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XtreamForex | Daily Technical Analysis

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US Consumer Sentiment and Elections
Officially which party has won control of the Congress is still not known. The trends and projections, the results are pretty much in line with what was expected. Republicans take control of the House, but by a smaller margin than expected. And control of the Senate is still unknown, and will likely come down to a run-off election in Georgia.

The initial reaction from the markets wasn’t favorable, likely because of the associated uncertainty. Investors don’t like knowing what’s coming, and with control of the Senate down to a single race that had less than a percentage point of margin, doesn’t inspire confidence. Additionally, Republican control by a small margin means that maintaining consistency will be harder. It only would take convincing a small number of Representatives to change legislative outcomes.

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United Kingdom Inflation Rate
The UK GDP revealed that the economy shrank by only 0.2% in 3rd Quarter, which means that a contraction of more than 0.55% may be needed in the last three months of the year for the BoE’s forecast of a 0.75% contraction during H2 2022 to materialize. Yet, investors dragged their rate-path projections lower. The probability for a 50bps hike at the December gathering renamed near 80%, but the implied terminal rate was lowered to 4.47% from 4.6%.

The jobs report is forecast to show that the unemployment rate held steady at 3.5% in September and that the average weekly earnings excluding bonuses have accelerated. With an inflation rate at 10.1% during that month, real wages likely stayed well into the negative territory and disposable incomes at record lows.

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AUD/USD – Australian Dollar US Dollar
The Australian dollar is in negative territory, after posting huge gains last week. In the European session, AUD/USD was trading at 0.6690, down 0.22%. US Dollar took a nasty spill last week, and the Australian dollar made the most of it, gaining 3.6%. The US dollar was slammed after a soft inflation report, with headline and core inflation slowing in October and beating the forecasts. This lit up risk appetite and sent the Australian dollar to its highest level since September 22nd.

The soft inflation report had such a strong effect on the greenback because it has raised expectations that the Fed will ease up on its rate tightening. After four consecutive hikes of 0.75%, the markets have now priced in a 0.50% increase at the December meeting. That would still represent an oversize hike, but investors have been looking for a reason to rush into stocks and the drop in inflation provided that excuse.

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Markets Position, The lower-than-expected US inflation
The lower-than-expected US inflation print simply extended with economic data serving as an accelerator. European stocks add a normal 0.6% but US indices open with very solid 0.9-2.5% gains. The US NY Empire manufacturing index surpassed the bar with ease, coming in at 4.5 vs a -6 consensus. But new orders turned negative again and the outlook for six months ahead turned deeper below zero from -1.8 to -6.1. Financial markets definitely also spotted the PPI easing by more than expected.

Headline factory inflation for September was revised lower to 8.4% and slowed to 8% vs 8.3% expected. Core gauges retreated from 7.1% to 6.7% and 5.6% to 5.4%. All of them are still at elevated levels but similar to last Thursday’s CPI, that’s of no importance to markets who just want to see pressure decline, both on prices and on the Fed.

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US Consumer Remains Strong
Equity markets in Europe are back in the red yesterday, while the US looks largely unchanged around the open on Wall Street.

Reports of missile strikes in Poland on Tuesday naturally caused a shudder in the markets. The prospect of a sudden and unexpected escalation in the war in Ukraine, particularly involving a NATO state, doesn’t bear thinking about but it’s almost forced to and under the circumstances, the reaction was fairly modest.

It could have been much worse but investors appear to have come to the view that it was a situation that would be quickly de-escalated which is what occurred despite initial reports not looking good.

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Japan’s Inflation hits the ‘40-year high
Despite the BOJ’s best efforts to contain inflation, prices are indeed rising.

Nationwide inflation rose to its highest levels since 1984 at 3.7% y/y and core inflation is also at 3.6%. If food and energy are excluded, CPI is now 1.4% y/y- which is its highest since 1998 we exclude the pre-emptive buying ahead of 2015’s tax hikes. Services PPI is down to 9.1% but historically high after peaking at 10.2% last month.

At 3.7%, nationwide CPI is nearly twice their 2% target. The BOJ were relatively late to the 2% inflation bandwagon by introducing their 2% target in January 2013. Of the 118 months since it was introduced, only 16.1% of them have been above 2%. There was a 12-month period from April 2014, and more recently inflation has been above 2% since April this year and still rising.

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RBNZ seen raising rates by historic 75 bps
Whilst there has been some less expectations that inflation around parts of the world have topped out, recent data for New Zealand is remining us that inflation can remain at elevated levels for longer than anyone would like.

CPI rose 2.2% q/q, up from 1.7% and well above the 1.6% consensus. Annual CPI rose 7.2% y/y – slightly below the 7.3% peak – but if the quarterly is trending higher then it can send the annual higher too. Labor costs have risen to a record high of 3.8% y/y and, whilst the quarterly read pulled back from its record, at 1.1% q/q labor costs remain quite elevated from its long-term average of 0.01%.

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FOMC Minutes, Fed Hiking Rates slowly
At the November 2nd FOMC meeting, members unanimously agreed to hike the Fed Funds rate by 75bps to bring the key rate to 3.75%-4.0%.The statement from the meeting said members agreed that ongoing rate hikes were necessary until rates were “sufficiently restrictive”. In addition, the statement noted that “in determining the pace of rate hikes, we will consider cumulative tightening, policy lags and economic and financial developments”. However, during the press conference which followed, Fed Chairman Powell stated that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated.

The FOMC Minutes released on Wednesday showed that a substantial majority of officials said a slowing in the pace of rate hikes would be appropriate soon.

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EUR/JPY Eyes Breakout – Xtreamforex
The US out on holiday, there’s not much point in discussing the dollar. Instead, something that could move during the Asian hours. The Japanese yen.

After being the weakest of major currencies for an extended period this year, the yen has stormed back against the dollar, along with equities, gold and other risk-sensitive assets. Wednesday’s publication of less hawkish Fed minutes and weaker-than-forecast US business activity data further fueled speculation the Fed is going to slow down its rate increases and potentially pause in early 2023.

As the USD/JPY slumped, other yen pairs have started to move lower with it – including the EUR/JPY – albeit to much lower extent. This is because nothing has changed in terms of the Bank Of Japan’s ultra-loose monetary policy. Thus, the USD/JPY has been hit because of dollar weakness than yen strength.

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This week’s currency pair, USD/CNH
This week will bring a lot of US macroeconomic data and speech from US Fed Chairman Powell, which should give the markets a clearer direction of where the Fed may be headed next regarding monetary policy. Powell speaks at the Brookings Institute on Wednesday. The topic is the economy and labor market. The statement after the November 2nd FOMC meeting stated that “ in determining the pace of rate hikes, we will consider cumulative tightening, policy lags, and economic and financial developments”. The markets took this to be dovish. However, in the press conference that followed, Powell said that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated. However, the pace of tightening is not as important as the terminal rate. Markets took this to be hawkish, Traders will be looking for Powell to clarify these statements and try to determine if the Fed will hike by 50bps or 75bps at the December meeting. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY print of 5% vs a September reading of 5.1%. If this number is stronger, the Fed may feel comfortable leaning towards a 75bps hike in December. The US will also release Non-Farm payrolls on Friday. Expectations are for a print of 200,000 vs a previous reading of 261,000. The Unemployment rate is expected to remain unchanged at 3.7%.

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