Daily market analysis

The Fight Against Inflation is Far from Over, Fed Officials say

August 23, 2022

US stocks plunged on Monday, as the earnings season wrapped up and the threat of an economic recession still looming large amid warnings from Fed officials that the fight against inflation is far from over. That stance will likely be reinforced by Jerome Powell Friday at the prestigious event in Wyoming’s Grand Teton mountains, which has been used by Fed chairs as a venue for making key policy announcements. According to the latest MLIV Pulse Survey, stocks and bonds are set to tumble once more even though inflation has likely peaked, as rate hikes reawaken the great 2022 selloff. Many investors see the most destabilizing era f price pressures in decades eroding corporate margins and sending equities lower.

The benchmarks, both S&P500 and Dow Jones Industrial Average dropped on Monday, as equities saw their worst rout in two months after a surge drove S&P500 to its best start to a third-quarter since 1932. All sectors stayed in negative territory, as Consumer Discretion, Information Technology, and Communication service performed the worst among all groups, falling with 2.84%, 2.78%, and 2.67% on daily basis respectively for the day. The Nasdaq dropped 2.7% as big tech underperformed, Dow Jones Industrial Average fell 1.9%, and the MSCI world index plunged 1.8% on Monday.

Main Pairs Movement

The US dollar surged on Monday, as investors shied away from riskier assets amid growing fears that interest-rate hikes in the United States and Europe, aimed at curbing inflation, would weaken the global economy. The DXY index extended bullish momentum and edged higher, witnessing fresh transactions and surging to a level above 109.0 in the early US trading session.

The GBP/USD plunged and printed a fresh two-year low of 1.1742 on Monday, as strong greenback across the board and the vulnerable employment data have trimmed the confidence of the Bank of England in hiking interest rates. The cables have extended the selling pressure caused by the US dollar since last week and edged lower to a level below 1.177 by the end of the day. Meantime, EUR/USD fell to a level below 0.995, the lowest level since December 2002, as fears of the Eurozone recession escalated day by day. The pair dropped 0.94% on daily basis for the day.

Gold dropped and remained weighted at a one-month low, down for the seventh consecutive day, with the risk-aversion market mood supporting the US dollar ahead of the Jackson Hole meeting on Friday. Moreover, market fear of Russia’s Nord Stream 1 pipeline’s maintenance also supports the XAU/USD bears. The gold extended the bearish momentum and kept moving down to a level below $1,730 marks ahead of the US trading session, then rebounded to oscillate in a range from $1,735 to $1,740.

Technical Analysis  

EUR/USD (4-Hour Chart)

The EUR/USD pair tumbled on Monday, coming under heavy bearish pressure and extended its slide toward the multi-year low below the 0.996 mark amid a risk-off market environment. The pair is now trading at 0.9958, posting a 0.80% loss daily. EUR/USD stays in the negative territory amid renewed US dollar strength, as the flight to safety in the American session provides a boost to the greenback and lifted it to new highs further north of the 108.00 mark at the beginning of the week. The growing worries over a global economic downturn and the COVID lockdowns in China have both undermined the market sentiment and exerted bearish pressure on the EUR/USD pair. For the Euro, the Bundesbank monthly report, which weighed on the shared currency, showed that a recession in Germany is increasingly likely and inflation will continue to accelerate.

For the technical aspect, the RSI indicator is 17 as of writing, suggesting that the pair might witness some upside correction as the RSI stays in the oversold zone. As for the Bollinger Bands, the price preserved its bearish traction and moved out of the lower bands, therefore a strong downtrend continuation can be expected. In conclusion, we think the market will be bearish as the pair is testing the 0.9991 support. But the pair could see some short-term correction before edging lower amid the oversold RSI.

Resistance:  1.0082, 1.0111, 1.0188

Support: 0.9991, 0.9950, 0.9910

GBP/USD (4-Hour Chart)

The GBP/USD pair suffered heavy losses on Monday, continuing to turn lower for the fourth straight day and dropped to the lowest level since March 2020 below 1.1750 level amid renewed US dollar buying. At the time of writing, the cable stays in negative territory with a 0.64% loss for the day. The expectations that the Fed would continue to tighten its monetary policy to tame surging inflation continued to underpin the US dollar and dragged the GBP/USD pair lower. The speech from Fed Chair Jerome Powell at the Jackson Hole Symposium on Friday might also provide clues about the possibility of a 75 bps rate hike move at the September meeting. For the British pound, the Bank of England’s gloomy economic outlook and growing recession fears kept acting as a headwind for the currency.

For the technical aspect, the RSI indicator is 21 as of writing, suggesting that the pair could stage a correction before extending its slide as the RSI has dropped below 30. As for the Bollinger Bands, the price remained under pressure and dropped toward the lower band, therefore a continuation of bearish traction can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.178 support. A four-hour close below that level could open the door for additional losses.

Resistance: 1.1830, 1.1922, 1.2050

Support: 1.1780

XAU/USD (4-Hour Chart)

Gold price slumped to below $1,730 level in the European session and tried to erase losses in the early American session but failed on Monday. Price continues losing ground for the sixth straight day and drops to a nearly four-week low, suggesting that gold is still hard to gather bullish momentum with US Treasury bond yields continuing to push higher.

From the technical aspect, gold price witnessed heavy sell on Monday from the $1,750 level to the lowest $1,728. The RSI indicator is 28 as of writing, slightly below 30, which suggests that there could be a correction due to overselling. On the other hand, any advance upward now might be taken as a good chance for investors to sell while the trend is still downward. As for the Bollinger Bands, the price kept declining along with the lower band, a continuation of bearish traction can be expected. In conclusion, we think the market will maintain its downside traction but need to be aware of upside correction.

Market participants now eye on Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday for clues about the possibility of a 75-bps rate hike move at the September meeting. This and the important US economic releases this week will play a key role in influencing the USD price and help determine the next direction for gold.

Resistance: $1,757, $1,783, $1,803

Support: $1,714, $1,685

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EURGerman Manufacturing PMI (Aug)15:3048.2
GBPComposite PMI16:3051.3
GBPManufacturing PMI16:3051.0
GBPServices PMI16:3052.0
USDNew Home Sales (Jul)22:00575k