Daily market analysis

Household and labour demand are strong, supporting the Fed’s aggressive move

August 31, 2022

US stocks ends at the lowest level in a month, as fresh data pointed to resilience in household and labour demand, affirming the Federal Reserve’s resolve to continue to be aggressive in its fight against inflation. Three regional Fed presidents, in separate remarks on Tuesday, reiterated Chair Jerome Powell’s intention to bring down inflation. A reading on job openings Tuesday added to signs that the labour market remains tight and wage pressures persist. Jobless claims will air Thursday before Friday’s August payroll report. Moreover, the Fed this week is also set to step up the unwinding of its near-$9 trillion balance sheet. Other risks range from China’s economic slowdown to an energy crisis that threatens to tip Europe into recession undermining the market mood.

The benchmarks, both S&P500 and Nasdaq100 slid on Tuesday and finished the session at their lowest level in a month. All eleven sectors of S&P500 stayed in negative territory, as Energy and Materials performed the worst among all groups, which dropped by 3.36% and 1.71% respectively for the day. The Dow Jone Industrial Average fell 1%, Nasdaq 100 tumbled with a 1.1% loss, and the MSCI world index also decreased 1% on Tuesday.

Main Pairs Movement

The US dollar was little changed on Tuesday, as the market priced the huge interest rate hikes by U.S. Federal Reserve and the European Central Bank (ECB). The DXY index edged lower and touched a daily low level below 108.3 in the first half of Tuesday, then regained bullish momentum and surged to a daily high level above 109.1 following the announcement of Consumer confidence readings. However, the greenback then weighted by heavy selling pressure, dropped and oscillated in a range from 108.6 to 108.9.

The GBP/USD dropped with a 0.45% loss daily for the day, as the data this week so far has kept the hawkish sentiment going. The cables dropped dramatically and touched a daily low below 1.1626 following the surprised US CB Consumer Confidence, then little corrected and wandered to a level around 1.1660. Meanwhile, EUR/USD tumbled with a huge loss to a level around 0.9983, then corrected to a level above 1.001. The pair advanced with a 0.18% gain on daily basis on Tuesday, after upbeat statistics from Germany, as well as hawkish comments from the European Central Bank (ECB) policymakers.

Gold dropped with 0.75% losses for the day, drifting back closer to a one-month low. The aggressive Fed rate hikes bets drive flows away from the yellow metal, XAU/USD tumbled and oscillated around $1,724 marks after the US consumer reading.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair edged higher on Tuesday, failing to extend its intra-day rebound and retreated from daily highs that touched in the European session after the release of upbeat US data. The pair is now trading at 1.0002, posting a 0.09% gain daily. EUR/USD stays in the positive territory amid renewed US dollar weakness, but the higher US yields and improving economic data have both provided support to the safe-haven greenback and exerted some bearish pressure on the EUR/USD pair. The US CB Consumer Confidence Index improves to 103.2 in August, which came in better than expected and helped the greenback gather strength against its rivals. For the Euro, the German Annual CPI inflation rises to 7.9% in August, which is higher than the market expectation of 7.8% and showed that inflation in Germany continued to rise.

For the technical aspect, the RSI indicator is 56 as of writing, suggesting a bullish tilt in the near term as the RSI on the four-hour chart climbed above 50. As for the Bollinger Bands, the price regained some upside traction and rose higher toward the upper band, therefore the upside momentum should persist. In conclusion, we think the market will be slightly bullish as the pair is heading to test the 1.0033 resistance. A breakthrough at that level should lead to additional gains toward the next resistance at 1.0089.

Resistance: 1.0033, 1.0089, 1.0171

Support: 0.9991, 0.9917

GBP/USD (4-Hour Chart)

The GBP/USD pair declined on Tuesday, coming under bearish pressure and dropped to a daily low below 1.1640 level in the early US trading session amid growing worries about a deeper global economic downturn. At the time of writing, the cable stays in negative territory with a 0.50% loss for the day. The expectations that the Fed will continue to tighten its monetary policy at a faster pace and a possible 75 bps rate hike move at the upcoming policy meeting both continued to act as a tailwind for the US dollar. The market focus now remains on the US jobs report (NFP) that will release on Friday. For the British pound, the currency might remains under pressure as the Bank of England had predicted earlier this month that the UK economy will enter a prolonged recession from Q4 of 2022.

For the technical aspect, the RSI indicator is 35 as of writing, suggesting that the downside is preserving strength as the RSI dropped sharply toward 30. As for the Bollinger Bands, the price witnessed fresh selling and declined toward the lower band, therefore a persistent selling interest can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.1655 support. Sustained weakness below that critical support should lead to a steeper decline toward a two-year low set near the 1.1500 area.

Resistance: 1.1738, 1.1780, 1.1853

Support: 1.1655, 1.1476

XAU/USD (4-Hour Chart)

Gold struggled to capitalize on yesterday’s gain from the $1,720 level and met with a fresh supply on Tuesday. The steady intraday decline extended through the US session and dragged the XAU/USD to the one-month low at the $1,720 level. Despite modest US dollar weakness and a further decline in the US Treasury bond yields, gold price struggles to advance as firming expectations for a 75 bps Fed rate hike at the September meeting. Hawkish comments from Fed Chair Jerome Powell on Friday reaffirmed these bets, which also weights on the gold price.

For the technical aspect, the RSI indicator is 36 as of writing, declining from mid-line on the trade of the day, which suggests that the persistent bearish mode could be expected. As for the Bollinger Bands, gold price sustained pressure from the downward moving average and declined to the lower bound, showing the downward traction influence on the gold price. In conclusion, we think the market is still under bearish pressure as the price couldn’t capitalize on the previous day’s bounce and closed at a lower high at the $1,740 level on the 4H chart. The price hovers around the $1,720 level as of writing, which is close to the support region at the $1,714 level. If the price closes below, it may head to test the pivotal support region at the $1,685 level, which is at a multi-year low and acts as key support for gold investors.

Resistance: 1765, 1803

Support: 1714, 1685

Economic Data

CurrencyDataTime (GMT + 8)Forecast
CNYManufacturing PMI (Aug)09:3049.2
EURGerman Unemployment Change (Aug)15:5528K
EURCPI (YoY) (Aug)17:009.0%
USDADP Nonfarm Employment Change (Jun)20:15200K
CADGDP (MoM) (Jun)20:300.1%
USDCrude Oil Inventories22:30-1.483M