London 12/10/2022

It’s been a quiet week so far in the financial markets and it makes perfect sense since the whole community awaits the important announcement of the US inflation in September. The announcement will be released on Thursday at 12:30 GMT and it will define the anticipation of the markets for the next actions of the Fed, regarding the monetary policy and the interest rates. A higher-than-anticipated inflation rate may cause the sense that the Fed will be more aggressive with new big interest rate hikes. Logically, the reaction of the markets in such a case will be the weakening of the dollar and the strengthening of the major stock indices and commodities. For the moment, the probability of a 0.75% rate hike in early November’s decision is 83%. A lower-than-anticipated inflation rate, most likely, will cause the opposite results. Some hints about Fed’s next steps we may know later today at the Fed minutes release (FOMC). So far, the dollar is mildly strong, the stock indices are slightly bearish and most commodities such as gold and oil, perform losses. Interesting enough is the fact that the US 10-year bond yield has approached the milestone level of 4%.
Besides the developments from the USA, ECB head Christine Lagarde is scheduled to deliver a speech later today and the investing community is expecting hints about the future ECB’s behavior. Interesting news comes from the UK as well, as we’ll see below in the GBPUSD section.
EURUSD (current price at 0.9706) is slightly bullish so far with low volatility all eyes are on tomorrow’s inflation announcement in the USA. Earlier today, the Eurozone announced September’s industrial production which was better than expected. Also, Germany had a 10-year bond auction that closed with a yield of 2.33% which is considered pretty high. The producer price index (inflation indicator) was announced in the US at 8.5% vs the 8.4% expected and this has caused a mild strengthening of the dollar. The consumer price index tomorrow will define the trend and the volatility of the EURUSD, at least until the end of the current week. Technically speaking, above 0.9775 there’s a good chance for parity (1:1) while below 0.9670 the bearish trend may prevail.

GBPUSD (current price at 1.1048) is bearish this week, following the dollar’s strength but the volatility remains high, following the instability of the sterling. The UK had a series of important announcements. Yesterday, the unemployment rate for August was released at 3.5% which is an improved price compared to the 3.6% in July. Today’s news was disappointing though: GDP, industrial & manufacturing production, and trade balance were all well below the markets’ expectations. Yesterday, the head of BoE Andrew Bailey, speaking at an event, announced the decision to intervene in the financial market because the bank stress tests have exceeded the limits, regarding the market volatility. Andrew Bailey reminded pension fund managers of the deadline until the end of the week for their positions rebalancing. Also, the BoE expanded its gilt buying program to include inflation-linked gilts. These are developments that cause nervousness and high volatility in the markets. The FTSE100 index has losses of more than 2%, underperforming the rest of the major indices.  In the case of GBPUSD dropping below 1.09, the downtrend will become stronger. Above 1.1180 the reversal earns more credits.

USDJPY (current price at 146.74) is bullish this week, based mainly on the dollar’s strength and on the new rally that bond yields perform. It’s very impressive that the USDJPY had its 9th bullish week in a row. Japanese officers reiterated that the Japanese government may intervene again as they closely monitor the currency rates but the uptrend of the pair is very strong and was not affected by the statements. Some days ago, an intervention took place that caused a drop in the USDJPY but right away, the markets reverted the price to its previous state. According to the current data, the BoJ will continue its ultra-loose monetary policy and under this assumption, the USDJPY may expand its uptrend, threatening the all-time high price at 147.68. The trend may reverse in case of a low US inflation rate at tomorrow’s announcement.

DISCLAIMER: The information produced by a-Quant is of a general nature only. It is not personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

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