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Daily market analysis

Fed officials: Rates will continue to rise

December 19, 2022

US stocks confronted the longest weekly losing streak since September, as investors were concerned that the Federal Reserve’s resolve to keep raising rates could tip the economy into a recession. Market participants had cheered the softer-than-expected inflation data earlier this week.

However, that euphoria faded as Fed officials hammered home the message that rates will go higher for longer until they’re confident inflation has been subdued. While the Fed raised rates by an expected 50 basis points on Wednesday, risk assets have been on the back foot ever since policymakers signalled a peak rate that was above market expectations. A wave of rate hikes and hawkish outlooks from central banks across the globe, including the European Central Bank, further bruised sentiment this week.

The benchmarks, the S&P500 and the tech-heavy Nasdaq 100 closed the session lower for a third day. The S&P500 dropped lower with 1.11% on Friday and the Nasdaq 100 was down by 0.9% for the day. All eleven sectors of the S&P500 stayed in the negative territory, as the Real Estate sector performed the worst among all groups, falling by 2.96% on a daily basis. Meanwhile, the Dow Jones Industrial Average edged lower by 0.9% on a daily basis and the MSCI world index tumbled by 2.4% on Friday.

Main Pairs Movement

The US Dollar edged higher by 0.27% on a daily basis, as investors are consuming the Federal Reserve’s resolve to raise interest rates higher and longer. The DXY index extended its upside momentum since late UK trading and ended at a level above 104.8.

The GBPUSD slid by 0.25% for the day, as the Bank of England raised its policy rate by 50 basis points following the December policy meeting as expected. The pair dropped to a daily low level below 1.2120 during the UK trading session. Meanwhile, the EURUSD dropped nearly 0.55% during the US trading hour with investors consuming that European Central Bank announced that it raised key rates by 50 basis points. The pair fell 0.4% on Friday.

The XAUUSD surged by 0.91% for the day, managing to erase some losses from the biggest weekly loss in four. The gold price witnessed some positive traction during the UK trading hours, regaining the huge fall from last Thursday.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD traded lower on the last trading day of the week. Despite falling on the last two trading days of the week, EURUSD still posted a weekly gain of more than 0.5%. The Euro underperformed against the Dollar on the last two trading days as recessionary fears and risk-off sentiment prevailed across markets. Released during last Friday’s American trading session, the lower-than-expected U.S. PMI figure dragged on U.S. equities as market participants reassess the slowing down of purchasing and the U.S. economic outlook. Furthermore, the higher-than-anticipated European region CPI did little to boost sentiment surrounding the Euro. The ECB’s decision to hike rates on the 15th did not create the expected upward boost for the Euro, rather the decision is criticized as being a late reaction, which is proven by Friday’s CPI upside surprise. On the economic docket, U.S. GDP and weekly initial jobless claims will be released on the 22nd, while no major economic data releases are scheduled for the Euro.

On the technical side, EURUSD continues to retreat from our previously estimated resistance level of 1.0785. The 76.4% Fibonacci retracement level of 1.0538 now presents itself as a short-term support level for the pair. RSI for EURUSD sits at 42.44, as of writing. On the four-hour chart, EURUSD is currently trading below its 50, 100, and 200-day SMA.

Resistance: 1.0785

Support: 1.0538,  1.031

GBPUSD (4-Hour Chart)

The pound looks set to be under severe pressure against the dollar by the end of the week, with weak economic data on Friday stoking fears of a recession. BoE raised interest rates by 0.5%, bringing the benchmark rate to its highest level since 2008 (3.5%). However, it was not strong enough to prevent the Cable from suffering the biggest decline in past six weeks in one day. Although six of the nine Monetary Policy Committee members were in favour of the decision, and one wanted stricter action, the market still interpreted the move as a dovish rate hike. BoE Governor Andrew Bailey said we may see a glimmer of hope that inflation may be slowing. But even so, he said that further rate hikes may still be appropriate given the tightness of local labour conditions. Nevertheless, the market made its choice and the pound fell. Also, the December PMI data showed that the dominant service sector remained in expansionary territory, while manufacturing improved slightly this month. Companies reported that price pressures eased further from this year’s record highs. However, these figures do not dispel market fears of a recession in the UK and have put pressure on the pound during the European session.

On the technical side, GBPUSD failed to reach our previously estimated resistance level of near the 1.26 price region. The short-term support level for the pair remains at around the 1.19 and 1.176 price region. RSI(14) for the pair sits at 44.77, as of writing. On the four-hour chart, GBPUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1.2666, 1.3000

Support: 1.1900, 1.176

XAUUSD (4-Hour Chart)

Gold raise more than 0.5% as of writing during Friday’s trading session. After the hawkish message from the US Federal Reserve on Wednesday, the ECB followed right behind the pace, making it clear that there would be more than 50 basis points of rate hikes in the following meetings. This took markets surprised and triggered a rally in EURUSD, but was reversed immediately as the Fed remains in the lead. In other gold-related news, India plans to invite tenders to extract gold from 50 million tons of processed ore from colonial-era mines in the southern state of Karnataka, Reuters reported, citing a senior government official with direct knowledge of the matter. The potential increase in gold supply has negatively impacted the outlook for gold prices.

In other gold-related news, India plans to invite tenders to extract gold from 50 million tons of processed ore from colonial-era mines in the southern state of Karnataka, Reuters reported, citing a senior government official with direct knowledge of the matter. The potential increase in gold supply has negatively impacted the outlook for gold prices.

On the technical side, if the price stabilizes above $1,790 and confirms that level as support, it could test $1,800 in the near term and then aim for $1,830 (50% Fibonacci retracement of the long-term downtrend). RSI(14) for the yellow metal sits at 57.66, as of writing. On the four-hour chart, XAUUSD currently trades below its 50, and 100-day SMA but above its 200-day SMA.

Resistance: 1800, 1810, 1830

Support: 1790, 1775

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EUR                German IFO Business Climate Index (Dec)17:0087.4