential. On Wednesday, gold accelerated its decline, and the test of the $1900 per troy ounce level loomed on the horizon:

In early May, the price of gold rebounded from its historical peak, forming a double top. In mid-June, after a tense struggle between sellers and buyers, it exited the medium-term ascending channel (white parallel lines). Currently, a short-term bearish corridor is taking shape (red lines). The chart also reveals a broader ascending channel (orange parallel lines). Its lower boundary, intersecting with the lower boundary of the short-term bearish channel, which corresponds to approximately the $1880 per troy ounce area, may form an interesting support zone where the price could reverse and move upward again. Clearly, one of the three drivers mentioned earlier must come into play: stress in the banking sector due to growing interest rate disparity between banks’ assets and liabilities, signals of easing core inflation, or a new wave of geopolitical tensions.

Yesterday's comments from ECB officials in Sintra showed that hoping for soft rhetoric today from the heads of the US, EU, and Japanese central banks is unlikely. The wording contained a very clear hint at a rate hike: signals of slowing core inflation in the EU are unconvincing, so a pause in July is unlikely. Based on this, one can assume that Lagarde, Powell, and the head of the Bank of Japan, Kuroda, will develop this idea today since core inflation is indeed currently holding at a relatively high level and receding slowly:

Incoming data from the US effectively quells the market's concerns that central banks are making policy mistakes. Durable goods orders in the US (a strong indicator of household income expectations) rose by 1.7% in the month, surpassing the forecast of -1%. Consumer confidence was directly confirmed by the Conference Board's index, which reached 109.7 points in June, surpassing the forecast of 104 points. Concerns about inflation were amplified by real estate market data: the price index increased by 0.7% in the month, exceeding the forecast of 0.3%. Additionally, API data showed strong demand for fuel as crude oil inventories declined by 2.4 million barrels, compared to a forecast of 1.467 million.

The dollar has turned higher against major currencies ahead of Powell's speech in Sintra. On the technical chart, it can be seen that the dollar index exited the bearish channel, rebounded after reaching its upper boundary, and continued to rise. The medium-term resistance is located in the range of 103.50-103.70, where the corresponding trendline was previously formed by the price:

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 June CPI strips dollar of any support as odds of hawkish Fed outcome plummet


The US June CPI report left the dollar entirely defenseless, causing the US currency index to plummet to nearly 100 level:

As seen in the chart, this is the lowest level since April 2022, meaning the dollar index has not been in this area for over a year. Dropping below the 101 level, the dollar index broke through a support area that was formed by a double bottom in February and May 2023, so we are likely to see further downward movement as an important support level has been breached. To assess the potential decline of the dollar, it's worth looking at the EURUSD chart, which provides more informative insights. There are two areas where dollar buyers may make their presence felt - 1.12500 and 1.15. The first level coincides with the upper boundary of the current ascending channel, while the second level aligns with a long-term resistance trendline that price tested in 2011, 2012, 2014, and 2021:

It should be noted that the US currency had been already in a downbeat mood before the CPI was released. The DXY had been on a slippery slope for the fifth consecutive day yesterday, largely influenced by the unexpectedly dovish rhetoric of two top Federal Reserve (Fed) officials, Daly and Bostic. They notably deviated from the central line of communication between the regulator and the markets by stating on Tuesday that monetary policy is already restrictive enough and that the Fed may need to take time to observe how the economy responds to policy tightening. Of course, such comments contradict Powell's statements at the ECB Sintra symposium, where he said that no officials anticipate a rate cut this year and that the vast majority of FOMC members believe that the interest rate should be even higher.

Yesterday's inflation report clearly shifted the balance of power in favor of the doves within the FOMC. Overall inflation declined to 3% (forecast was 3.1%), while core inflation, which excludes goods and services with volatile prices, slowed from 5.3% to 4.8% (forecast was 5%). The significant progress in core inflation, which FOMC officials referred to as the key variable determining short-term Fed policy, allowed the markets to reassess the likelihood of two rate hikes this year to the downside. If a week ago the probability of the Fed raising rates twice by the end of the year was 36%, it has now decreased to 13%. Consequently, the outcome with one rate hike has become the baseline, with the probability rising to 64%:

Today, the US producer inflation index for June is also due, and the markets are likely to pay some attention to it, considering that it is a leading indicator for consumer inflation. The indicator is expected to be at 0.2% MoM. The market may also pay attention to the data on initial and continuing jobless claims, the importance of which has significantly increased since the June NFP indicated the first signs of weakness in the labor market. The key report for tomorrow is the University of Michigan Consumer Sentiment Index for July, which is expected to be slightly higher than the previous month at 65.5 points.


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]

Is the Global Disinflation Wave Gaining Momentum? UK and US Inflation Data Suggest Yes


GBPUSD experienced a rapid decline on Wednesday after the release of British consumer price data, revealing an unexpected drop in core inflation from 7.1% to 6.9%. It became evident that disinflation is slowly spreading beyond the USA. The pound plummeted by nearly 1% against the dollar, breaking through the 1.30 level. From a technical analysis perspective, the price is still holding above the uptrend line, indicating potential for further upward movement. However, to confirm this, it would be beneficial to assess the buying initiative with a corresponding correction to the trend line. Based on the chart below, the target level for this correction could be around 1.282 (marked by the yellow circle). The main target within the upward trend since October last year is the level of 1.3450/1.35, where the major resistance trend line, formed by price extremes in 2015 and 2021, is located:

The British data did not go unnoticed in European trading, as market participants rushed to price in the risk of the rising wave of disinflation affecting the EU economy in the near future (or possibly already). Consequently, the ECB will likely have to temper its ambitions and hint at a pause after the July rate hike. This led to a temporary breakthrough of the EURUSD level of 1.12 and increased investor interest in short-term EU bonds at the start of the session, with 2-year German bond yields falling by approximately 12 basis points today:

Later on, the Euro and bond yields slightly recovered as the revised core inflation assessment for the EU in June showed a slight increase from 5.3% to 5.5%. Of course, compared to the US and UK data, the EU price data currently does not show any hint of disinflation. If this trend continues into July, the Euro would have a significant chance of strengthening its position against major rivals.

The retail sales data in the US for June added some intrigue to the upcoming Federal Reserve meeting in July. A consensus is rapidly forming that after the July rate hike, there will be an uncertain pause (or the end of the tightening cycle). The key indicator for the central bank's policy, the core retail sales, exceeded expectations, increasing by 0.3% month-on-month (forecast was 0%). However, the overall retail sales figure was below the forecast, but this was due to demand fluctuations that do not reflect the main trend (as seen from the behavior of the core retail sales indicator). The dollar responded positively overall yesterday, even attempting to test the 100 level on the DXY index, which it succeeded in achieving today after the release of British inflation data. The DXY dollar index is reaching towards 100.50 and briefly touched 100.30 at the start of the European session.

Market participants also paid attention to the US construction data today, but it did not show any significant deviations. The number of building permits issued in June almost matched the forecast (1.44 million vs. forecast of 1.49 million). The pace of new housing construction slowed by 8% month-on-month.
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 Rebounds on Positive US Data, EURUSD and GBPUSD Charts Show Potential Resistance



Labor market and consumer confidence data in the US, released yesterday, beat estimates, allowing the dollar to stage a comeback. EURUSD retreated into the range of 1.11-1.1150 in line with expectations, GBPUSD also extended its correction, driven by a weak inflation report, dropping to 1.2850.

Monthly charts of EURUSD and GBPUSD deserve attention:

It's easy to spot potential resistance levels for the current upward trends. The resistance area for EURUSD is in the range of 1.15-1.16, while for GBPUSD it lies between 1.3450-1.355. It’s pretty easy to spot those areas, and in my view, the likelihood of self-fulfilling prophecy to play out (the key idea behind technical analysis) is high. Buyers will likely prefer to take profits upon reaching those levels, fearing a backlash, while sellers will jump in expecting buyers to temporarily stay out of the market. For this scenario to unfold, prices must at least reach these areas. Therefore, the current dollar rebound should be considered intermediate – it must return to a downward trajectory for a while so that we can observe how classic patterns of technical analysis work out. As I mentioned earlier, on hourly charts for EURUSD and GPBUSD, the areas where the downward correction is likely to peter out are 1.11-1.1120 and 1.28-1.2820.

Yesterday, the Philly Fed report also provided some support for the dollar. Despite a "red" value for the overall manufacturing activity index (-13.5 against a forecast of -10 points), the leading components of the index performed well – the expected overall activity index jumped from -10.3 to 12.7 in June, and expectations for future orders reached 38.2 points. Price pressure indicators in the sector also showed positive dynamics, maintaining their values below long-term averages.

Today's inflation report in Japan caused the yen to plummet, with USDJPY surging more than 1%. Despite efforts by the Bank of Japan to curb borrowing costs to boost inflation through investments and a cheaper yen, consumer prices grew at a slower pace than expected in June – 3.3% versus a forecast of 3.5%. The last yen downward rebound occurred at the 145 level, which was also the point where the Japanese central bank announced currency intervention last time. It's also the upper boundary of the current upward channel. The next target could be at the same level where the ascending corridor line intersects – at 146.80, as shown in the chart below:

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]

The Fed and Inflation: A Longer Road to Policy Shift


So, the FOMC day has arrived. The market has already priced in one rate hike (according to futures, with a 99% chance), and judging by the recent bullish rebound of the dollar, it doubts that the regulator will consider the June deceleration of core inflation as a starting point in its communication. The Fed could either discount the positive inflation developments or announce that future policy will be entirely data-dependent, which would be a strong bearish signal. In the first case, the dollar may not only sustain its growth at the beginning of this week but also gain some more ground (EURUSD may drop below 1.10). In the second case, it is expected that sellers will target levels below 100 in the DXY index, and EURUSD will return to considering a rally towards the multi-year resistance at 1.15.

Here's one of the technical setups for the Dollar index:

The movements of major currencies in relation to each other in recent days exposed several intriguing trends. Optimism about China's economy has strengthened, which also manifested in the successful resistance of export-dependent currencies (CAD, AUD, NOK) to the moderate dollar recovery. The Brazilian real and the South African rand also appreciated due to the strengthening of the Chinese currency, which have a significant positive correlation with renminbi. A slight negative reassessment of growth prospects for the EU (after the ECB's bank lending survey and PMI activity indices) resulted in a 1.3% correction of the European currency against the dollar, which had a very steep ascent last week. The British pound is also struggling with growth ideas due to the shock caused by inflation figures for June.

The main short-term drivers in the currency market will be the Fed communication today, the ECB meeting on Thursday, as well as the story with fiscal and monetary stimulus in China, which urgently needs to return the economy to its targeted growth trajectory. As for the Fed, despite significant inflation progress, the regulator is unlikely to shed the mantra in its accompanying statement that further policy tightening "may be appropriate." It is also worth paying attention to the potential reaction of the regulator regarding market expectations for the rate next year, which currently account for a 100 basis point rate cut. Overall, in my view, the Fed meeting will have positive consequences for the American currency, especially if we assume that the market showed an excessive reaction to the CPI report, after which the greenback depreciated by nearly 3%.

It is also worth noting the positive release of the Consumer Confidence report by the Conference Board yesterday. The index surged from 110 to 117 points, the highest level since July 2021:

Against the backdrop of solid labor market statistics, still healthy rate of US consumer spending, and optimism among American households, one cannot ignore the risk of a repeat acceleration of inflation or "sticking" near current levels, and the regulator is likely to take this risk into account in today's 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.

 

[sharp1278]

thank u for sharing,so much knowledge here,very detailed outlook

 

[Analytix]

Why US Treasury Yields Are Rising at Different Rates Based on Maturity - Understanding the Reasons Behind This Trend



On Friday, major currency pairs experienced limited price movements, with slight gains observed in commodity dollars such as the Australian Dollar (AUD) and Canadian Dollar (CAD), owing to moderate positive developments in the commodity market. US equities showed signs of weakness yesterday, as the S&P 500 index drifted towards 4500 points. However, today, index futures are attempting to rise, albeit with modest growth not exceeding half a percent. In contrast, European markets are witnessing a purely technical bullish rebound following a decline in the first half of the week, and European stock indices continue to consolidate near historical highs:

The US Treasury market remains highly volatile, with yields rising across the entire maturity spectrum, frequently setting new local highs and approaching the peak levels recorded this year. Not since 2007 has the market witnessed such levels. Investors are selling bonds, though the intensity of selling varies depending on the maturity period. For instance, comparing the yields of 2-year and 10-year Treasury bonds:

Since the third week of July, when robust data on the American economy began to emerge, yields across all maturity periods have been on the rise. However, long-term bonds have experienced more significant selling pressure, leading to faster growth in yields. In other words, the attractiveness of short-term bonds has increased relative to long-term bonds. Most investors had anticipated that a strategy of sequentially investing in a series of short-term bonds (lending for short terms and continually rolling over the investment) would generate higher overall returns than a strategy of purchasing long-term bonds (borrowing for a single long-term period).

When investors believe that the Federal Reserve is planning to excessively tighten its monetary policy, they sell short-term bonds (expecting interest rate hikes) and instead buy long-term bonds, anticipating that the Fed's actions will prove to be a mistake and lead to an economic downturn or recession, along with corresponding fall in inflation rates. In such a scenario, buying long-term bonds becomes more advantageous compared to investing in a series of short-term bonds, as short-term interest rates are expected to decline in the future. Conversely, if investors believe that the Fed's will undershoot with policy tightening due to the strong economy's potential, they sell long-term bonds, expecting that the restrictive effect of high rates will be insufficient, leading to economy and inflation staying hot longer. In this scenario, a series of investments in short-term bonds appears more appealing, given the expectation that short-term rates will remain stable or potentially even increase.

In the first case, the spread between long and short-term bonds will go lower, while in the second case, it will increase. Currently, investors seem convinced that the Federal Reserve's current policy outlook is insufficient to push inflation to its target level.

Signs that inflation is likely to persist emerged yesterday after the release of ISM data in the services sector. Although the overall index roughly met expectations (52.7 points, with a forecast of 53 points), the input price index surged from 54.1 to 56.8 points (the first time in several months):

This is indeed a very concerning signal that the Federal Reserve may once again be underestimating the potential for inflation.

Today, the market braces for volatility related to the release of Nonfarm Payrolls (NFP) report, with expectations of modest job growth of around 200К and a 0.3% increase in wages on a monthly basis. In my opinion, the current rally in yields likely already factors in a strong NFP report, leading to a potential asymmetric reaction: a robust report may have minimal impact on the market, while weak job growth, especially with modest wage increases, could trigger a retracement in the recent bond market trend. Consequently, the U.S. dollar is also expected to experience a tangible downward correction in case of a dovish report.



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 gains ground awaiting inflation report as US labor market shows signs of weakness


The dollar recovers on Monday after mixed NFP report released last Friday. Job gains fell short of the modest forecast of 200K, coming in at 187K, which greatly disappointed fixed income bears who was dumping bonds throughout the previous week. Yields plummeted by more than 15 basis points after the release:

However bullish reaction in bonds proved to be transitory as the inflation part of the unemployment report still indicated that the labor market retains decent potential to generate price pressures. Wage growth beat forecast coming at 0.4% MoM vs. 0.3% consensus. Unemployment also decreased to 3.5%, and as it is known, the Fed uses the inverse relationship between inflation and unemployment to shape monetary policy.

In essence, if there was any negativity, it was minor, and on Monday, the dollar started to exert pressure again, with the dollar index recovering about half of its Friday decline. The price is just a bit shy of a retest of the upper bound of the medium-term bearish channel, making the idea of shorting the dollar much more appealing:

On the chart, the zone where the dollar could renew its medium-term decline is near the 103 level.

One source of dollar support could be the U.S. stock market, which, judging by the S&P 500 chart, is clearly developing a bearish momentum:

The price rebounded from the upper bound of the ascending channel, and it had been in a downturn for the previous four days. Of course, buying interest near the key 4500 level may prevent the market to push through it easily, but in my view, a significant portion of buyers will be waiting for convergence at least with the 50-day moving average. This is roughly around the 4400 level.

A trigger for such a correction could be the U.S. inflation report this week, scheduled for release on Thursday. A decrease in core inflation from 4.8% to 4.7% is expected, along with an increase in overall inflation from 3% to 3.3%. The focus, of course, will be on core inflation, which is "cleaned" of the influence of seasonal and other short-term factors. A substantial correction of risk assets is quite likely with a combination of a weak labor market report and more resilient core inflation than expected. It might be sufficient even if inflation exceeds the forecast by 0.1% and reaches 4.8%, as in this case, asset prices will start factoring in the risks of stagflation – long-term bond yields will decrease, short-term yields will rise, and risk assets will account for the risk that the "soft landing" the Fed is diligently working towards might break at some point.

If the inflation report aligns with the forecast, there's a chance that the Producer Price Index (PPI), which will be published on Friday, will trigger a strong reaction. Last time, there was a significant response to the surprise, as PPI is a leading indicator of CPI, due to the fact that price pressure is transmitted from producer prices through costs to consumer prices.



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

 

[Analytix]

Dollar Rally Pause: What to Expect in the Near Future?

The dollar is attempting to consolidate its gains on Monday after breaking above the upper bound of a key bearish channel:

In the search for bullish entry points, attention should be paid to the same upper channel bound, which now has a high chance of acting as a support line. On the chart, this corresponds to approximately the 103.5 level on the dollar index. The development of an upward trend in the coming month seems to be the more likely scenario in my view, given that last week on lower timeframes, there was a battle to maintain trading within the channel (breakouts and subsequent pullbacks), which enhances the significance of this line as an important market reference point.

Powell spoke at last week's Jackson Hole Symposium. Central bank heads generally deliver insightful remarks at this symposium, and this time was no exception. The market was overall satisfied with how the Fed chair tried to strike a balance between risks and the necessity for hawkish policy. This is evident from the positive closing of major indices on Friday, which, by inertia, passed on risk appetite to Monday's trading. The Federal Reserve Chairman once again did not rule out further tightening and indicated that in the context of inflation forecasts, investors should keep an eye on the labor market. It was a fairly clear statement that the central bank will be waiting for weak labor market indicators before hitting on the pause button. Additionally, the Fed Chairman stated that officials are currently concerned about inflation in the non-housing services sector, which aligns with his previous remarks on the labor market, as labor is a more significant factor of production in the services sector than capital. Wage growth in this sector currently has a faster pace compared to the production sector, which underlies the primary inflation risks. In short, the slowing pace of job growth in the services sector and clear signs of inflation deceleration in non-housing services are what Powell recommended to watch in upcoming labor and inflation reports.

The U.S. Treasury bond market reacted unusually to Powell's speech, with short-term bond yields rising while long-term bond yields remained steady or even slightly declined:

This suggests that the chances of near-term tightening have increased, while in the more distant future, the market has begun to anticipate a slightly faster inflation easing.

China rolled out new stimulus measures today, which also boosted risk appetite in markets, initially in China and then in financial markets beyond China.

Overall, lack of major market events and reports in the first half of the week favors the development of the bullish rebound in equities and the pullback in the dollar against other major currencies.
In the second half of the week, markets expect the Core PCE for July, which, despite it now being August, has the potential to surprise, as it did in June and July. On Thursday, the focus will be on the NFP report, as mentioned earlier, with an emphasis on employment in the services sector and, consequently, wage growth in it. For the EU, the market awaits inflation data for August, as well as labor market statistics for Germany. Also on Wednesday, China will release the official Manufacturing PMI, considering that China remains on the market's radar after a series of recent negative news, a significant deviation from the forecast could also impact risk appetite in external markets.

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

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

 

[Analytix]

NFP report Analysis: Job Growth and Fed Policy Outlook



The US unemployment report for August showed modest job growth, a slowdown in wage growth, and a relatively sharp jump in the unemployment rate, all clear signs that the US labor market is normalizing. It's challenging to expect inflation to accelerate in this context, so the likelihood of the Federal Reserve raising interest rates in September and possibly in November is diminishing.

Job growth in the US in August reached 187,000, slightly surpassing the modest forecast of 170,000. However, the previous two months were revised downward by a total of 110,000 jobs. The report adds weight to the argument that there is a sustained trend of weakening in hiring. In the private sector, the increase was 179,000, with 102,000 of those jobs coming from the private education and healthcare sector. A positive development in terms of its impact on inflation is the increase in the labor force participation rate – a measure calculated as the sum of unemployed and employed individuals as a percentage of the total working-age population. An increase in this rate means a "net" inflow into the category of those who are either employed or actively seeking employment, which should exert downward pressure on wages and, subsequently, consumer inflation in the US. The decline in this rate in 2020 led to the phenomenon of sustained inflation pressures, which the labor market continues to generate. With its return to normal levels, this effect is likely to be a deflationary factor:

Along with the rise in the labor force participation rate, wage growth is also starting to slow down, with August recording a 0.2% MoM increase compared to a forecast of 0.3%. This marks the first drop below 0.3% in over six months. The unemployment rate jumped from 3.5% to 3.8%, clearly indicating a slowdown in the pace of labor demand growth.

The probability of the Federal Reserve raising rates in September in the face of such soft figures is sharply decreasing, and the pause is likely to extend into November.

The markets did not see anything critical in the unemployment report in terms of recession risks in the US. Short-term Treasury yields returned to levels preceding the report release after a brief dip, and long-term bond yields even increased slightly, from 4.10% to 4.18% for 10-year Treasury bonds. Consequently, the report had no significant impact on the US dollar, which strengthened against major currencies after a brief bearish correction. The dollar index rose from 103.50 to 104 points, and the price formed a chart pattern rebounding from a support line, which previously acted as resistance, serving as a confirmation of bullish intentions:

This week, we can expect the release of the US ISM Services PMI on Wednesday, which will also include respondents' assessments of hiring conditions and price pressures and is expected to be closely watched by the market. In Europe, the third estimate of second-quarter GDP growth will be released on Thursday, and Germany's inflation report will be published on Friday.



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

 

[Analytix]

Dollar Faces Resistance Amid Oil Price Swings

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

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

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

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

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

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

 

[Analytix]

Risk Appetite on the US Stock Market Wanes Amid Inflation Concerns


On Wednesday, appetite for risk in US equities decreased, with major stock indices finishing the session slightly in the red. The American market successfully passed the bearish baton to Asian and European markets as investors gradually sold off stocks amidst rising oil prices. US Treasury bond yields increased as traders apparently factor in the risks of a potential inflation resurgence due to anticipated cost-push inflation impulse, particularly due to rising fuel prices. Yields for two-year bonds crossed the 5% mark, while ten-year bonds reached 4.25%. The spread between long-term and short-term bonds changed recent direction and moved lower. This may indicate a resurgence of speculation in the market regarding a Federal Reserve interest rate hike.

A significant event from yesterday was the ISM report on US service sector activity. It provided another mixed signal: the overall index rose from 52.7 to 54.5 points, beating expectations of 52.5 points. The ISM Prices sub-index left the market bewildered, as instead of the expected decrease, it actually increased from 56.8 to 58.9 points. This suggests that, according to respondents, price pressures may have increased at increasing rate compared to the previous month. This contradicts recent CPI and PCE inflation and wage data from the NFP report. It's worth noting that the Federal Reserve's number one goal is to reduce inflation in the service sector since its price pressures largely shape the overall trend of consumer inflation in the US. Additionally, the labor-intensive nature of the industry (high labor-to-capital ratio in its output) creates a positive feedback loop of "prices-wage-prices" which largely explains inflation persistence.

Short-term bond yields increased following the report's publication, underscoring the market's surprise at the unexpected new information:

Consequently, the likelihood of a Fed rate hike in November has also increased. If a week ago it stood at 37.1%, it now sits at 43.5%:

The US dollar index halted its recent downward correction and rose to the 105 level on Thursday. EURUSD continues to consolidate around the 1.07 level, with minimal attempts to stage a rebound:

This behavior near the round figure increases the likelihood of a bearish breakthrough on new information towards the 1.06 area. However, the ECB is due to hold a meeting next week, and based on the rhetoric of ECB officials, the regulator is set to hike interest rate further. The potential for hawkish surprises likely rules out a significant decline and even if a downward market breakout occurs, it will likely be short-lived.



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

 

[Analytix]

US Consumer Inflation Slightly Exceeds Expectations, ECB Prepares for Meeting: Market Overview


Consumer inflation in the United States in August came in slightly above expectations, as indicated by the report released on Wednesday. Core inflation, which excludes items or services with volatile prices, reached 0.3% for the month. While the deviation from the forecast (0.2% MoM) is not significant, it is likely enough to prompt the Federal Reserve (Fed) to maintain its projection of a single interest rate hike by year-end during the upcoming meeting.

Headline inflation deviated slightly more from the forecast due to a 10% increase in fuel prices in August, but the market had already priced in this development, reacting to the recent rally in the oil market.

The market reacted fairly indifferently to the acceleration in core inflation. This can be attributed to elevated market expectations, as the market had factored in the risk of fuel-related inflation driving up core inflation. Additionally, a slowdown in the growth of housing expenses (Shelter Inflation) from 0.4% in July to 0.3% in August played a role:

This component, which represents the most inert or "sticky" aspect of the Consumer Price Index (CPI) for services, closely reflects the underlying trend in consumer prices. The dynamics of this component could potentially offset the relatively minor acceleration in the overall core inflation figure, as it is clear that the trend is more important than month-to-month fluctuations driven by seasonal or transitory factors.

Today, the market is focused on the European Central Bank (ECB) meeting. According to interest rate derivatives pricing, the likelihood of a rate hike is estimated at around 65%. Therefore, an actual rate hike would come as somewhat of a surprise, potentially causing the European currency to strengthen and also lifting the British pound. The belief that the ECB will raise rates today gained momentum following a Reuters report suggesting that ECB economists are likely to revise their inflation forecast for the next year upward to 3%. However, it is worth considering that the cumulative tightening of policy expected by the market until the end of the year is only 23 basis points, which is roughly equivalent to a single rate hike. To drive sustainable euro appreciation, the ECB will likely need to convince the market that further tightening cannot be ruled out. The extent of dissent within the Governing Council regarding September's tightening will be crucial. If the decision is made with only a slight and minimal majority, then Lagarde's assurances that "there could be more" are unlikely to have much effect. Overall, the potential euro strength is likely to be short-lived and levels above current ones, say 1.08 for EUR/USD, could present an excellent opportunity to enter short positions ahead of the Fed's meeting next week, where the potential for hawkish surprises is much higher.

The market is not anticipating a Fed rate hike next week, but it will be looking for potential surprises in the Dot Plot, which represents the rate projections of top Fed officials collected on a single chart. Signs of disinflation are likely to leave rate projections unchanged compared to the previous Dot Plot version (one more rate hike till the end of the year):

However, the economic resilience of the United States, evident in recent incoming data, could compel officials to push back the potential rate cut in the following year to a later date. This particular development could significantly impact the market (especially long-dated fixed income assets like 10-Year Treasuries) and contribute to further strengthening of the US dollar.


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

 

[Analytix]

Fed's Meeting Outlook: Dollar Stability Hangs in the Balance as All Eyes Turn to the Dot Plot



EURUSD has stabilized around the 1.07 level, while the dollar index hovers near the 105 mark ahead of the Federal Reserve's meeting scheduled for today. Markets are not anticipating a rate hike; however, the rhetoric regarding the November decision, which the market views as the most likely date for another, potentially final, rate increase this year, will have a significant impact on asset prices. A crucial piece of information regarding the November meeting will be the Dot Plot – the forecasts of top Fed officials regarding interest rates in 2023-2025 and the long-term period, all displayed on a single graph. Currently, it appears as follows:

The red dot on the chart represents the median forecast, indicating a rate of 5.50% for this year, which is 25 basis points above the current level.

Apart from the increase this year, there remains high uncertainty about the trajectory of rates next year. The market is concerned about when the Fed will start cutting rates next year, if at all. The Dot Plot will also clarify the Fed's stance on this issue, so any change in the median forecast for the next year will have a strong impact on market expectations today.

If the Fed excludes a rate hike this year or the Dot Plot points to a lower median rate forecast for the next year, it will send a strong bearish signal for the dollar. In general, the forecast for 2024 could be an interesting point, especially in terms of its impact on the currency market. The median forecast is likely to remain unchanged at 4.64%, indicating a potential 100 basis points cut next year. Given the resilience of the U.S. economic outlook and the reinforcement of the "higher rates for longer" concept, there is a nonzero risk that the median forecast for 2024 could be revised upward. In other aspects, only minor changes in the statement are expected, maintaining a reference to further rate increases that "may be appropriate." Additionally, Federal Reserve Chair Jerome Powell is likely to keep all options open during the press conference. Anticipate the usual resistance against rate cut expectations (which have recently been softened), especially if not signaled by a revision in the Dot Plot for 2024.

The overall message from the Federal Reserve should support the dollar: the Fed will hint at keeping the door open for further tightening if necessary and will do everything possible to undermine the idea that rate cuts are still a long way off. However, market expectations seem quite condensed around this scenario. As mentioned earlier, 2024 could be a point of greater uncertainty: leaving the Dot Plot for 2024 unchanged may not be enough to trigger a significant correction in the dollar's exchange rate, but higher 2024 forecasts could lead to another leg up for the dollar. Beyond the short-term impact, this meeting is unlikely to be a game-changer for the dollar, as the focus will remain on U.S. economic data.


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

 

[Analytix]

Cautious Optimism: S&P 500 Nears Key Reversal Zone Amidst Rising Oil Prices and Central Bank Tightening


Oil prices are vigorously rising after a week-long correction, with BRENT gaining $3 per barrel in just two days. It's worth noting that the retracement from $96 per barrel down to $92, occurred in line with a much-anticipated pullback from the upper bound of the trend channel, however hardly hinted at a reversal. Prices were swinging back and forth, with a daily range of $1.5 to $2 (indicating that buyers were holding their ground). However, yesterday's breach of the $92 level sparked a powerful bullish impulse, nearly pushing the market to the local high:

Rising oil prices undermine strength of currencies of energy-importing countries. This simple idea underpins the intense selling pressure on the EUR, GBP, and JPY and has two underlying fundamental reasons. Firstly, oil trades in dollars and rising energy prices imply demand for dollars from countries, relying on energy imports, should increase. Secondly, rising energy prices boost inflation expectations, as consumer inflation will likely respond to rising costs, namely fuel prices. Rising inflation expectations pressure central banks to deliver more policy tightening which works through demand destruction, i.e., additional economy slowdown. EURUSD has shifted its defense to 1.05, GBPUSD has fallen for the sixth consecutive session, nearly reaching 1.21, and USDJPY is eyeing a test of the 150 level. The demand for the dollar is also fueled by risk aversion, as yesterday the S&P 500 closed down by almost 1.5%, with similar dynamics seen in two other key stock indices, Nasdaq and DOW.

Today, investors are attempting to regain control and adopt a positive outlook. Major European markets are trading in positive territory, although the rally is quite modest and resembles calm before the storm. It is also noteworthy that gold has fallen below $1900 per troy ounce. This, in the context of clear signs of risk aversion in the market, indicates the presence of a factor that outweighed the demand for gold as a safe-haven asset. This factor is undoubtedly the expectations of higher central bank interest rates, which strengthened further after statements from ECB and Fed officials. For instance, Neil Kashkari, a top manager at the Fed, stated yesterday that the resilience of the American economy to high interest rates has been surprising, and if the current level of tightening does not slow down the economy, it will likely require further tightening. The official assessed the chances of a soft landing for the economy at 60%, while he associated 40% of future outcomes with an even tighter monetary policy than now.

Also of concern are the cautious remarks from Fed officials about the possible change in the neutral interest rate (i.e., one that neither stimulates nor slows down the economy). This would represent a structural shift in policy, with far-reaching consequences, especially for long-term bonds.

The S&P 500 VIX volatility index surged to 19 points yesterday, marking the highest level since May 2023:

The index itself breached the 4300 level yesterday and declined to 4265 points. It's worth noting that the price reached the lower bound of the ascending corridor, and the intensity of the correction pushed the RSI value to the classic reversal level of 30 points:

Slightly below, around the 4200-point mark, is the 200-day moving average, which has proven to be an important support level in technical analysis. In general, from the perspective of classical technical analysis, there is a very good chance that the market will view the current range of 4270-4220 as an area to consider for a reversal. Interestingly, the previous reversal in March, around 3850, also coincided with the EURUSD reversal around 1.05, which is where the pair is currently trading:

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 Retracement Amid Shifting Market Dynamics: A Technical Outlook


On Thursday, the dollar finally took a step back, but the rebound of its major rivals looks more like a technical retracement, as the fundamental picture hasn't changed much. The American currency was weakened by a "relief rally" in risk assets, with the S&P 500 attracting buyers in the support zone we've been discussing since the beginning of the week - 4220-4270:

The technical setup for the EURUSD pair worked almost flawlessly: the price reversed in the 1.05 area, where it had found support in January and March of this year. Market participants who bet on a false breakout of the lower bound of the bearish corridor in which the pair has been trading since mid-July of this year may have also contributed to the rebound:

The USD/JPY pair is also trying to reverse, and there were strong technical reasons for it: approaching the "round" level (150 yen per dollar) and the upper boundary of the bullish channel:

Since mid-August, USDJPY has clearly been pushing towards the upper bound of the channel, indicating that there was little resistance from sellers regarding the depreciation of the yen, despite approaching the round level. If this is indeed the case, the medium-term outlook for the yen is not particularly bright: it could easily reach a new low if the US Treasury market offers even higher yields than it does now. There are reasons to believe in such a scenario, as some US money managers are boldly assuming that the yield on the 10-year bond could reach 5% in the near future. For example, Bill Ackman. Yesterday, the 10-year bond was trading at 4.68%, and today the market is offering slightly less - 4.54%.

Inflation data for the Eurozone released today exceeded expectations: core prices in September rose by 4.5% on an annual basis, compared to a forecast of 4.8%. Such price behavior is certainly favorable for the ECB, which would very much prefer not to tighten policy when real output growth is slowing down (which is happening now), thus further burdening the economy. Price data could also explain the strengthening of the European currency, although the behavior of the currency pair is currently mostly dependent on the dollar fundamentals, which, as mentioned earlier, has not changed in the absence of macroeconomic news from the US. There is a chance that today's Core PCE report will shift expectations for the dollar, but for this, we would need to see a strong deviation from the forecast (3.9%) towards lower values. The market may also be influenced by the U. Michigan consumer sentiment report, but again, the market will probably want to see a series of data indicating a negative impulse in the US economy before challenging the Fed's "higher for longer" narrative. Therefore, the risks of the S&P 500 returning to decline next week and the dollar rising remain high.


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]

Cautious Markets React to Disappointing Jobs Data and Oil Inventory Surge


Oil prices resumed their downward trend on Wednesday following the release of employment data from ADP:

Job growth was significantly lower than expected, with only 83K jobs added compared to the anticipated 156K. The accompanying commentary was equally disconcerting, highlighting a marked deceleration in job growth throughout September, primarily attributed to job reductions within large enterprises.

The market correction gained momentum after the weekly EIA data on oil reserves were made public. These figures revealed a substantial surge in gasoline inventories, registering a substantial increase of 6.4 million barrels, in stark contrast to the forecasted 0.1 million. An uptick in gasoline inventories often signals reduced demand for fuel, a clear economic activity indicator.

Within a span of just under two days, oil prices retreated by approximately 7%, breaching a critical upward trend:

The tepid yet concerning signal from ADP raised concerns about the recent frenzy within the US Treasury bond market. This frenzy was sparked by a sudden realization of market participants that it may take a long time for high interest rates to do their job in suppressing inflation. In addition to oil, yields on Treasury bonds have also reversed their course, with ten-year bond yields decreasing by roughly 9 basis points to 4.71%.

Nevertheless, other economic indicators released in the United States this week continue to point toward significant inflationary potential. The ISM report on service sector activity from yesterday met expectations, with headline remaining in expansion zone at 53.6 points. Initial claims for unemployment benefits, released on Thursday, saw an uptick of 207K, slightly surpassing the projected 210K. It is worth noting that the weekly increase in unemployment level, tracked by this measure, remains close to the lows of the current business cycle, suggesting that the labor market remains robust.

The US dollar has also weakened against its major counterparts, although the correction appears to have stalled around the 106.70 level on the dollar index (DXY). The market is likely awaiting the official labor market report, scheduled for release on Friday, to determine direction. However, given the lackluster ADP report, the risks associated with a negative deviation in job growth in the NFP report are increasing. Consequently, we may witness tentative efforts to sell the dollar in anticipation of this risk materializing. In the event of a weak NFP report, there is a strong possibility that the dollar index will continue its descent towards the 106 level on the DXY index, where the lower boundary of the ascending corridor is situated:

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]

Middle East Crisis Spurs Market Volatility and Drives Oil Prices Higher



Stock markets in Asia and Europe experienced a decline on Monday, while gold prices rose, and the dollar resumed its upward movement towards local highs amid a sharp escalation of tensions in Israel. The markets also took into account past experiences of conflicts in the Middle East, which, in one instance, led to a recession due to OPEC's decision to sharply limit oil supplies. These concerns drove oil prices up by nearly 4%:

The focus of the markets this week will undoubtedly be on how events in the Middle East unfold. Investors will be monitoring the risk of a broader conflict involving primarily Arab nations, which could have serious consequences for destabilizing the oil market. Additionally, given Iran's open support for Palestine, markets are likely factoring in the potential risk of sanctions against Iranian oil, which could further exacerbate the market's supply shortage. Considering that developed countries are grappling with high inflation, a potential spike in oil prices could have a negative impact primarily on countries dependent on energy imports. The currency market, as we can see, is primarily factoring in this risk, with the European continent currencies and the Japanese yen being sold.

The yield on US debt has decreased slightly as inflation risks offset the recession risk associated with the escalation of tensions into a more serious conflict. The yield on short-term bonds has barely changed since the start of trading today, while the yield on long-term bonds has decreased from 4.79% to 4.71%.

The macroeconomic situation also favors the strength of the US dollar. A significant argument in favor of at least holding the dollar is the US unemployment report for September, released last Friday. Job growth totaled 336K, nearly double the forecast, and the figures for the previous two months were revised up by a total of 119K. The range of estimates for September's job growth had varied from 90K to 250K, so the surprise to expectations was significant. Furthermore, the official report's figures failed to predict both ADP and ISM hiring data, as well as NFIB small business data. However, it is worth noting that the JOLTS report on job openings and the series of data on initial claims for unemployment benefits surprised on the upside, steadily decreasing in September toward a cyclical minimum.

Speaking of key events on the economic calendar this week, the Federal Reserve's meeting minutes and the Producer Price Index on Wednesday, US CPI for September, and the European Central Bank's meeting minutes on Thursday, as well as the University of Michigan's consumer sentiment data on Friday, should be highlighted. The US CPI is of particular interest to the market as the inflation trajectory currently holds the greatest importance for the Federal Reserve's policy, which is exerting all efforts to return it to the target level. A slowdown in overall inflation from 3.7% to 3.6% is expected, but labor market conditions suggest there are good chances of deviations towards higher values. Both this circumstance and the technical outlook for the dollar indicate that the risks are tilted towards further strengthening:

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 React to Middle East Crisis: Dollar's Dive, Bond Yields, and Gold Stability


The wave of risk aversion on Monday, following the tragic events in Israel, is gradually fading away. There appears to be a growing market consensus that the conflict will remain local, and third-party countries won't get involved. The market's reaction on Monday still lingers in the oil market; prices are hesitant to drop after surging by nearly 4%. Gold prices have also remained quite stable, consolidating near the $1950 level per ounce.

The dollar index has dipped to the 106 level and is trading near the lower boundary of the upward trading channel:

It's worth noting that along with the drop in the dollar, Treasury bond yields have also significantly retreated. This basically suggests that the reasons for the dollar's weakening can be attributed to a reassessment of market expectations, either related to inflation or the Federal Reserve's interest rate trajectory. Indeed, yesterday, we heard a rather unexpected comment from the head of the Dallas Fed, Logan, who mentioned that under certain conditions, the Fed's interest rate has varying effects on the economy, depending on the risk premium incorporated into long-term Treasury bond yields. This indirect change can be tracked through the yield spread between long-term and short-term bonds. For example, the spread between the yields of 10-year and 2-year Treasury bonds has increased by almost 50 basis points since the beginning of September:

This increase in the yield spread means that the risk premium associated with longer-term investments in the economy has also risen, which, according to Logan, strengthens the 'cooling' effect of policy tightening. Ultimately, this could imply that fewer rate hikes may be needed.

The markets have interpreted Logan's musings as a signal that the dynamics of yields are starting to concern the Fed and that Fed officials might lean towards eschewing further tightening. Long-term bond yields have dropped by nearly 15 basis points, from 4.80% to 4.65%:

Other Fed officials haven't expressed similar speculations yet, so it's premature to talk about a change in the Fed's narrative. Consequently, the stability of yield decreases, spurred by Logan's comments, is in question. There's also a chance that market participants are factoring in a dovish surprise in the upcoming U.S. CPI report to be published on Thursday. Notably, weak wage growth in the U.S. in September is one sign that inflationary pressures in the economy continue to ease.

Based on the expected bond market response to the Fed's comments, the downward correction of the dollar is likely nearing its end. The technical analysis presented at the beginning of the article on the dollar index also suggests that prices may have reached a zone where buyer interest will resurface. European currencies remain vulnerable to a decline, as markets, as we can see, are not rushing to price out the risks of negative consequences of the Middle East conflict on oil prices. Looking at the technical chart of EURUSD, a potential zone is evident where the upward correction could encounter seller resistance – 1.0630-1.0650:

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 Jitters, Surprising Retail Sales, and the Dollar's Rollercoaster Ride


Events in the Middle East are keeping the market on edge. Stock markets, if they go up at all, are doing so with caution. There's a little bit of growth followed by some corrections. Today, the main European exchanges and U.S. index futures are down by about half a percent. Gold is hanging onto its gains from last Friday, thanks to the geopolitical tension, making it a hot item.

The dollar is holding its ground.

The big deal today in terms of economic news is the report on U.S. retail sales. This report is probably the third most important after the NFP (non-farm payrolls) and the inflation report. Despite a negative sign from household credit card spending, the report surprised on the upside. Retail sales for the month increased by 0.7% compared to the previous month, and core sales, which give a better idea of consumption trends, rose by 0.6%. These numbers are much higher than the expected 0.3% and 0.2%. Notably, the previous figures were also revised significantly upward, to 0.8% and 0.9% respectively. This data pulled the dollar out of the red where it started the session and put it on an upward trend:

Yields on long-term bonds, like the 10-year Treasuries, shot up on the news, challenging recent highs around 4.90%. Verbal interventions from the central bank officials about high long-term bond yields having a tightening effect on the economy, reducing the need for tightening by the central bank, triggered a correction in Treasuries. This correction only lasted a week, and then rates started rising again, effectively ignoring the events in the Middle East:

This week, on Thursday, Federal Reserve Chairman Powell is speaking. In light of recent comments from several Fed top brass that recent yield curve behavior might reduce the need for a rate hike, Powell has a tough task ahead. He'll have to somehow comment on the incoming data to give the impression that the Fed has everything under control. It's known that the effectiveness of the Fed's policy depends heavily on whether it influences market expectations. If the Fed 'misses the mark' by suggesting one thing and the economy requires another, market participants may start making their own forecasts about what the Fed will do. That's why the Fed's influence on their expectations will diminish, and the efficiency of monetary policy will take a hit.

Also, today we'll get data on international capital flows into U.S. Treasury bonds (TIC Flow) for August. This publication updates us on what major foreign countries are doing with their U.S. debt. China's holdings of U.S. debt have fallen from $1.04 trillion at the beginning of 2022 to $821 billion. Further decreases could cause problems in the U.S. bond market and raise questions about whether rising U.S. bond yields due to an increase in the term premium are actually good news for 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.