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LAST WEEK’S RECAP
The DXY index, which measures the strength of the US dollar, fell by almost 2.75%. This decline happened over the last few trading sessions and was triggered by lower-than-expected US inflation figures and disappointing initial jobless claims. The broader greenback dropped significantly, nearing its lowest level since early September.
The decrease in price pressures, along with a slowdown in the labor markets, has eliminated the possibility of further tightening by the Federal Open Market Committee (FOMC), weakening the argument for keeping higher interest rates for an extended period. Treasury yields have seen a significant decrease this month, with the 10-year note trading at about 4.45%, down from 4.95% at the end of October.
The trend of bond yields going down is expected to continue. As the effects of previous Fed rate hikes impact the real economy and with oil prices at multi-month lows, business activities are likely to further cool, causing inflation to fall more rapidly than initially projected. This situation is expected to put downward pressure on the US currency in the near future.
On Friday, the FX and energy markets were very active, while bonds and equities showed less activity as the weekend approached. The depreciation of the US dollar continued as the market consensus grew that the Federal Reserve had completed its series of rate hikes, coupled with expectations of a decline in economic data. The euro showed strength, consistently gaining ground and surpassing 1.09 for the first time since late August, closing near its peak.
Cable also showed strength, rising from 1.2375 to 1.2460 at the start of European trading. Although the dollar received some support during the London fix, it quickly surrendered those gains. Despite the opportunity for Federal Reserve official Collins to challenge the prevailing ‘no hikes’ narrative, there was only minimal resistance provided. The bond market experienced fluctuations, with short-term yields ending slightly higher while long-term yields decreased.
In his remarks, Fed’s Collins acknowledged some moderation in inflation and referred to ‘promising news.’ While recognizing the uneven nature of progress, Collins emphasized a patient approach, stating that additional hikes are not entirely off the table. The overall evaluation of financial conditions, including some restrictiveness on bank lending, led Collins to stress the importance of patience. Despite acknowledging positive signs in labor supply and demand alignment, Fed officials did not strongly oppose the dovish market pricing, signaling a cautious stance.
THIS WEEK’S OUTLOOK/FORECAST
The forecast for EUR/USD made last week was accurate and delivered a 95% success rate, as shown in the chart below.
During the session, the sharp sell-off in the US dollar on Tuesday was particularly noteworthy for various USD pairs. EUR/USD experienced a significant surge, gaining almost two big figures. Positive developments for the Euro combined with the likelihood of a persistently weaker US dollar in the future could propel the pair to achieve fresh multi-month highs in the upcoming weeks.
After a year marked by global interest rate hikes and a hawkish tone from central banks, the rates market is now fully pricing in a series of interest rate cuts next year by various central banks. Euro interest rate predictions suggest a potential decrease of around 100 basis points by the ECB in the coming year, with the April meeting being considered a live event. Euro Area inflation is expected to reach the target by the end of Q1 or the start of Q2. Therefore, forthcoming data will play a crucial role in determining the timing of the ECB’s decision to implement rate cuts.
Looking ahead, it is anticipated that the price will remain above the 200-day moving average (200MA) on the daily chart. However, there is a notable resistance level around 1.09467, which is likely to impede the pair’s upward momentum. This level is also in close proximity to the 0.236 level of the Fibonacci retracement. As a result, the suggested bias is to be vigilant for potential sell signals, such as a slowdown in the current buying momentum, followed by multiple instances of price rejection around the 1.09481 level.
On Friday, GBP/USD rose above both the 200-day simple moving average and Fibonacci resistance at 1.2461. However, the Pound Sterling (GBP) is struggling to maintain its gains against the US Dollar (USD).
Despite a general risk appetite in the market, driven by speculation that the Federal Reserve (Fed) has finished raising interest rates, GBP/USD remains within a midrange due to disappointing UK data.
If sellers regain control in the foreign exchange markets and push the exchange rate below the 200-day SMA, the pair could gradually decline to the 1.2320 level. It is possible that GBP/USD may find support in this area before considering a reversal; however, a breakdown scenario could trigger a further decline to the 50-day SMA and 1.2200 thereafter.
On the other hand, if buyers can sustain the bullish momentum, GBP/USD could reach the 1.26844 level, which represents the next resistance where sellers may try to regain control.
- 200MA (1.24400)
As forecasted last week from the chart below, the USD/JPY met resistance at the 152.000 area, followed by a sell-off.
On Friday, the USD/JPY pair sell-off continued, dropping toward its 50-day simple moving average, which is currently hovering slightly above the 149.00 mark. Despite positive US housing data indicating signs of recovery, the pair failed to find support. Building Permits in the United States surpassed forecasts, registering a 1.1% increase to 1.487 million, reflecting the resilience of the housing market amidst low inventory and attractive rates offered by homebuilders despite higher mortgage rates. October’s Housing Starts also exhibited growth, rising by 1.9% from 1.35 million to 1.37 million, presenting a picture of a robust economy.
However, the overall economic landscape is nuanced. Industrial Production and Retail Sales have hinted at the impacts of the Federal Reserve’s tightening, contributing to an accelerated disinflationary process. Despite these positive housing indicators, if prices fall below the current technical support level, which holds significant importance, potential losses could intensify, leading to a retreat towards 147.25. If this level is breached, the next conceivable support lies at the 100-day simple moving average.
On the other hand, if USD/JPY resumes its upward trajectory, it will face resistance at 150.900, followed by 152.000. In the event that Tokyo considers intervening to support the yen if this resistance level is challenged, a breakout could propel prices toward 152.650. Further upward movement might lead to a rally towards 153.500, marking the upper boundary of a medium-term ascending channel.
XAU/USD (GOLD) FORECAST
This week, the US will celebrate the Thanksgiving holiday, which means that there will be a Federal Holiday on Thursday. During this week, the price of Gold could be negatively affected by potential risks from US data releases that could strengthen the US Dollar. This could exert downward pressure on Gold.
Moreover, investors need to pay attention to ongoing geopolitical tensions in the Middle East, which could add another layer of uncertainty to the market’s risk sentiment. These tensions could cause investors to seek safe-haven assets such as Gold.
On the economic front, the release of the Federal Reserve Minutes is anticipated, but it’s unlikely to bring about any significant surprises. Nonetheless, analysts will be watching closely for any hints about the future direction of monetary policy. Positive indicators in terms of inflation and somewhat softer labor data since the previous Fed meeting could overshadow any bullish rhetoric in the minutes.
Other key data releases, such as housing figures, durable goods orders, and jobless claims, could induce brief changes in sentiment toward the Dollar. These data releases will be important to watch, as they could impact the US Dollar’s value and subsequently affect Gold prices.
Considering these factors, any significant downside misses in the US economic data and further cooling in the labor market could potentially trigger a renewed selloff in the US Dollar. This could provide a boost for Gold prices. Investors will be keeping a close eye on these developments, and shifts in sentiment may impact Gold prices accordingly during this holiday-shortened week.
After analyzing the technical perspective, Gold closed last week within a crucial range of resistance. Last Friday’s selloff could mean that there might be a further retracement in the early part of the upcoming week. The area between 1977.00 – 1984.00 has a host of confluences that still hold on a daily timeframe.
The Fib Retracement/discount level between 0.618-0.786 is also in play. If the Friday high holds on Monday, there could be a selloff to start the week, which may result in gold reaching the 0.5 Fib Retracement at 1948.00.
It is important to pay attention to key support areas around 1968.00, 1959.00, and 1948.00, which may provide support before gold reaches the low print around 19335 from last week.
All charts and diagrams were created using PrimeMarket Terminal. You can gain an edge and insider information with PrimeMarket Terminal. Check out PrimeMarket Terminal Review and use “XOXOTRADERFX” for 15% off during checkout.