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Daily market analysis

US 10-year treasury yield dropped, Fed possibly to slow the pace of hikes

October 24, 2022

U.S. equities traded higher over the course of yesterday’s trading. The Dow Jones Industrial Average gained 2.47% to close at 31082.56. The S&P500 gained 2.37% to close at 3752.75 The tech-heavy Nasdaq Composite gained 2.31% to close at 10859.72. Equities hit the best week since June despite the 10-year Treasury yield surging to its highest level since 2008, the next move of the central back on curbing inflation will be crucial for the market.

The benchmark U.S. 10-year treasury yield has dropped 0.16% from the highest and is currently trading at 4.219%, the drop is considered a reflection of the possibility of the Federal Reserve could begin to slow the pace of hikes.

The upcoming PMI monthly Composite Reports released by Markit Economics shows the percentage of respondents reporting an improvement, deterioration or no change since the previous month, which captures business conditions in the manufacturing sector of the EU and UK.

About the ECB meeting, it seems a 75 basis points interest rate hike is a done deal, and the deposit rate reaching 3% by March next year to beat inflation, besides, there might be a prospect of another jumbo hike in December according to the 75bp increase. Also, Governing Council is considering to start reducing the bond portfolio, which will remove liquidity from the market and additional monetary tightening.

U.S. GDP(QoQ) of Q3, 2022 will be announced on Thursday, Oct 27, in view of the persistently challenging environment, with historically high energy costs and rapidly rising interest rates, as the very high inflation, especially in food and household costs, we have less optimistic about GDP forecast.

Main Pairs Movement

The Dollar Index lost 0.05% over the course of yesterday’s trading. The Greenback strength is at a three-week high as rising global bond yields weigh on equity markets and Asian currencies, and the greenback is more robust against all its G-10 peers

EURUSD gained 0.2% over the course of yesterday’s trading. The comeback was from the announcement about of combating inflation and the meeting on Thursday with European Central Bank.

GBPUSD gained 0.78% over the course of yesterday’s trading. Retail Sales declined by 1.4% in September, and the estimate was 0.5%, the core sales tumbled 6.2% YoY in September with an estimation of 4.1%, which indicates the high inflation in the UK.

Gold gained 1.57% over the course of yesterday’s trading. Gold is headed for the second consecutive weekly decline, and the higher borrowing cost will continue denting the non-yield metal.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair edged higher on Friday, regaining upside momentum and rebounded towards the 0.9800 mark amid speculation the US Federal Reserve will debate smaller rate increases starting in December. The pair is now trading at 0.9842, posting a 0.61% gain on a daily basis. EUR/USD stays in the positive territory amid renewed US dollar weakness, as the safe haven greenback is losing ground and retreats to the 112.7 area amid a less hawkish stance from the Federal Reserve. The latest reports showed that the Fed could debate on whether and how to signal plans to approve a smaller increase in December, as few officials signalling greater unease with big rate rises to fight inflation. For the Euro, the concerns about a deeper global economic downturn and the protracted Russia-Ukraine war could keep acting as a headwind for the shared currency.

For the technical aspect, the RSI indicator is 60 figures as of writing, suggesting that the pair is preserving its bullish momentum as the RSI climbs sharply towards 70. As for the Bollinger Bands, the price regained upward strength and crossed above the moving average, so a strong uptrend continuation can be expected. In conclusion, we think the market will be bullish as the pair is testing the 0.9861 resistance. The rising RSI also reflects bull signals.

Resistance:  0.9861, 0.9921, 0.9986

Support: 0.9757, 0.9667, 0.9551

GBPUSD (4-Hour Chart)

The GBP/USD pair edged higher on Friday, coming under selling pressure but then rebounded back to the 1.1300 area despite the release of the disappointing UK Retail Sales figures. At the time of writing, the cable stays in positive territory with a 0.30% gain for the day. The Wall Street Journal reported that Federal Reserve officials are likely to debate then whether and how to signal plans to approve a smaller rate increase in December, which led to a goodish recovery in the equity markets and weighed on the greenback. For the British pound, the UK Retail Sales declined 1.4% MoM in September, which is worse than market expectations of -0.5% and suggests that consumers are feeling the pinch of high inflation. On an annualized basis, UK retail sales also plunged -6.9% in September. Therefore, the downbeat UK data further fueled the growing fears of a deeper economic downturn and exerted bearish pressure on the GBP/USD pair.

For the technical aspect, RSI indicator 53 figures as of writing, suggesting that the upside is more favoured as the RSI stays above the mid-line. As for the Bollinger Bands, the price witnessed fresh buying and touched the moving average, therefore the upside traction should persist. In conclusion, we think the market will be bullish as long as the 1.1131 support line holds. A sustained strength beyond the 1.1390 mark might trigger a short-covering rally and allow the GBP/USD pair to reclaim the 1.1470 mark.

Resistance: 1.1390, 1.1476, 1.1566

Support: 1.1131, 1.0968, 1.0392

XAUUSD (4-Hour Chart)

As the US dollar failed to preserve its upside momentum after the Wall Street Journal mentioned that Fed officials are split about December’s rate hike on an article, the pair XAU/USD regained bullish strength and rose sharply towards the $1,647 level during the US trading session. XAU/USD is trading at $1655 at the time of writing, rising 1.59% on a daily basis. Fed officials are adjusting the pace of rate increases as they try to cool down inflation and policymakers are weighing whether to hike rates at a slower pace in December. Therefore, the US bond yields retreated lower after the article was published, providing strong support to the dollar-denominated gold. The report has also offset the impact of the hawkish tone of the Fed officials’ recent comments, as Philadelphia Fed President Patrick Harker reiterated on Thursday that the bank will keep raising rates for a while.

For the technical aspect, RSI indicator 57 figures as of writing, suggesting that the pair is preserving its upside strength as the RSI stays near 60. For the Bollinger Bands, the price extended its intra-day rally and climbed towards the upper band, therefore the upside traction should persist. In conclusion, we think the market will be bullish as the pair is heading to test the $1666 resistance line. The pair seems to be well supported by the $1620 support and a break above the $1666 mark could open the door for additional gains.

Resistance: 1666, 1681, 1705

Support: 1620

Economic Data

CurrencyDataTime (GMT + 8)Forecast
CNYGDP (YoY) (Q3)10:003.4%
CNYIndustrial Production (YoY) (Sep)10:004.5%
EURGerman Manufacturing PMI (Oct)15:3047.0