Daily Market Analysis from ForexMart

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USD/JPY: USD to come out on top again

The currency market seems to have turned upside down. The US dollar, which has remained a king on Forex this year, suddenly began to lose ground. The yen, which is considered the main outsider this year, took advantage of the greenback's weakness which. It rose significantly.

Why USD loses ground

On Thursday night, the US dollar saw a large-scale sell-off. The US dollar index dived by 1.1%, reaching the monthly low of 109.56.

The greenback dropped across the board due to increased expectations of less aggressive tightening by the Fed and more hawkish stances of the ECB and the Bank of England.

In light of the recent weak US economic reports, traders have revised their outlooks for the Fed's monetary policy.

Investors expect the regulator to raise the interest rate by 75 basis points at the next meeting. However, they believe that the regulator will hardly undertake the same rate increase in December.

Aggressive tightening launched by the Fed to tame soaring inflation has adversely affected the economy. The world's largest economy is starting to show signs of slowing down.

It may force the Fed to shift to less aggressive rate hikes. If this scenario comes true, it will be rather bearish for the US dollar.

This year, the main driver for a rally was the monetary tightening. As the Fed has hiked rates more aggressively than other central banks, the greenback has skyrocketed to multi-year highs against its rivals.

It has grown the most versus the yen amid the divergence in monetary policies of the Fed and the BoJ. Since the beginning of the year, the yen has fallen by more than 20%, logging the worst performance among all the currencies.

The yen has become an outsider due to the Bank of Japan's commitment to a dovish stance. The regulator maintains its ultra-loose stance, while other major central banks are hiking rates.

After expectations of a slowdown in monetary tightening by the Fed have increased, the yen managed to climb.

The yen has been growing for two consecutive sessions. This morning, the Japanese currency extended gains.

At the time of writing the article, the USD/JPY pair fell by 0.5%, trading around 145.6. This is almost 5% below the high of 152 reached last week.

USD likely to rebound

Now, the dollar/yen pair is rapidly recovering after recent sell-offs. It has already approached a 32-year low.

However, many analysts believe that the current rally of the JPY will be short-lived as the US dollar could assert strength amid strong US economic data.

The US GDP report for the third quarter is due today. The indicator is projected to advance by 2.4% following a decrease of 0.6% in the previous quarter.

If this scenario comes true, market participants will have to revise their forecasts for the Fed's further plans for monetary policy, abandoning hopes for a softer stance.

The US dollar is sure to regain ground, while the yen will resume a downward movement.

On top of that, the JPY may decline even more after the results of the BoJ meeting. This event has been the main driver for the yen this week

Given a domestic demand shock in Japan, many analysts believe that the Bank of Japan will maintain its ultra-loose monetary policy to spur economic growth.

"The Bank of Japan will likely keep its main policy levers unchanged, yet again. Core inflation well above the 2% target and set to hit 3% isn't enough to prompt the BOJ to reduce monetary easing. Stronger wage growth is desired first," Bloomberg emphasizes.

The BoJ may keep the interest rate in negative territory, while the ECB may raise the key rate by 75 basis points today. The Fed will do the same next week. This is why the yen may again lose luster with investors.

In the short term, it may resume a sharp decline. If the yen collapses to critical levels again, the Bank of Japan will have to intervene once again.

Over the past month, the Japanese government has intervened in the forex exchange market three times. One intervention was officially announced. Analysts are sure that there have been two more. However, the Ministry of Finance did not announce them.

All interventions had a short-lived effect. The greenback recovered quickly thanks to strong fundamental factors, which boosted bullish bias.

Bulls are confident that the pair will climb again despite any intervention. The main thing is that the Fed adheres to its hawkish stance. If so, the US dollar will definitely resume an upward movement.

 

[KostiaForexMart]

Trading plan for EURUSD on October 31, 2022

Technical outlook:
EURUSD dropped through the 0.9914 lows intraday on Monday before finding support and reversing sharply to 0.9945. The single currency pair is seen to be trading close to 0.9935 at this point in writing as the bulls prepare to resume higher towards the 1.0170-1.0200 area. The currency pair is testing the backside of the past resistance trend line around 0.9910-20, which now serves as support.

EURUSD might have one more rally left to terminate its counter-trend rally, which began from 0.9535 earlier. The proposed target prices are towards 1.0200 and 1.0350, which are also lined up with resistance levels as marked on the daily chart. Immediate support is at 0.9700 on the daily chart and we can expect higher prices from here until it remains intact.

EURUSD is currently working on its recent upswing between 0.9700 and 1.0093. Prices are finding support just above the 0.9900 mark and could resume higher from here. Strong intraday support is seen at about 0.9850 as it is also the Fibonacci 0.618 retracement of the above upswing. We are looking higher from here in the near term.

Trading idea:
Potential rally through 1.0200 and higher against 0.9500

Good luck!

 

[KostiaForexMart]

Euro sadness is growing: macro data makes you sad. And the dollar is no stranger to: either retreat, or win

The US currency has once again bypassed the European one, which is seriously puzzled by a new batch of news about inflation. At the same time, the dollar draws confidence in the Federal Reserve's actions, which allows the completion of the current cycle of rate hikes.

The greenback significantly strengthened at the beginning of this week, restoring some of the positions lost over the past month. This was largely facilitated by the expectation of another interest rate hike from the Fed, whose two-day meeting is scheduled for November 1-2. According to preliminary calculations, on Wednesday, November 2, the central bank will raise the key rate by 75 bps, to 3.75-4.00%. This will be the fourth step on the Fed's part in raising rates.

However, many analysts and market participants doubt the continuation of the Fed's harsh rhetoric. According to experts, after the fourth rate hike by 75 bps, the central bank will take a less aggressive position on this issue. Michael Wilson, currency strategist at Morgan Stanley, is sure of this. He believes that the Fed's rate hike cycle is nearing completion. In support of his words, Wilson cites the inversion of the yield curve of ten-year and three-month US Treasury bonds. Recall that this is one of the key indicators indicating the need for a reversal of the central bank's tight monetary policy to a softer one.

However, some experts do not share the optimism of the Morgan Stanley representative. Currency strategists at UBS Global Wealth Management are confident that a reversal in the Fed's policy is unlikely, since the inflation rate in the US remains high. Against this background, the central bank will have to raise the rate until inflation recedes, the bank emphasizes.

The current situation puts pressure on the dollar, which, despite the current tension, is gradually strengthening. Against this background, the EUR/USD pair has been declining for the third consecutive day, continuing to struggle with the pull of the downward trend. On the morning of Tuesday, November 1, the EUR/USD pair was cruising near 0.9911. This is a difficult situation for the euro since it has to resist negative macro data.

Recall that reports on inflation in the eurozone were published on the evening of Monday, October 31, which again demonstrated its sharp rise. As a result, the inflation rate in the region soared to a new historical high, and the euro bloc economy lost its growth momentum. According to analysts, consumer prices in the EU rose by 10.7% in October 2022 compared to October 2021, exceeding forecasts. In the third quarter of this year, the volume of production in the eurozone decreased to 0.2% compared to the same period last year.

According to experts, the current situation is aggravated by a sharp increase in the European Central Bank's interest rates. At the same time, many analysts believe that the central bank should continue to actively fight inflation, which includes raising rates. It is possible that after the recent rate hike, the ECB will raise it again by 75 bps at the next meeting, which is scheduled for December 15. However, such a scenario is still in question, as well as a possible pause in the process of raising rates by the Fed.

Some analysts do not expect dovish decisions from the US central bank, although the current situation requires revision. According to experts, the aggressive tightening of the monetary policy contributes to the early onset of a recession in the United States, as well as a large-scale drop in treasury state bonds and stocks over the past few years. Take note that as rates rose and the economic downturn that followed the tightening of the monetary policy, the markets were gripped by a crisis. It was followed by an increase in the number of defaults, which seriously hit investors. In the current situation, the leading central banks will have to solve the issues that provoked such problems.

The current situation significantly affected the dynamics of the EUR/USD pair, provoking a correction at the end of September. However, the pair is gradually returning to a relatively stable course. According to experts, a new round of risk appetite in the markets will save the EUR/USD pair from further decline. At the same time, experts expect a New Year rally on the US stock market and the growth of risky assets in the near future.

 

[KostiaForexMart]

GBP/USD: dollar and pound in the ring. Waiting for the last knockout?

The British currency has cheerfully started November, but experts fear that its ardor will fade in the near future. The prerequisites for this are economic instability in the UK and the long-term strengthening of the US currency, which is not going to give up its position.

Sterling ended October on a negative note, losing 1% shortly before the decisive meeting of the Federal Reserve, which will end on Wednesday, November 2. According to its results, an additional increase in the interest rate by 75 bps is expected. The implementation of such a scenario will be the first step for the Fed to slow down the pace of rate hikes starting in December 2022, economists believe.

The past month was a time of recovery for the pound, experts believe. Against this background, the GBP/USD pair gained 3%, simultaneously reaching an impressive 1.1646. In many ways, this improvement is due to the curtailment of the economic policy of Liz Truss, the former prime minister of Great Britain, and her resignation. However, it was not only the rejection of the "mini-budget" that helped GBP get out of the price hole. The expectation of positive changes in the Fed's policy played a significant role. In addition, at the end of October, the US currency weakened.

At the beginning of the last month of autumn, the pound behaved cautiously, occasionally trying to rise. On Wednesday morning, November 2, the GBP/USD pair was trading at 1.1513, significantly retreating from the previous high positions. This was facilitated by the strengthening of the greenback, which continues its victorious march in the global market.

According to currency strategists at Bank of America (BofA), in the short and medium term, the dollar will still be the leader. Analysts are confident in the dollar's dominance. However, the implementation of such a scenario can dramatically limit the recent recovery of the pound. A similar development is likely with the next increase in the Fed's interest rate, according to BofA.

By the end of 2022, the market expects an additional rise in the Fed rate (the total volume of these increases is 135 bps). At the same time, by the first quarter of 2023, the peak of the federal funds rate will be 5%, BofA is confident. The bank believes that the Fed's decision in November will provide significant support to the greenback. According to John Skeen, currency strategist at Bank of America, at the moment the US currency is at 40-year highs. At the same time, "the strength of the dollar will remain at such levels at the beginning of 2023," the expert emphasizes.

The current sterling losses are due to the release of positive macroeconomic data from the United States, which provided significant support to the greenback, but pushed the pound and the euro into the abyss. According to reports, business activity in the US manufacturing sector (PMI) soared to 50.4 points in October (against the expected 49.9 points), and the ISM business activity index in the manufacturing sector rose to 50.2 points, exceeding the projected 50 points. Before the release of the reports, the GBP lost almost 100 points, falling sharply to 1.1550. In the future, sterling lost almost all the positions won earlier and fell into a downward spiral, reaching 1.1455. Later, the British currency managed to recover, but the consequences of such a "knockout" received from the dollar seriously affected the further dynamics of the GBP.

However, UOB currency strategists remain positive about the GBP/USD pair, believing that the pound will stand until the 1.1440 level is broken. If this stronghold falls, then sterling will be in a price hole for a long time. However, this is unlikely now, the UOB emphasizes. Earlier, analysts predicted the pound's growth to 1.1700, but the chances of this are melting every day.

According to experts, in the coming weeks, the euro and the pound will remain under pressure against the USD. Nevertheless, market participants do not lose hope for the pound's recovery in the long term. Many large hedge funds have raised their bets on the pound's growth, although asset managers have reduced their short positions against the GBP. However, the majority of market participants, taking into account the positive changes in the UK fiscal policy, support the position of hedge funds. At the same time, many analysts believe that optimism about the pound is justified.

 

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USD slides down after Fed interest rate hike

The US currency reacted negatively to another Fed funds rate increase following the FOMC meeting. USD slumped significantly, losing many of its earlier gains. However, market players and analysts believe that the US dollar is strong enough to recoup its losses.

USD decreased late on Wednesday after the Federal Reserve increased the interest rate by 75 basis points. Fed policymakers stated that future rate hikes, which are aimed at decreasing galloping inflation, could be smaller than the previous ones.

Analysts noted that the market regarded this statement as quite dovish. Investors assumed that the regulator will slow down the pace of rate hikes in the current situation. Many analysts believe that the Fed would increase the rate by only 50 bps in December.

While some market players expected the Fed to slow down monetary tightening significantly, these expectations were dispelled by Fed chairman Jerome Powell. At the press conference following the meeting he said that the Federal Reserve does not plan to slow down the pace of rate hikes. "It is very premature to be thinking about pausing," Powell added. The Fed chairman said the regulator will present a new summary of interest rate trajectory projections.

Furthermore, Powell pointed out the steady rise of the US dollar and called it "a challenge" for many countries. Expectations of an excessively high rate hike strongly pressured USD. Early on Thursday, November 3, EUR/USD traded near 0.9825. Earlier, the pair rose to 0.9832, but retreated slightly afterwards.

Market players hoped the Fed would slow down interest rate hikes this year and ultimately end the tightening cycle in the first quarter of 2023. However, the Fed's actions did not match their expectations. A 50 bps rate increase in December is the only likely policy adjustment the regulator can do.

Rising employment in the US became a key indicator signalling that the Fed would not soften their stance. According to the latest data by ADP, the US economy added 239,000 new jobs in October, well above 192,000 new jobs reported in September. The Federal Reserve uses such data to determine the level of inflation and interest rate adjustments. Strong US labor market data gives the Fed more room for maneuver, allowing the regulator to tighten its monetary policy more aggressively to fight soaring inflation.

Amid such developments, experts note that the US dollar rally can potentially continue in 2023, fuelled by concerns over a global recession and the hawkish Fed. FX strategists at Capital Economics believe that the Fed's tightening cycle is close to an end. The research firm's chief economist Jonas Goltermann predicts that the US dollar will continue to climb in the first half of 2023.

Goltermann believes that if interest rates reach their peak, it will not be an obstacle for a USD rally in the future. The economist said falling risk appetite in the global markets and rising demand for safe haven assets have given support to the US dollar. According to Goltermann, the US currency went up during earlier tightening cycles.

Earlier outlooks by some analysts saw the Fed increase interest rates up to 5% in 2023. Bloomberg predicts that the effective Fed funds rate could hit a peak of 5.1% by May 2023. Market players expect the key interest rate to decrease afterwards in the first or second quarters of the year.

 

[KostiaForexMart]

EUR/USD: USD likely to rise higher; EUR weak due to risk-off sentiment

The US dollar has kicked off the new week with a rapid increase. The euro, on the contrary, was unable to rebound. The greenback is gaining momentum despite a short-term drop last week.

On Monday morning, it advanced significantly against the euro. Its growth was facilitated by positive US macro stats published at the end of last week and the latest economic reports from China. By the end of October, the Chinese authorities announced an unexpected contraction in imports and exports. After the release of disappointing data from China, fears about a looming recession increased in markets, fueling demand for safe-haven assets, including the US dollar.

As the risk-on sentiment decreased, the US dollar won luster win investors again. The US dollar, the most popular safe-haven asset, rose the most. Its further growth may be stimulated by the US inflation report for October, which is due on Thursday, October 10. According to preliminary estimates, inflation is expected to slow down to 8%, logging the fourth decline in the indicator.

Analysts are confident that the Fed mainly takes into account inflation figures when making monetary policy decisions. Since early 2022, the Fed has raised the key rate six times to curb galloping inflation. It has started to slow down thanks to monetary tightening. However, after moving away from an all-time high of 9.1%, inflation still remains above the 2% target level.

Inflation will hardly drop considerably because of high wages in the United States. According to the Nonfarm Payrolls report for October, the economy added 261,000 new jobs, exceeding the previous forecast readings. At the same time, last month the unemployment rate rose to 3.7% from 3.5%. Economists at Capital Economics said that given the wage growth, it would be hard to push inflation to the 2% target. For this reason, the Fed is likely to stick to aggressive tightening.

The greenback was somewhat stuck in the narrow range due to market uncertainty. Judging by the data on the US dollar index (USDX), last week large traders significantly reduced their long positions on USD. If this trend persists, the US currency may lose momentum. However, many analysts are betting on a further rally of the greenback. On November 7, the EUR/USD pair was trading at 0.9962, showing steady growth. However, UBS analysts stress that in March 2023, the pair may fall to 0.9600. It is quite curious given that now there are plenty of fundamental factors for a rise to 1.0000 and above.

Alan Greenspan, the former Fed Chairman, expects a buoyant rally of the US dollar in 2023. Such a scenario is possible even if the regulator makes smaller rate hikes. If inflation peaks in early 2023, the US currency will continue to grow, Greenspan stressed.

This year, the US dollar has been rising mainly amid more aggressive tightening compared to other central banks. Many USD rivals, in particular the euro and the pound sterling, have reached multi-year lows due to the divergence in monetary policy. In addition, the Fed is actively shrinking its balance sheet, boosting the US dollar in the long term.

Analysts at UBS assume that next year the greenback is likely to retain its upside potential. At the moment, it is too early to talk about the end of the rally as inflation remains high. UBS believes that the central bank will continue to aggressively raise rates until a steady decrease in inflation. In the fourth quarter of 2022, the greenback is projected to grow and in the first quarter of 2023, it may reach new highs. This might be the first step towards the possible slowdown of the Fed's tightening hike cycle, analysts believe.

 

[KostiaForexMart]

Tips for beginner traders in EUR/USD and GBP/USD on November 9, 2022

Details of the economic calendar from November 8
The midterm elections to the US Congress are in the center of everyone's attention. During which the House of Representatives and a third of the Senate will be re-elected. The first polling stations closed in a number of districts of Indiana and Kentucky at 23:00 UTC, and the last at 05:00 UTC - stations in Alaska and Hawaii stopped accepting ballots.

Ballot counting is still ongoing. As a result, 435 members of the House of Representatives and a third of its Senate will be elected. In addition, the governors of 36 states and three US overseas territories are elected.

As I wrote in the previous article, the victory of the Republicans will lead to heavy clashes in promoting legislative initiatives of the White House. As a result, characteristic uncertainty and even investors' fears may arise, which will lead to the sale of the US dollar.

Analysis of trading charts from November 8
The EUR/USD currency pair continues to show an upward trend in the market. A short stagnation within the parity level was replaced by a subsequent inertial move, which let the quote approach the local high of October.

The GBP/USD currency pair managed to maintain the upward cycle previously set in the market during the impulse jump. As a result, the quote remained above the 1.1525 mark. The scale of the strengthening of the pound sterling from November 4 to November 8 is about 400 points.

Economic calendar for November 9
Today, the macroeconomic calendar is empty, and it would not be of interest to traders because all their attention is focused on counting ballots.

Thus, investors and traders will monitor the information and news flow coming to the media and act on the market in relation to it.

Trading plan for EUR/USD on November 9
In this situation, the value of 1.0100 is considered a variable resistance level. In order for there to be a subsequent increase in the volume of long positions, the quote needs to stay above this value for at least a four-hour period. In this case, both the current upward cycle and the corrective move from the bottom of the downward trend will be prolonged.

At the same time, traders are considering the scenario of a price rebound from 1.0100. In this case, the inertial move may be interrupted, and the quote will return to the parity level limit.

Trading plan for GBP/USD on November 9
A stable holding of the price above 1.1525 may lead to a prolongation of the upward cycle. Under this scenario, it is possible to update the local high of October, which, in turn, will open the way in the direction of the resistance level 1.1750.

As for the downward scenario, it will again be considered by traders in case the price returns to the boundaries of the area of interaction of trading forces 1.1410/1.1525.

What is shown in the trading charts?
A candlestick chart view is graphical rectangles of white and black light, with sticks on top and bottom. When analyzing each candle in detail, you will see its characteristics of a relative period: the opening price, closing price, and maximum and minimum prices.

Horizontal levels are price coordinates, relative to which a stop or a price reversal may occur. These levels are called support and resistance in the market.

Circles and rectangles are highlighted examples where the price of the story unfolded. This color selection indicates horizontal lines that may put pressure on the quote in the future.

The up/down arrows are the reference points of the possible price direction in the future.

 

[KostiaForexMart]

Hot forecast for EUR/USD on 10/11/2022

The first thing you should pay attention to is that since the beginning of the week, the dollar has fallen sharply in price, and the rebound was asking for it. Moreover, it was only the political factor that put pressure on it, in the form of uncertainty about the results of the midterm elections. So as soon as it became clear that the Democrats were apparently gaining control of the Senate, the US currency immediately began to actively rise in price. Although the counting of votes is still ongoing, and less than half of the ballots have been counted at some polling stations. Nevertheless, so far everything is going to the fact that the Democrats take the Senate, while the Republicans take the House of Representatives. The main driver of the dollar's weakening was the assumption that the Republican Party would win a crushing victory and gain control of both chambers of Congress.

There is a high probability that the dollar will be able to further strengthen its position today. The reason for this may be the US inflation report. And although the growth rate of consumer prices is likely to slow down from 8.2% to 8.1%, this still means that the Federal Reserve will continue to raise interest rates. Firstly, inflation remains at an extremely high level. Secondly, on a monthly basis, consumer prices should increase by 0.5%, whereas a month earlier they increased by 0.4%. In other words, prices continue not only to grow, but there are signs of even a possible acceleration of this process. Consequently, the US central bank will continue to pursue an extremely tight monetary policy.

Inflation (United States):

The EURUSD currency pair bounced precisely from the area of the local high in October. As a result, there was a pullback in the direction of the parity level.

During the price rebound, the RSI H4 indicator came out of the overbought zone. This is a fairly good technical signal about the regrouping of trading forces. It is worth noting that the indicator has not gone below the average line of 50, which indicates the bullish mood in the market.

The moving MA lines on Alligator H4 and D1 are directed upwards, which corresponds to an ascending cycle.

Expectations and prospects

In this situation, the parity level serves as a support in the market. Thus, it is possible to strengthen long positions. We expect the euro to rise only if the price stays above October's local high in a four-hour period.

As for the downward scenario, in order to consider it, the quote must first stay below the 0.9950 mark. This price move may restart short positions.

Comprehensive indicator analysis in the short-term and intraday periods has a sell signal due to the recent price rebound. In the medium term, the signal from the indicator is focused on an upward corrective move from the low of the trend.

 

[KostiaForexMart]

Tips for beginner traders in EUR/USD and GBP/USD on November 14, 2022

Details of the economic calendar of November 11
The macroeconomic calendar focused only on statistics from the UK, which came out better than expected. The final estimate of GDP for the 3rd quarter reflected a slowdown in the economy from 4.40% to 2.40%, with forecast of 2.10%. Meanwhile, the rate of decline in industrial production is slowing down from -4.3% to -3.1%, although forecast assumed that the indicators would remain at the same level.

As a result, the pound sterling, overbought in recent days, continues to hold its positions in the market.

As for the US ballot count, the preliminary totals are:

House of Representatives: Democrats 204 - Republicans 212. Control requires 218 seats out of 435.

Senate: Democrats 50 - Republicans 49. Control requires 51 seats out of 100.

The data is not final, the ballots are still being counted.

Analysis of trading charts from November 11
The EUR/USD currency pair appreciated more than 450 points during the past week. This strong inertial move led to the update of the corrective cycle from the low of the downward trend. As a result, the euro reached the subsequent resistance level of 1.0350.

The GBP/USD currency pair gained more than 550 points during the past week. This unprecedented inertial move overcame the local autumn highs. As a result, the corrective movement from the low of the downward trend was prolonged, where the overall scale of the strengthening of the pound sterling is about 14.5%, which is about 1500 points.

Economic calendar for November 14
The new trading week starts with data on the industrial production of the European Union, whose growth rate may accelerate from 2.5% to 3.3%. This is a positive factor for the EU economy, which can stimulate the euro.

Trading plan for EUR/USD on November 14
In view of the clear signal that the euro is oversold, a price rebound from the 1.0350 resistance level is allowed. In this case, sellers will receive local support in the market, and buyers will be able to regroup their positions.

Traders will consider the subsequent upward movement if the price holds above the level of 1.0350, at least in a four-hour period. In this case, we will receive a technical signal about the prolongation of the ascending cycle.

Trading plan for GBP/USD on November 14
The new trading week was opened with a downward GAP, where the overbought pound sterling entered the stage of a technical pullback. The previously passed 1.1750 resistance level now serves as support, where the quote returned during the pullback.

Presumably, the upward inertial mood still takes place in the market. For this reason, a price return above 1.1855 could restart long positions. As for the current pullback, for its prolongation and transition to the correction mode, it is necessary to be consistently below the level of 1.1750.

What is shown in the trading charts?
A candlestick chart view is graphical rectangles of white and black light, with sticks on top and bottom. When analyzing each candle in detail, you will see its characteristics of a relative period: the opening price, closing price, and maximum and minimum prices.

Horizontal levels are price coordinates, relative to which a stop or a price reversal may occur. These levels are called support and resistance in the market.

Circles and rectangles are highlighted examples where the price of the story unfolded. This color selection indicates horizontal lines that may put pressure on the quote in the future.

The up/down arrows are the reference points of the possible price direction in the future.

 

[KostiaForexMart]

Is the yen deflating?

The dollar-yen pair is gradually recovering from a collapse that happened last week. At the start of Tuesday, the major pair received a new breath from the economic data of Japan.

Recall that last week the USD/JPY pair experienced the most dramatic fall in 14 years. According to the results of five sessions, it sank by almost 6% and fell below 139.

The ground from under the dollar's feet was knocked out by data on inflation in the United States. The statistics for October turned out to be much softer than the forecast, which increased traders' fears about a possible slowdown in the pace of tightening in America.

The greenback was able to return to life only after the weekend. It was revived a bit by a hawkish commentary by Christopher Waller.

On Sunday, a member of the Federal Reserve's Board of Governors said it's unreasonable to judge the weakening of inflation by just one month. The central bank will need to get some more hard evidence before moving to a less aggressive policy.

Hints of further sharp rate hikes in the US helped USD/JPY recover slightly. Yesterday, the quote rose by more than 0.5% and crossed the threshold of 140.

This morning, the pair has confidently settled above this level, having received support from Japan's macro statistics. Shocking data on GDP for the third quarter came out at the beginning of the day, which not only fell short of the forecast, but also turned out to be much worse than preliminary estimates.

The report showed that on a quarterly basis, the Japanese economy fell by 0.3% against expectations of growth of 0.3%. And in annual terms, the indicator fell by 1.2%, while an increase of 1.1% was predicted.

According to analysts at Bloomberg, the unexpected contraction in Japan's GDP reflects the impact of a weaker yen on the economy.

This year, the JPY has fallen by more than 20% against the dollar due to the strong divergence in the monetary policy of the Bank of Japan and the Fed.

Unlike its American counterpart, which actively fights inflation by raising rates, the Japanese central bank adheres to an ultra-soft rate and maintains ultra-low rates.

The weakness of the currency led to an increase in the country's spending on imports, which significantly undermined the growth of Japan's economy, which was already very fragile.

Japan has yet to recover from the COVID-19 pandemic. It is for this reason that the BOJ continues to go the dovish route and pump liquidity into the economy.

Recall that last month, Japanese Prime Minister Fumio Kishida developed another stimulus package, and his cabinet approved an additional budget of $207 billion to fund these measures.

As you can see, the circle is closed: the soft monetary rate necessary for GDP growth weakens the yen, and this further slows down the economy. Japan has found itself in a trap into which it has driven itself, and is unlikely to find a way out in the near future.

Now, as fears of a global recession are rising amid a massive increase in rates, it is becoming increasingly clear that the recovery of the Japanese economy is once again being postponed.

And given the latest data on GDP, many analysts have no doubt that the BOJ can further strengthen the dovish rhetoric at its next meeting. This will be another blow to the yen.

Experts predict that the JPY's downtrend will continue despite speculation about a possible slowdown in US rate hikes, especially since the market has already taken this risk into account.

Most investors are well aware that the US central bank has not yet finished its fight against rising prices. To return inflation to its target, it will have to raise rates a few more times.

But even if the central bank does it less abruptly than before, the dollar-yen pair should still get at least the slightest benefit from each round of rate hikes.

 

[KostiaForexMart]

Gold breaks the trend

Dashing trouble began. After Jerome Powell's fiery speech about a higher peak federal funds rate, who would have thought that gold would not just bounce back but return to 3-month highs? In fact, the slowdown in the rate of tightening of the Fed's monetary policy is a bullish driver for XAUUSD. If inflation remains at elevated levels for a long time, and the Central Bank slows monetary restrictions and eventually pauses, real yields on Treasury bonds will fall, allowing the precious metal to rise above $1,800 an ounce.

The main catalysts of the 9.5% November gold rally were the releases of data on consumer prices and producer prices. Both indicators slowed down more than Bloomberg experts predicted, which gave rise to talk that the Fed is doing its job well and can afford less aggression. In the end, the tightening of monetary policy affects the economy with a time lag, rates are already at restrictive levels, so you can not go as fast as before.

However, in order to defeat inflation, you need to understand its causes well. The Fed and the White House have gone too far with stimulus in response to the pandemic. As a result, domestic demand grew by 21.4% in the three years to the end of the second quarter of 2022, which is equivalent to an annual GDP growth of 6.7%. No wonder inflation is so high and the job market is strong as a bull. Americans sitting on a mountain of dollars are in no hurry to return to work.

Dynamics of domestic demand in the US, Britain and the Eurozone

Sooner or later, the money runs out, which will lead to a slowdown in consumer prices in the US by itself. The Fed's aggressive monetary restriction can strengthen their decline. There will be a risk of deflation on the horizon, as in Japan. Ark Invest agrees with this scenario. The company sets the example of the beginning of the 20th century, which was overshadowed by the First World War and the Spanish flu epidemic. Inflation in 1920 in the United States exceeded 20%, but thanks to an aggressive increase in the federal funds rate from 4.6% to 7%, it fell to -15% in 2021.

Current conditions have much in common with the period of a hundred years ago. The same scenario of the development of events is not excluded, but in my opinion, it is unlikely. Its implementation would be disastrous for gold, returning its quotes to $1,610 per ounce.

On the contrary, a scenario where the Fed slows down and eventually pauses while inflation remains at elevated levels creates a tailwind for the precious metal. Simultaneously with the fall in real yields of Treasury bonds, the US dollar is also weakening.

Technically, on the daily chart of gold, due to the implementation of the triple bottom pattern the long-term bearish trend was broken. Quotes have gone beyond the descending trading channel and are moving away from the moving averages. I recommend holding the longs formed on the decline to the support at $1,702 and periodically increasing on pullbacks. The targets are $1,790 and $1,815 per ounce.

 

[KostiaForexMart]

Tips for beginner traders in EUR/USD and GBP/USD on November 17, 2022

Details of the economic calendar of November 16
Inflation in the UK reached a 41-year high. The consumer price index rose from 10.1% to 11.1%. Consequently, the Bank of England will continue to raise interest rates at the same pace.

Prime Minister Rishi Sunak said on this occasion that inflation control is a key goal of the government.

As for the US ballot count, the preliminary totals are:

House of Representatives: Democrats 211 - Republicans 218. Control requires 218 seats out of 435.

Senate: Democrats 50 - Republicans 49. Control requires 51 seats out of 100.

Although counting of votes is still ongoing, President Joe Biden officially congratulated the future House speaker Kevin McCarthy on his election victory.

The Republican Party gains control of the US House of Representatives in the midterm elections.

Analysis of trading charts from November 16

The GBPUSD currency pair is in the stage of a pullback-stagnation relative to the psychological level of 1.2000. The absence of a transition to a full-size correction suggests that traders' interest in long positions on the pound sterling is still maintained in the market.

The EURUSD currency pair formed a stagnation at the conditional peak of the ascending cycle. This occurred after the quote came close to the 1.0500 resistance level.

Economic calendar for November 17
Today, the final data on inflation in the European Union is expected, the growth rate of which should accelerate from 9.9% to 10.7%. The market is more ready for these indicators, so if they coincide, you should not expect anything drastic. In any case, rising inflation is a clear signal that the ECB will continue to raise interest rates at the current pace.

During the American trading session, weekly data on jobless claims in the United States will be published, where figures are expected to rise. This is a negative factor for the US labor market.

Statistics details:

The volume of continuing claims for benefits may increase from 1.493 million to 1.5 million.

The volume of initial claims for benefits may remain at the same level of 225,000.

Time targeting:

EU Inflation – 10:00 UTC

US Jobless Claims – 13:30 UTC

Trading plan for EUR/USD on November 17
In this situation, the stagnation of the past day can serve as a catalyst for trading forces, in which there was a regrouping of working positions. In this case, subsequent price jumps are not excluded. The following values are considered as signal levels: 1.2050, in case of an upward scenario, which may lead to the prolongation of the current cycle; 1.1750, while holding below this value, a transition from the pullback stage to the full-size correction stage is possible.

Trading plan for GBP/USD on November 17
Little has changed on the chart compared to the previous day—the quote is standing still. This means that there is a process of accumulation of trading forces before a new speculative price jump.

From a technical analysis point of view, the signal levels are in the values: 1.0500 for an upward scenario and 1.0300 for a downward price development.

What is shown in the trading charts?
A candlestick chart view is graphical rectangles of white and black light, with sticks on top and bottom. When analyzing each candle in detail, you will see its characteristics of a relative period: the opening price, closing price, and maximum and minimum prices.

Horizontal levels are price coordinates, relative to which a stop or a price reversal may occur. These levels are called support and resistance in the market.

Circles and rectangles are highlighted examples where the price of the story unfolded. This color selection indicates horizontal lines that may put pressure on the quote in the future.

The up/down arrows are the reference points of the possible price direction in the future.

 

[KostiaForexMart]

USD/JPY. The yen ignores the record inflation report and follows the dollar

The dollar-yen pair earlier this week updated a three-month price low, reaching 137.70. However, the USD/JPY bears failed to settle in the area of the 137th figure - dollar bulls stopped the downward momentum and turned the pair 180 degrees.

In general, the trajectory of the pair's movement correlates with the trajectory of the US dollar index. Once again, we are convinced that the yen is not an independent player against the greenback. The Japanese currency certainly has its trump card, but it rather serves as a "stop tap". We are talking about a currency intervention, the risk of which increases along with the USD/JPY rate. In this context, we can say that the Japanese government controls the upper limit of the price range within which the pair is traded. According to most analysts, this limit is in the area of the 150.00 mark: exceeding this target is fraught with consequences. As for the lower limit of the conditional price range, everything depends on the "well-being" of the US currency. USD/JPY bears are forced to follow the greenback, which determines the end point of any downward surge. The yen has no arguments of its own to strengthen – primarily due to the divergence of the Federal Reserve and the Bank of Japan rates.

The events of the last days serve as evidence of this. They eloquently illustrated the stated disposition, the essence of which boils down to an uncomplicated conclusion: the downtrend ends exactly where the dollar recovery begins.

As you know, the US currency significantly sank throughout the market after the release of the latest data on the growth of inflation in the United States. The market started talking about the fact that the Fed will slow down the pace of monetary policy tightening at the next meeting, which will be held in December. A little later, these assumptions were confirmed by many representatives of the Fed: according to them, the central bank can afford to reduce the speed, while maintaining the final goal at the same level (that is, above the 5.0% mark).

At first, traders mostly focused their attention directly on the fact of slowing down the pace of tightening of the monetary policy. But then they "listened" to the signals from the Fed representatives, who made it clear that no one was going to curtail the hawkish course – only the speed of achieving the goal slows down. In particular, Christopher Waller, a member of the Board of Governors, said that the markets should now pay attention to the "end point" of the rate hike, and not to the pace of its achievement. At the same time, he noted that the end point is probably "still very far away." Some of his colleagues also stated that, firstly, inflation in the United States is still at too high a level; secondly, it is impossible to make any long-term organizational conclusions based on only one report.

Such messages eased the pressure on the dollar, and, accordingly, cooled the ardor of bears of the USD/JPY pair. Turning to the upside, the pair gradually began to gain momentum, rising by 250 points in two days. At the same time, traders ignore Japanese statistics, even when it comes to the inflation report.

Key data on the growth of inflation in Japan was published during the Asian session on Friday. The report reflected a record growth of key indicators. For example, the overall consumer price index rose by 3.7% in October, which is the strongest growth rate of the indicator since 1982. The core CPI, which does not include fresh food, but includes energy prices (petroleum products), also updated the 40-year record. The consumer price index, excluding food and energy prices, jumped 2.5% year-on-year in October.

All components of the above report came out in the green zone, significantly exceeding the forecast levels. It is worth noting that inflation has been exceeding the BOJ's 2% target for seven months, but at the same time BOJ Governor Haruhiko Kuroda continues to "hold the line", maintaining a soft monetary policy. This, in fact, explains such a phlegmatic reaction of USD/JPY traders to the report published today. Market participants reasonably doubt that Kuroda will toughen his rhetoric in response to the published figures.

Thus, the fate of the USD/JPY downward trend depends solely on the behavior of the US currency, which is gradually beginning to "come to its senses". After all, even taking into account the slowdown in the rate hike, the Fed continues to act as an ally of the greenback, and even more so in tandem with another, which cannot count on the support of the BOJ. In my opinion, the rhetoric of the Fed representatives will only tighten ahead of the December meeting (at least in the context of determining the upper limit of the current cycle), while Kuroda will once again ignore the inflation report, declaring the preservation of the accommodative policy.

All this suggests that the USD/JPY pair may demonstrate a more confident growth in the near future – at least to the Tenkan-sen line on the daily chart, which corresponds to the 142.40 mark. If we talk about the medium term, the main target here is 145.50: at this price point, the upper line of the Bollinger Bands indicator coincides with the upper limit of the Kumo cloud on the D1 timeframe.

 

[KostiaForexMart]

The Fed writes between the lines. The dollar is lost in speculation. No clear strategy or desire to play with the markets

The dollar index is showing signs of recovery. Perhaps it will show even stronger signs in the coming sessions. However, traders will refrain from making bold attempts to push the dollar higher before the release of the Federal Reserve minutes. The fact that we are facing a short week may also play a role here. The United States will be celebrating its Thanksgiving holiday on Thursday, which will lead to lower activity in markets and limited reaction to market data and other news.

Wednesday will be an important trading day. A series of macroeconomic data will be released on this day, as well as the minutes. There might be a flurry of activity before holidays and weekends. It is possible that there will be a delayed reaction to all of this as early as next week. In the meantime, markets are evaluating or rather quietly studying the fresh opinions of the Fed members on the central bank's further steps.

The main question is whether the central bank will eventually shorten the time period during which it is not expected to pause in policy tightening. No matter what the Fed members say, investors are hoping for less aggressive measures and an early transition to dovish rhetoric. They will be looking for signals for such a scenario in all publications, statements and other news reports.

News from the Fed

The speech of the head of the San Francisco Fed, Mary Daly, was quite long. The members of the central bank don't seem to have a definite line on what they plan to do next. Now is the time when they are thinking and discussing their next steps.

Citing new research from her regional bank, Daly said that "the level of financial tightening in the economy is much higher than what the (federal) funds says." Financial markets are acting as if it is about 6%.

Markets have priced in QE parameters that far exceed those outlined by the Fed. In this regard, Daly noted that "it will be important to remain conscious of this gap between the federal funds rate and the tightening in the financial markets. Ignoring it raises the chances of tightening too much."

Anyway, the Fed still has a lot of work to do to steer monetary policy in the right direction to curb inflation. Those were probably the key words.

Daly, speaking to reporters, made no secret of the fact that she has yet to decide which rate hike she will support at the December FOMC meeting. We need to look at new economic data before making a decision.

The central bank representative also warned against using the market funds rate of 6% as a benchmark for determining the actual policy.

"I use the proxy rate as a point of reference, not as an indication that we should stop early," Daly summarized.

In economic forecasts released in September, the central bank's policy makers outlined an average target rate of 4% for the next year. Most officials have since assumed that, given the dynamics of inflation and the continuing strength of the labor market, they may want to go higher. Daly did not rule out the possibility of an increase to 5.25%.

At the same time, everyone understands and knows that raising rates too sharply will cause great damage to the economy, so the possibility of reducing the size of individual rate hikes is being discussed in parallel. In addition, recent data showing signs that inflation may slow down has given officials some room for such a maneuver.

Daly said in her formal remarks that the next stage for the Fed will be "in many ways more difficult". She added that officials will need to be "mindful" of their choices and its consequences. Too much adjustment can lead to an unnecessarily painful recession. At the same time, "adjusting too little will leave inflation too high".

The dollar reflects

BNP Paribas has provided a number of new interesting research for dollar bulls. According to analysts' calculations, the bottom of the stock market in the current bear market has not yet been reached.

After analyzing 100 years of crashes, BNP Paribas finds market bottoms typically require a capitulation event – which is associated with a coordinated spike in volatility, skew, and convexity.

"We have not yet seen this, suggesting that the bottom is not yet in," says Calvin Tse, Head of US Macro research, at BNP Paribas. "Recessionary bear markets historically have often ended with a capitulation. We are calling for a capitulation in equities next year."

Therefore, if the bottom of the stock market has not yet been reached, then neither is the dollar's peak.

The dollar is countercyclical and rises in bad market conditions as investors seek cash as protection against asset depreciation. If the BNP Paribas economists' assessment has merit, then those who advocate for a stronger dollar could win.

Meanwhile, the dollar index rose for the third consecutive session and is trading near the key barrier at 108.00. Although, the bulls' grip eased somewhat.

The uptrend meets obstacles in the way. However, if it breaks through the 109.18 resistance and then the 109.70 level, it could encourage the exchange rate to rise in the short term.

Today's dollar losses could be due to the fact that investors are cautiously awaiting the latest Fed meeting's minutes, which could affect the U.S. rate forecast. Traders also analyzed various comments from Fed officials and found them largely soft. Central Bank officials are still sticking to their version of lower inflation, but doubts are certainly present.

Meanwhile, the dollar index jumped 1% on Monday due to the worsening Covid situation in China. This factor is known to have a short-term effect.

 

[KostiaForexMart]

USD unable to regain momentum; GBP to face strong resistance level

Next week, the trajectory of some pairs may change dramatically. The US dollar is also expected to resume an upward movement. If so, it will increase pressure on its rivals. Fed policymakers could also provide more comments on future plans for monetary policy. Some Fed members could even speak in favor of the fifth consecutive rate increase by 75 basis points at the December meeting.

Yesterday, the pound sterling rose above 1.2000 for the first time since August. Such a sharp increase occurred amid the falling US dollar before Thanksgiving Day and fundamental factors. As trading floors in the US are closed, the pound sterling will be able to climb higher in the coming sessions.

Why has the pound sterling started steady growth? Is there a likelihood of a rise in the greenback next week?

GBP maintains bull run

The British currency jumped against the US dollar, the euro, and other major currencies on Wednesday and Thursday, following the news about a surge in the UK's government debt.

The GBP/USD pair was trading around a high of 1.2110.

Falling government bond yields are signaling confidence in the improving economic conditions in the UK.

As a reminder, Treasury yields grew considerably after the announcement of the September mini-budget of former Prime Minister Liz Truss. Investors demanded higher interest premiums to purchase UK debt.

Following a jump in government bond yields, the cost of borrowing increased drastically. It led to the destabilization of the UK financial sector and worsened the economic downturn. The pound sterling reacted with a nosedive.

The current decline in Treasury yields indicates an improvement in the UK's economic prospects.

The GBP/USD pair grew by 16% after the political woes in late September.

After several months of volatility and lows, the pound sterling may finally recover. Naturally, not all problems have disappeared completely but it is easier to assess risks at the current levels, analysts HSBC pointed out.

In their latest forecast, they predicted a rally during 2023.

As for growth yesterday, it was facilitated by some internal factors. The economic reports turned out to be better than expected. The PMI Indices for November increased after a long time of contraction.

There is no denying that the country is in a recession but traders are well aware of it. Therefore, the market reaction is likely to be quite strong to positive reports. In other words, traders will pay more attention to upbeat reports, ignoring bad ones.

Besides, traders are no longer concerned about another bearish factor that has been weighing on the British currency for some time. The UK Supreme Court ruled that the Scottish government cannot hold a referendum for independence without the UK government's approval.

This news also supported the pound sterling today.

USD not ready to give up

On Wednesday, the greenback saw a big sell-off. It dropped lower after the release of the economic reports. The Manufacturing PMI Index slid below 50. The labor market seems to be losing steam as well. Analysts were not surprised.

Economists at Pantheon Macroeconomics believe that the number of initial jobless claims has been gradually rising for some time as firms are facing challenges due to the Fed's aggressive tightening.

The Manufacturing and Services PMI Indices fell at the fastest pace since August and the 2008 financial crisis. Recessions in both sectors have become deeper.

Meanwhile, new home sales soared by 632,000 in October after a downwardly revised figure of 588,000. It was the first increase in three months. The US dollar managed to recover slightly amid this report. However, this data is quite controversial given a decrease in mortgage demand.

The University of Michigan's inflation expectations has declined this month. The Fed is sure to take notice of this survey. The greenback may start a short-term rally.

As seen, the US economic reports are rather controversial. It is hard to get a clear picture of the economic situation.

ING economists are concerned that a 7% fall in the US dollar against its rivals and a drop in the 10-year government bond yield has led to a significant weakening of financial conditions. The result is the exact opposite of what the central bank is trying to achieve.

It would not be surprising if the Fed's rhetoric becomes even more hawkish next week.

One year ahead inflation expectations decreased to 4.9% from 5%. At the same time, the figures remain at a level more than twice exceeding the Fed's target of 2%. Five years ahead inflation expectations also remained above the target.

Inflation expectations will hardly force the Fed to change its hawkish stance. Investors may again abandon their expatiations of a softer stance next week after studying the November meeting minutes and returning to the market after the holiday.

Traders are likely to pay attention to how many Fed policymakers are backing further aggressive tightening. At the press conference, Fed Chair Jerome Powell said that officials could raise interest rates even higher than 4.5-4.75% than initially projected in September.

 

[KostiaForexMart]

Trading Signal for GBP/USD on November 28-29, 2022: buy above 1.2025 (21 SMA - GAP)

Early in the European, session the British pound (GBP/USD) is trading around 1.2043. The currency pair is going through a slight technical bounce, having reached a low of around 1.2025.

According to the 4-hour chart, we can see that the British pound has formed a bearish GAP around 1.2089 which was Friday's close. If GBP/USD bounces above the 21 SMA located at 1.2020, it could cover the gap and could reach the top of the downtrend channel around 1.2096.

In case the British pound breaks above the downtrend channel formed on November 23 and settles above 1.2097, it will be a clear signal to resume buying and the price could reach +2/8 Murray located at 1.2207.

Conversely, if GBP/USD breaks below the psychological 1.20 level, it could fall rapidly towards 1.1962 (+1/8 Murray) and could even reach the area between the support of 8/8 Murray (1.1718) and 200 EMA (1.1649).

The eagle indicator is trading above a downtrend channel. A technical correction is expected in the next few hours and then the pair will resume its bullish cycle. Therefore, the British pound is expected to trade above the psychological 1.20 level, which will be a signal to continue buying.

The strength of the US dollar (USDX), observed in the last hours of trading on Friday, was boosted by risk aversion, causing a reversal in GBP/USD. The British pound is likely to make a strong technical correction in the coming days due to overbought levels on the daily chart.

According to the daily chart, we can see that the British pound has a 200 EMA located at 1.21. As long as GBP/USD trades below this level, any technical bounce will be seen as a clear signal to sell, with short-term targets around 1.1697.

Our trading plan in the next few hours is to buy the British pound above 1.2035, with targets at 1.2096 and 1.2207 (+2/8 Murray). On the other hand, if the pound falls below the psychological level of 1.20, it will be a signal to sell with targets at 1.1650.

 

[KostiaForexMart]

EUR/USD. The euro has two problems - Lagarde and China

Another attempt to attack the 4th figure ended in failure. On Monday, EUR/USD bulls hit a five-month price high at 1.0498. However, the pair did not stay at this level for long - the price fell during the US session and finished the trading day at 1.0340. If the impulsive growth was unreasonable and unusual (despite the news from China), then the downward momentum was provoked by quite a specific person - European Central Bank President Christine Lagarde.

Lagarde delivered her semi-annual report to members of the European Parliament Committee on Economic and Monetary Affairs. The theme of the report was directly related to monetary policy, so the speech triggered increased volatility in the pair. And it was not in favor of the euro. It's notable that Lagarde voiced quite contradictory rhetoric. There were different ways to evaluate her speech, both in its favor and against. In the end, traders chose the second option: as a result, the euro weakened not only against the greenback, but also in many cross-pairs.

So, on the one hand, Lagarde said that the ECB will continue to raise rates, despite the slowdown in business activity in the eurozone. She acknowledged that high levels of uncertainty, tighter financial conditions, and declining global demand are putting pressure on economic growth in the European Union. But the record growth of inflation in the eurozone, according to her, is forcing the ECB to move on. Lagarde expressed doubt that the consumer price index in the eurozone has reached its peak values. She noted that the cost of wholesale energy supplies continues to rise (which is the main driver of headline inflation), so a slowdown in CPI growth in November seems extremely unlikely.

Lagarde said that she "would be surprised" if inflation reached its peak in October.

Certainly, the talking points are hawkish. In other circumstances, EUR/USD bulls would have taken advantage of the situation and rushed upwards, building on their success (i.e. in our case they would have settled in the area of the 5th figure).

If it were not for one "but".

The fact is that Lagarde made it clear in the European Parliament that slowing down the pace of interest rate increases in December is still a matter of debate. In doing so she took a neutral position in the corresponding dispute of many ECB representatives. Mario Centeno, Philip Lane, Francois Villeroy de Galo and Klaas Knot, among others, spoke publicly in favor of a lower rate of monetary policy tightening. Whereas the hawkish wing of the central bank, such as Robert Holzmann, Isabelle Schnabel and Joachim Nagel, came out in favor of a 75-point rate hike in December. Lagarde stayed "above the fray." According to her, the central bank will make an appropriate decision based on many factors: "...it will be based on our updated outlook, the persistence of the shocks, the reaction of wages and inflation expectations, and on our assessment of the transmission of our policy stance". Based on a comprehensive analysis of these factors, the ECB will decide how far rates should be raised and how fast.

Such statements sobered up the EUR/USD bulls and then the price rolled back and headed to the daily lows, to the area of the third figure. Even in the first half of Monday, the ball was on the side of euro-dollar pair bulls, which took advantage of the weakening of the greenback and the strengthening of the hawkish mood regarding the ECB's further actions. But the diplomatic wording of Lagarde, which allows for various scenarios (both dovish and hawkish) did not allow the bulls to consolidate their success. The bears took the initiative and pulled the price back to its previous positions.

On top of that, in the afternoon, the market finally reacted to events in China, which unfolded too dynamically and unexpectedly.

First, the number of coronavirus cases in China is surging. Last Thursday, Beijing reported 31,000 new infections, noting that this was the strongest daily rate of increase in the history of the pandemic. But a little later, it turned out that PRC anti-records are updated almost daily. For example, the number of diseases has already exceeded the 40,000 mark on Monday. COVID outbreak in China is fraught with another wave of lockdowns. Strict quarantine has already been imposed in many cities across the country, with millions of people locked in their homes. Enterprises and firms have moved their employees to remote work schedules (where this is possible due to the nature of their work). China is known to have a "zero tolerance" policy for the Coronavirus, so it is not surprising that the authorities reacted to the situation with the utmost severity. And this circumstance gave rise to a second problem: Anti-Coronavirus protests broke out in China.

At the moment, it is difficult to talk about the prospects of the protest movement. In most cases, people are protesting against the "zero Covid" policy, which, in their opinion, does not bring results, but hits hard on the pocket. However, in some cases, demands for the resignation of Chinese leader Xi Jinping are also heard among the demonstrators. In any case, these protests are already considered the largest in China for the last 33 years, since the 1989 protests (the events on Tiananmen Square).

Judging by the dynamics of the dollar index, traders are wary of the unfolding events. The situation is, in a sense, a stalemate: on one side of the coin - possible turbulence in the markets due to the protests, on the other side of the coin - negative consequences from large-scale lockdowns in major cities of China.

Thus, the current fundamental background is clearly not favorable for the euro's upward movement (first of all, if we speak about a stable development, but not an impulsive breakthrough). Therefore, it is better to either take a wait-and-see position or consider short positions. The main bearish target is still at 1.0210 (the middle line of the indicator Bollinger Bands on the daily chart). Crossing this target will pave the way for the bears to reach the parity level.

 

[KostiaForexMart]

Will gold fall for the Fed's entreaties?

The external calm often hides internal tension. Despite gold's stabilization near $1,750 an ounce, we can't say the periods of turbulent XAUUSD quotes are far behind. The precious metal paused ahead of Federal Reserve Chairman Jerome Powell's speech and is trying to see if he can do what the other FOMC members failed to do. Can he use hawkish rhetoric to persuade stock indices to fall and the U.S. dollar to strengthen? Both are fundamentally important to gold.

As a rule, when evaluating the prospects for XAUUSD, the dynamics of the USD index and Treasury bond yields are analyzed. The fall of the first of them below 106, according to DeCarley Trading, will contribute to the continuation of the peak to 98, raising the quotes of the precious metal significantly higher. Many factors have already been factored into the U.S. dollar, including a 5–5.25% federal funds rate ceiling and a shallow recession that the U.S. economy will plunge into in the second and fourth quarters of 2023, according to Barclays.

Dynamics of gold and US dollar

At the same time, capital flows also affect the value of gold. Queen Anne's Gate Capital says the current rally in XAUUSD is due to an outflow of money from the crypto market. In 2020, investors actively invested in ETFs and crypto assets. As a result, specialized exchange-traded funds grew from 80 million ounces to 110 million ounces. By now, they have fallen to 95 million ounces. Many are still under water, that is, in losses. They will take advantage of the rise in gold to close their positions. If ETFs shrink another 20 million ounces, the precious metal will plummet to $1,300.

The collapse of cryptocurrency broker FTX accelerated the collapse of BTCUSD, and money poured into gold, but a stabilization of bitcoin will reverse that process.

Gold and Bitcoin Dynamics

However, if the capital outflow from specialized exchange-traded funds stops and the demand for physical assets in Asia starts to fall, the downward trend of XAUUSD can be considered broken not only technically but also fundamentally. The fact is that, in an upward trend, gold tends to flow from the East to the West and vice versa during downturns—from China and India to the USA and Europe.

In this regard, a sharp drop in October imports of China's precious metal from Hong Kong to 18.7 tons, which is 45% less than in September, indicates a decrease in demand. However, Commerzbank believes that the dynamics of the indicator was affected by restrictions imposed by Beijing due to COVID-19. According to customs data from Switzerland, gold exports to China in October decreased slightly from 44 to 43.7 tons.

In the near term, the fate of XAUUSD will be affected by Powell's speech and the U.S. labor market report for November.

In technical terms, the 1-2-3 pattern can work out on the daily chart of the precious metal. However, for this, quotes must fall below $1,725, which will be a reason for selling. A fair price break of $1,762 per ounce is more likely to be a reason to buy.

 

[KostiaForexMart]

USD/JPY: that's it, no movie!

Federal Reserve Chairman Jerome Powell's dovish speech pulled down the dollar. Yesterday, the U.S. currency experienced a resounding sell-off on all fronts, but saw the biggest loss against the yen.

A crushing blow from Powell
At the middle of the week, Powell spoke about the economic outlook, inflation and US employment at the Brookings Institution.

It was Powell's first public speech since the November FOMC meeting, so traders were looking forward to his comments on the central bank's future course.

The market has been in a state of strong uncertainty. Softer inflation provoked speculations about a possible slowdown of tightening in the US, and recent hawkish comments made by Fed representatives have cast doubts on this.

Until yesterday, dollar bulls had illusions about further sharp rate hikes in the US. However, Powell just shattered their hopes: the central bank intends to slow down.

He said it makes sense to 'moderate' the pace at this stage to balance risks. He also hinted that the Fed might take less aggressive steps at its next meeting.

After Powell's dovish rhetoric, the likelihood of a 50 bps rate hike in December rose from 69.9% to more than 90%.

The sharp weakening of hawkish market expectations took a heavy toll on the dollar. It interrupted its 3-day climb and went into free-fall.

Yesterday, the DXY index posted its biggest daily loss of the week, falling more than 1% from its major peers.

Goodbye USD/JPY
The U.S. currency showed the worst dynamics on Wednesday against the yen. The USD/JPY plummeted 1.2%, testing the 3-month low at 136.50 in one moment.

A steep peak in yields on 10-year U.S. Treasuries contributed to the yen's sharp growth. The index fell to a one-month low of 3.6% after Powell's comments.

"The dollar is losing more altitude as the market embraces a less hawkish than feared message from the Chair," said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. The "big decline in 10-year Treasury yields sees the yen at the top of the leaderboard."

Recall that this year the Japanese currency suffered the most from the aggressive Fed rate, and the Bank of Japan's dovish policy adds more pressure on it.

The BOJ is the only major central bank that has never raised interest rates this year.

The hope that appeared last month that the Fed might soon slow down the pace of tightening helped the yen recover from its multi-year lows.

The JPY showed the best uptrend against the dollar in November. It strengthened by more than 7%. This is the biggest monthly gain for the JPY in 14 years.

Now, when Powell actually gave the signal to start a slowdown in interest rates in the U.S., many analysts have revised their forecasts for the pair - downward.

According to experts, the asset has already exhausted its bullish potential and is unlikely to return to spectacular and confident growth in the near future.

In the short term, the major will move mainly downwards, still weighed down by Powell's dovish statement.

Also, US economic data may become a headwind for the dollar-yen pair. If the market sees another symptom of the approaching recession, it will finally convince traders that the US central bank will hit the brakes this month.

Analysts predict this is likely to happen. The ISM manufacturing activity index for November will be released today. Economists are predicting that the index will fall from 50.2 to 49.8.

Another headwind for the dollar will be the return of risk sentiment to the market due to the easing of anti-Covid measures in China. This should also favor USD/JPY bears.

 

[KostiaForexMart]

EUR/USD. All eyes on Nonfarm

Traders are focused on today's NonFarm Payrolls report. Key US labor market growth data is especially important right now in light of recent events. If the data lets the dollar bulls down as well (in addition to the PCE and ISM manufacturing index), the greenback will bear significant pressure in all major pairs. Also, keep in mind that the NonFarm Payrolls will be released less than two weeks before the Federal Reserve's December meeting. The last speech of Fed Chairman Jerome Powell was not beneficial for the dollar (in my opinion - undeservedly), while a disappointing labor market report will only add fuel to the fire. In that case, the EUR/USD bulls, in particular, can already think about conquering the 6 figure in the medium term.

In general, recent events are not unfolding in favor of the U.S. currency. And it is not only because of objective circumstances. For example, the market reacted quite adequately to the decline of the ISM manufacturing index, which collapsed to 49 points, reaching its lowest value since May 2020. Traders also reacted fairly to the slowdown in the core PCE index, although this slowdown was minimal (and predictable).

No complaints here, as they say. At the same time, in my opinion, market participants are interpreting too many fundamental factors against the greenback - even in those cases where there is a less favorable aspect of the issue. For example, Powell said during his last speech that the time to reduce the pace of rate hikes "may come as soon as the December meeting." At the same time, he said that the final level of the federal funds rate will likely be higher than the September forecasts. It is noteworthy that Powell had previously voiced both theses, and each time the market reacted differently to his words.

Lately, the fundamental environment has not been in favor of the greenback: traders are keenly reacting to negative information for the dollar and are quite skeptical to positive (hawkish) signals. A vivid example of this is the market's reaction to Powell's speech: market participants went with the dovish messages and chose to ignore the statement that the final rate will be at a higher level.

All this suggests that today's Nonfarm data will also be treated in a "special" manner. In my opinion, the data can only support the dollar if all components of the report come out in the green. Otherwise it will be interpreted against the greenback.

Let me remind you that dollar bulls were not impressed by the last (October) Nonfarm data. Specifically, the unemployment rate climbed to 3.7% (from the previous value of 3.5%) and the average hourly wage growth rate slowed on an annualized basis to 4.7%, whereas it has been consistently above or in line with the 5% level since January. The share of the economically active population in October slightly decreased, but still, to 62.2%. All of the aforementioned indicators came out in the red, much to the disappointment of supporters of the strong dollar. After this report, the odds of a 75-point rate hike at the December meeting dropped to 20% (according to the CME FedWatch Tool). Accordingly, the 50-point scenario became the base case, with an 80% chance of being realized.

According to general forecasts, the number of employed people should increase by 200,000 in November. The unemployment rate is likely to remain unchanged at 3.7%. The annualized growth rate of average hourly earnings may slow to 4.5%.

In my opinion, the dollar will get no support even if all components of the release come out at projected levels. At the same time, there is definitely an implication that the numbers may not reach the forecasts at all. The alarm bells have already rung on this subject: The day before yesterday, the ADP released a disappointing report which showed an increase of 127,000 new jobs in the non-farm payrolls, contrary to its forecast of 200,000.

However, we have to admit that the ADP numbers do not always correlate with the official numbers, so there is still intrigue here.

At the moment, it is advisable to take a wait-and-see attitude towards all dollar pairs, and EUR/USD is not an exception here. The Nonfarm data will probably not be able to change the situation: as mentioned before, the fundamental situation is not in favor of the dollar. Nevertheless, opening long positions ahead of such an important release is a very risky action. Taking into account the "Friday factor", it is an unreasonable risk, especially since the pair is in the area of 5-month highs.