Currency and Stock Markets. Daily Insights

stoch

Active Member
Weak UK PMI data points to further Pound weakness



Incoming data on the EU economy roughly correspond to the thesis put forward by the market that the bloc will be able to dodge a recession. The PMI index from S&P Global climbed into the positive zone in January, amounting to 50.2 points against the forecast of 49.8 points. Positive MoM dynamics is observed for the first time since June last year.




A number of factors contributed positively to activity, from a faster slowdown in inflation and improved supply chains to mild weather that helped the EU avoid an energy crisis.

Activity indices in the EU's two largest economies, France and Germany, remained at levels below 50 points, but there was a surprising improvement in the service sector in Germany and in the manufacturing sector in France.

The ECB has already raised rates by 2.5% and is expected to make another 50bp hike next week. What happens after is unclear: some Governing Council officials suggest it may be appropriate to slow down the pace of tightening, others continue to insist on the need for significant increases. The hawkish ECB case in 2023 finds its justification mainly in a strong labor market: employment continued to rise in December, supporting high wage growth, which usually generates the lion's share of domestic inflation.

Unlike the EU, the situation in the UK is less rosy. The S&P Global PMI index for the British economy dived deeper into the recession zone, to 47.8 points in January against 49 points in December. This means that the rate of deterioration in activity has been accelerating this month:



The negative momentum prevailed in the services sector, but manufacturers also reported that output declined in January at the fastest pace since the start of the pandemic. The pound fell by 0.6% after release of the index for January, market participants are beginning to price in the idea that the BoE will be forced to bring forward the point of time when it completes the tightening cycle. Traders are looking for another 50 bp hike, according to the current valuation in February and by 25 bp in March.

Additional pressure on the pound was also exerted by the publication of data on the UK budget deficit. It swelled by £27.4bn from a forecast of £17.3bn, an outcome that calls into question fiscal stimulus hopes, raising the risk of a UK recession in 2023.

From a technical point of view, GBPUSD has broken through the lower limit of the short-term range of 1.231 - 1.23, and now the next sellers' target is likely to be 1.2250. In the event that the price encounters weak resistance, there will be no potential bounce to 1.23 (which will already be a resistance zone) and the price will continue to move towards the main support at 1.22, 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.
 

stoch

Active Member
US data surprises helps USD to stage mini-rebound


Currency markets continue to remain in a relative equilibrium with FX majors fluctuating in fairly narrow ranges. US broad equity indices also lack direction, the key benchmark of the market, SP500, after two mini-selloffs to 3900 and 3960 in January, remains tied to the level of 4000 points. Oil (WTI benchmark) has been rising since the beginning of the year, but so far without serious prospects, facing strong resistance in the area of 82-82.5 dollars per barrel.



The macro picture of the market suggests that investors are clearly waiting for the easing of the Fed's stance in the first quarter of 2023 in response to slowing inflation and somewhat deteriorating activity data, but doubt whether the reaction will be adequate to the risks that have arisen. On the one hand, if the Fed gets worried and signals a quick end to the tightening cycle, risk assets will continue to rise, and the dollar will go to new lows. On the other hand, if fears of an “inflation comeback” and confidence that the economy is strong enough outweigh among the policymakers, markets will likely price in Fed’s policy error that will accelerate the onset of recession, what will clearly be risk-negative event. Hence the absence of pronounced trends in the market, since it is not clear what the Fed will put at the forefront in this situation. This uncertainty will likely be the key near-term trading theme until the middle of next week, when the Fed will hold a meeting on monetary policy.

Thursday's economic calendar contained some interesting surprises, including unexpected strong growth in January in US durable goods orders (5.6% YoY growth, 2.5% forecast) and fourth-quarter GDP (2.9% QoQ, 2.6% forecast). Employment in the US continues to inspire calm, initial applications rose by 186K against the forecast of 205K. Slightly higher than the forecast were long-term claims for unemployment benefits - 1.675 million, the forecast was 1.659 million:



Despite waves of sales, the dollar index is offered quite solid support at 101.50. It is worth noting that buyers' confidence in the dollar's rebound is falling, which can be seen from the gradual decrease in the amplitude of upward corrections in January, which forms the “triangle” pattern. This figure in a downtrend is often interpreted as a trend continuation pattern:



Today's data helped USD to stage a mini-rebound that reflects reducing bets on a dovish outcome of the Fed meeting in February. However, the dollar index is unlikely to move into an uptrend now: bullish momentum can definitely lead to a breakout of the level of 102 with an upside correction to 102.2-102.3, however, the market is unlikely to take medium-term direction before the FOMC meeting outcome. A short-term tactic in this situation may be to short EUR, GBP and USDJPY with positions covered closer to the middle of next week.

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.
 

stoch

Active Member
EURUSD consolidates ahead of the FOMC meeting

The dollar index started the week on a rather pessimistic note, trading below 102 points, suggesting that the market is setting low expectations for a hawkish Fed outcome on Wednesday. A moderate correction is taking place in the risk assets as a reaction to a possible turbulence due to a series of central bank meetings this week. Major European indexes and futures for US indices are in the red on Monday. The price of gold, which has been a pretty good proxy for expectations for the Fed's interest rate path since the beginning of this year, is consolidating around $1925, also indicating relatively mild expectations for a dovish Fed surprise.
The dollar could come under pressure, with EUR/USD above 1.10 if the Fed makes a big surprise, in particular by saying that any additional rate hike after 25bp this week will depend on incoming data. However, the chance of such an outcome is low. It is more likely that the Fed will reject market expectations of a 50 basis point rate cut in the second half of the year, in which case the dollar will move into a short-term rally.





Potential EURUSD reaction following FOMC decision


In addition to the FOMC meeting on Wednesday, there are two important reports on the US economy on the US data calendar. First, the Fourth Quarter Labor Cost Indicator (ECI) is one of the Fed's preferred measures of price pressure in labor markets. This indicator rose to 1.4% in the first quarter of last year from the previous three months, but is expected to fall to 1.1% in the fourth quarter from 1.2% in the third. Any surprise upside here could see expectations shift towards a more hawkish FOMC decision. And on Friday, the US jobs report for January comes out.


Clearly this is a busy week for FX and perhaps most of the volatility will come from the results of Wednesday night's FOMC meeting and the ECB/BoE decision on Thursday. The opening of Chinese markets after the public holiday of the Lunar New Year should also add some volatility to Asian markets price action. Investors are very optimistic about China reopening its doors and will need more data this week to see if the potential recovery momentum in the Chinese economy remains. Tomorrow we will see the Chinese PMI for January, where a significant rebound is expected to support the bullish positions on Chinese risk assets.
The main view of the ECB meeting is that the central bank will remain hawkish and resist the 2024 easing. This should see EURUSD's 2-year swap differentials continue to narrow and be positive for EUR/USD. The narrowing of the swap differential is the main market factor in the EUR/USD appreciation.


Before the ECB meeting on Thursday, euro zone economic confidence figures for January will be published today. They are expected to improve slightly, but any upside surprises will fuel the hypothesis of lower energy consumption and strong fiscal stimulus to ensure recessions, if any, are mild.


A 50 basis point rate hike by the Bank of England could provide moderate support for the pound sterling. The base scenario for a 50 basis point upswing is not fully priced in by the market. And with wage pressures lingering and the impact of a low base not leading to a significant decline in the consumer price index until the second quarter, it looks like it's too early for the Bank of England to relax on the predictability of inflation. Depending on the state of the dollar after the FOMC meeting, by the end of the week GBP/USD may rise to 1.2500.

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.
 
Dollar major recovery becomes a real risk after surprisingly strong US Payrolls report



US equities posted good performance on Thursday, with SPX almost testing 4200 points and NASDAQ jumping 3.56%, very close to 13000 points, the highest level since the end of August. The FOMC meeting was a nothingburger with the FOMC statement and Powell comments indicating a strong bias towards much less hawkish stance, which could open the way to new local highs this year, but Friday Payrolls report thwarted bullish outlook for risk assets. Also, market rebound on Thursday was not reflected in a corresponding decline in Treasury yields: despite the rise in equities, the 10-year bond yield hovered very subduedly around 3.35%, the level that formed after the Fed meeting on Wednesday. Thus, speculative momentum could join the rise in the stock market, which should make it more vulnerable to a pullback in the event of bearish catalysts.

Gold price, despite initial rise after the FOMC, plunged on Thursday, leaving many questions about investors’ take on the FOMC meeting. Since gold returns are a function of the real interest rate (the lower the expected rate, the higher the value of gold, all other things being equal), gold collapse suggests that the Fed meeting did not provide a convincing argument that real US rates will go down in 2023, including through the transition of the Fed to a soft policy.

The shocking Non-Farm Payrolls report today brought back a 50 bp Fed rate hike to the list of possible scenarios at the next meeting! Job growth more than doubled the forecast - 517K (expected 185K). The previous Payrolls figure was also significantly revised upwards to 260K. Wages in annual terms accelerated to 4.4%:





The release of the report caused a sharp strengthening of the dollar, the index of the US currency jumped by more than 0.5%, and the yield of the 10-year bond returned to the level of 3.5%. Gold collapsed:





Strong Payrolls report, in my opinion, will significantly complicate further rally in risk assets market, since the outlook for lower Fed rates in the second half of 2023 was the driver of bull run. Now, market participants may seriously consider that instead of a single rate hike, the central bank will deliver more or move to “large-caliber shells” (a 50 bp increase) as strong labor market can generate inflation longer, which may require a longer central bank intervention. On the other hand, the report showed that the US economy is in excellent shape and maintains momentum of expansion, which allows investors to revise growth outlook for US firms, and hence their expected yield. As one can see, the risk assets market will now be affected by two factors: one positive, in the form of a strong economy, and one negative, the Fed's later transition to a neutral policy setting.

The most likely market scenario next week is a moderate downward correction of risk assets and extension of the dollar rebound, these trends may sharply intensify in the event of a re-acceleration of inflation in January. The January CPI will help to clarify this risk.



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.
 

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