Daily market analysis

Federal Reserve will stay hawkish on policy tightening

September 7, 2022

US stocks edged lower on Tuesday, seesawing between gains and losses along the session but gave up ahead of the close amid the bets that the Federal Reserve will stay hawkish on policy tightening. On top of that, recession fears still remained amid the escalating energy crisis, but UK Prime Minister Liz Truss has announced energy bail-outs to cope with the crisis that affects all of Europe. On the economic data side, the US ISM Services PMI improved to 56.9 in August, which came higher than the market’s expectations and showed a slight uptick in the services sector due to increases in business activity. In the Eurozone, the conflict with Russia, which cut all gas provision to Europe, acted as a headwind for the euro and exerted bearish pressure on the market sentiment.

The benchmarks, S&P 500 and Dow Jones Industrial Average both suffered slight losses on Tuesday as the recession fears and the hawkish Fed expectations continued to weigh on the equity markets. The S&P 500 was down 0.4% on a daily basis and the Dow Jones Industrial Average also dropped with a 0.5% loss for the day. Seven out of eleven sectors stayed in negative territory as the Communication Services and the Energy sectors are the worst performing among all groups, losing 1.26% and 1.08%, respectively. The Nasdaq 100 fell the most with a 0.7% loss on Tuesday and the MSCI World index was down 0.5% for the day.

Main Pairs Movement

The US dollar advanced higher on Tuesday, preserving its upside traction amid upbeat US ISM Services PMI data. The DXY index was surrounded by bullish momentum for most of the day and touched a daily top near 110.5 level, but then retreated back slightly to erase some daily gains. A surprising improvement in the Services PMI helped the safe-haven greenback to find demand, which printed a fresh two-decade high at 110.55. Investors now waiting for the speech from Fed Chair Jerome Powell scheduled on Thursday.

GBP/USD is little changed on Tuesday as the market focus shifts to speeches from central banks. On the UK front, after securing the position of next UK Prime Minister, Liz Truss is continuously announcing relief packages for households against soaring inflation after securing the position of next UK Prime Minister. The GBP/USD pair climbed to a daily high above the 1.160 mark, but failed to preserve its upside traction and surrendered its early gains. Meanwhile, EUR/USD remained under bearish pressure and extended the slide towards 0.988 amid the escalating energy crisis. The pair was down almost 0.23% for the day.

Gold declined with a 0.50% loss for the day after dropping to a daily low near the $1700 mark during the US trading session, as the stronger US dollar across the board and upbeat US PMI data both dragged the precious metal lower. Meanwhile, WTI oil came under selling pressure and retreated to the $86 area during the second half of the day, as markets worried that high inflation and interest rate hikes will hit oil demand.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD saw large price movements as economic data from the U.S. and the E.U. were released. The shared currency enjoyed demand early in the trading day, but EURUSD could not hold on to gains as Germany published its July Factory orders, falling by 1.1% month over month and 13.6% year over year. The dismay economic data from Germany was exacerbated by the upbeat PMI data, which was released at the opening of the American trading session. The two key economic data sent EURUSD below the 0.99 level. The worse than expected Germany factory orders figure adds further concern to the E.U.’s economic outlook.

On the technical side, EURUSD has successfully defended our previous estimated support level of 0.9902; however, we do expect EURUSD to travel further lower to the 0.98 price region in the near future. RSI for the pair sits at 42.1, as of writing. On the four-hour chart, EURUSD currently trades below its 50, 100, and 200-day SMA.

Resistance:  1.0033, 1.0055, 1.0082

Support: 0.9902, 0.985

GBPUSD (4-Hour Chart)

GBPUSD enjoyed early gains during the Asia trading session, as market participants embrace a new British Prime Minister. Prime Minister Liz Truss has promised to deal with the energy crisis and intends to cut taxes in order to grow the slowing economy. However, Cable lost ground as soon as the better-than-expected PMI figure was released during the American trading session. Market participants will now turn their attention to the BoE’s statement, scheduled during today’s European trading session. Despite Cable’s retreat, the British Pound has outperformed its G10 peers against the American Greenback.

On the technical side, we remain confident that the 1.1463 price level will support Cable in the short term. The short-term resistance level remains around the 1.1561 price region. RSI for Cable sits at 44.787, as of writing. On the four-hour chart, GBPUSD currently trades below its 5, 100, and 200-day SMA.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAUUSD (4-Hour Chart)

After seeing a rise in Gold prices over the course of Monday’s trading, Gold has once again resumed its downward trend. The U.S. Greenback continues to be more attractive compared to the non-yielding precious metal. After the release of the U.S. non-manufacturing PMI, Gold entered a downwards spiral towards the $1700 per ounce price region. The rise in U.S. 10-year treasury yields has further added selling pressure on the yellow metal. The energy crisis and the price surge it accompanies have pulled market participants away from XAUUSD.

On the technical side, XAUUSD hit our previously estimated resistance level of $1724 per ounce and began retracing toward our estimated support level of around $1695 per ounce. RSI for Gold sits at 40.84, as of writing. On the four-hour chart, XAUUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1762, 1800

Support: 1688, 1695

Economic Data

CurrencyDataTime (GMT + 8)Forecast
BRLBrazil- Independence DayAll Day
AUDGDP (Q2)09:301%
GBPBoE Gov Bailey Speaks17:00
CADBoC Interest Rate Decision22:003.25%
CADIvey PMI (Aug)22:0048.3
GBPBoE MPC Treasury Committee Hearings22:15