Powell and NFP risk may renew demand for battered USD
Intensifying yield curve inversion in the US (when short-dated bonds are cheaper than long-dated ones) and WTI price below critical $80 support level tell us that markets are becoming more worried about global demand prospects. The risks of an economic downturn in China due to restrictive Covid measures also affect investor sentiment, adding pressure mainly to commodity market prices.
At the beginning of the week, the market’s focus is on the situation in China. Local authorities try to curb the spread of the epidemic and are forced to introduce new lockdowns. Quotes of the main benchmarks of oil and industrial metals dived down on Monday, WTI trades below $75 per barrel, Brent defends the level of $81. And this is despite the fact that OPEC decided to cut production by 2 million b/d at the beginning of this month. The technical chart of Brent shows that the price, having tried to break through the main bullish trend line from the bottom up, bounced off and continues to move in the bearish channel, where the sellers’ target may be the level of $75 per barrel:
In the US, the spread between short-term and long-term bond rates continues to increase and has reached -80 basis points (yield on a 10-year bond minus a yield on a 2-year bond). This tells us that the demand for long-term bonds in relation to short-term ones continues to grow, which means that expectations that rates will decrease in the more distant future (or inflation will decrease) gain momentum. Essentially, investors are expecting the central bank to cut rates and inflation to slow down, which is indicative of an economic downturn or recession.
Fed Chairman Powell is due to speak on Wednesday this week and there is a risk that he will rebuke market expectations that signals of slowing inflation will force the Fed to slow down the pace of policy tightening as well. This assumption is due to the fact that earlier the Fed has repeatedly stated that it is not worth drawing conclusions about the trend from one or two positive inflation readings.
Markets will also focus on inflation data (Core PCE for October) on Thursday and the NFP report on Friday. Job growth is expected to slow from 261K to 200K, unemployment is expected to remain flat, and monthly wage growth is expected to slow to 0.3%. Given the impact of the seasonal component in November, retail may show good growth, however, in other sectors, an increase in the number of layoffs was observed, especially in tech sector. As a result, the market may react weakly to a upside surprise if the main contribution is made by the retail sector, which may sag in the coming months.
As for the EU economy, investors will follow the data on inflation. Inflation report in Germany for November will appear tomorrow. EU-wide inflation report is due on Wednesday. Markets price in 61 basis points of ECB tightening in December, with room for correction in both directions.
The upward correction for the EURUSD pair hit an important technical level - the 200-day moving average. Given the risk of Powell's hawkish rhetoric and surprise in the NFP, breaking this line and trading above 1.05 before the end of this week is unlikely. The pair can go to the levels below and test support at 1.0350 and 1.03:
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.
Intensifying yield curve inversion in the US (when short-dated bonds are cheaper than long-dated ones) and WTI price below critical $80 support level tell us that markets are becoming more worried about global demand prospects. The risks of an economic downturn in China due to restrictive Covid measures also affect investor sentiment, adding pressure mainly to commodity market prices.
At the beginning of the week, the market’s focus is on the situation in China. Local authorities try to curb the spread of the epidemic and are forced to introduce new lockdowns. Quotes of the main benchmarks of oil and industrial metals dived down on Monday, WTI trades below $75 per barrel, Brent defends the level of $81. And this is despite the fact that OPEC decided to cut production by 2 million b/d at the beginning of this month. The technical chart of Brent shows that the price, having tried to break through the main bullish trend line from the bottom up, bounced off and continues to move in the bearish channel, where the sellers’ target may be the level of $75 per barrel:
In the US, the spread between short-term and long-term bond rates continues to increase and has reached -80 basis points (yield on a 10-year bond minus a yield on a 2-year bond). This tells us that the demand for long-term bonds in relation to short-term ones continues to grow, which means that expectations that rates will decrease in the more distant future (or inflation will decrease) gain momentum. Essentially, investors are expecting the central bank to cut rates and inflation to slow down, which is indicative of an economic downturn or recession.
Fed Chairman Powell is due to speak on Wednesday this week and there is a risk that he will rebuke market expectations that signals of slowing inflation will force the Fed to slow down the pace of policy tightening as well. This assumption is due to the fact that earlier the Fed has repeatedly stated that it is not worth drawing conclusions about the trend from one or two positive inflation readings.
Markets will also focus on inflation data (Core PCE for October) on Thursday and the NFP report on Friday. Job growth is expected to slow from 261K to 200K, unemployment is expected to remain flat, and monthly wage growth is expected to slow to 0.3%. Given the impact of the seasonal component in November, retail may show good growth, however, in other sectors, an increase in the number of layoffs was observed, especially in tech sector. As a result, the market may react weakly to a upside surprise if the main contribution is made by the retail sector, which may sag in the coming months.
As for the EU economy, investors will follow the data on inflation. Inflation report in Germany for November will appear tomorrow. EU-wide inflation report is due on Wednesday. Markets price in 61 basis points of ECB tightening in December, with room for correction in both directions.
The upward correction for the EURUSD pair hit an important technical level - the 200-day moving average. Given the risk of Powell's hawkish rhetoric and surprise in the NFP, breaking this line and trading above 1.05 before the end of this week is unlikely. The pair can go to the levels below and test support at 1.0350 and 1.03:
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.