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US Dollar burden from Fed scaling back monetary tightening

October 31, 2022

US stocks rallied on Friday, regaining upside momentum and ended a turbulent week with a sizable gain as the economic data suggested that the Federal Reserve’s battle against inflation is making progress. Investors have already priced in a 0.75% hike by the Fed in December, but the increasing rumours about the possibility of scaling down monetary tightening in December are weighing on the US dollar and providing support to the equity markets. The market now expects that the Federal Reserve might start softening its monetary tightening pace over the next months.

On the economic data side, the US annual Core PCE inflation rose to 5.1% every year in September, which came slightly lower than market expectations of 5.2%. In the Eurozone, estimations for further tightening by the European Central Bank are warranted as the inflation in Germany for October increased by 10.4% YoY and came in higher than market expectations. Some ECB speakers also commented that interest rates are still low and the ECB will decide on interest rate increases, meeting by meeting.

The benchmarks, S&P 500 and Dow Jones Industrial Average both advanced on Friday as the S&P 500 notched their longest weekly rising streak since August amid gains in big-tech companies including Microsoft Corp. and Google parent Alphabet Inc. The S&P 500 was up 2.5% daily and the Dow Jones Industrial Average also advanced higher with a 2.6% gain for the day. Ten out of eleven sectors in the S&P 500 stayed in positive territory as the Information Technology sector and the Communication Services sector are the best performing among all groups, rising 4.52% and 2.98%, respectively. The Nasdaq 100 climbed the most with a 3.2% gain on Friday and the MSCI World index was down 0.3% for the day.

Main Pairs Movement

The US dollar edged higher on Friday, touching a daily high above the 111.0 mark but then failed to preserve its upside during the US trading session amid further action warranted by the Fed. The core Personal Consumption Expenditure (PCE) jumped above August’s figures, which further justified the case for the Fed’s 75 bps interest-rate hike at the November meeting and acted as a tailwind for the safe-haven greenback.

GBP/USD advanced on Friday with a 0.43% gain after the cable refreshed its daily high above the 1.161 mark as the rumours of Fed pivoting are keeping USD bulls on a leash. On the UK front, Prime Minister Rishi Sunak and Chancellor Jeremy Hunt are working on reducing the piled debt of the UK to bring financial stability. Meanwhile, EUR/USD was nearly unchanged on Friday and rebounded slightly after retreating from a daily high near the 1.000 mark amid renewed US dollar weakness. The pair was up almost 0.03% for the day.

Gold declined with a 1.11% loss for the day after refreshing its daily low near the $1,640 level during the US trading session, as the Core PCE data underpinned the US dollar and exerted bearish pressure on the precious metal. Meanwhile, WTI Oil retreated lower with a 1.32% loss for the day after dropping to a daily low of around $87.4 area. But the EU’s oil embargo should lend support to oil prices.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD was little changed on Friday and continued to trade above 0.9950 at the moment of writing, as the dollar struggles to gather positive traction ahead of the weekend. The latest data from the US showed that core PCE inflation rose at a slightly softer pace than expected in September and that Pending Home Sales declined by 10.2%. Apart from that, EURUSD has reversed its direction to the downside as investors assess the European Central Bank’s (ECB) monetary policy decisions and communication.  As widely expected, the ECB raised its key rate by 75 basis points (bps) following the October policy meeting. The ECB president Christine Lagarde did not provide any details regarding a potential quantitative tightening move during the press conference, and she avoided committing to a specific size of a rate hike in December. On the data side, although the German Gross Domestic Product expanded at an annual rate of 1.2% in the third quarter, more than the expected 0.8%, it failed to underpin the European currency.

From the technical perspective, the four-hour scale RSI indicator 52 figured as of writing and turned weak compared to days ago, suggesting the bullish momentum has been lost and is ready to get into the consolidation phase. As for the Bollinger Bands, the pair dropped below the 20-period moving average and priced at a lower area, indicating the pair has no clear pressure direction and would put into sideways in the near term.

Resistance:  1.0093, 1.0198

Support: 0.9857, 0.9749, 0.9661, 0.9554

GBPUSD (4-Hour Chart)

The GBPUSD edged higher above the 1.1550 area in the second half of the day on Friday as the US dollar lost on the softer-than-expected Core PCE inflation and disappointing Pending Home Sales data for September.  The US Bureau of Economic Analysis’s report showed that US Core PCE Price Index declined from the previous 0.6% to 0.5% monthly rate in September, slightly softer than the market expected. However, the Pending Home Sales data for September reads -10.2%, far from the -5.0% forecast. These figures improved market mood and acted as a tailwind to help the pound hold its ground. Meanwhile, the European Central Bank (ECB) President Christine Lagarde’s dovish tone in the press conference following the bank’s decision to raise key rates by 75bps helped the British pound capture some of the capital outflows out of the euro.

From the technical perspective, the four-hour scale RSI indicator 59 figured as of writing, suggesting the upside traction was weaker as RSI fell from near 70. As for Bollinger Bands, the pair was priced just above the 20-period moving average and the gap between upper and lower bands get closer, signalling the positive movement turned. Hence, we think GBPUSD would slightly edge higher and challenge the resistance of the 1.1639 level in the short term.

Resistance: 1.1639, 1.1738

Support: 1.1250, 1.1071, 1.0953, 1.0392

XAUUSD (4-Hour Chart)

Gold price records a fresh three-day low spurred by a strong US Dollar. XAUUSD had a further decline and now was trading at the $ 1643 mark as stubbornly high US inflation was reported namely the Core Personal Consumption Expenditures (PCE), the Federal Reserve’s favourite gauge of inflation, which increased more than estimates, bolstering the US dollar.  Under the backdrop, the so-called Fed pivot narrative could be discarded as inflation remains at its extremely high level and salaries are rising, despite the Federal Reserve’s effort to tame the runaway inflation. Furthermore, US Treasury yields, namely the 10-year benchmark rate, recover five basis points up at 3.973% and Wall Street holds to gains amidst a decent earnings season, keeping US equities in the green, which undermined the non-yields yellow metal situation. The market participants turn to the next week’s Federal Reserve Open Market Committee (FOMC), in which most analysts expect the Fed to hike rates by 75bps, as reported by the CME FedWatch Tool, with speculations at an 84.5% chance.

From the technical perspective, the four-hour scale RSI indicator 39 figured as of writing, suggesting the gold amid heavy selling pressure which would persist until RSI fell to 30, an oversold region. As for Bollinger Bands, the pair was pricing around the lower band and the size between upper and lower bands remained unchanged, signalling that bearish momentum slow its pace. Therefore, we think XAUUSD would move downward to test the $1626 support, if failed, then a rebound could be expected.

Resistance: 1675, 1700, 1726

Support: 1626, 1616, 1600

Economic Data

CurrencyDataTime (GMT + 8)Forecast
AUDRetail Sales (MoM)08:300.6%
CNYManufacturing PMI (Oct)09:3050.0
EURCPI (YoY)(Oct)18:009.8%