Table of Contents
Last week was a transitional period for both the financial markets and the calendar. Treasury yields fell significantly, leading to a decrease in the value of the dollar, while equities experienced their most profitable week in a year.
The performance of non-farm payrolls and ISM services was weaker than anticipated, which contributed to the continuation of these trends. As a result, the British pound (cable), EUR/USD, and AUD/USD all reached one-month highs. These movements were initially limited to around 40 pips after the non-farm payrolls release, but as revisions in the report and other details were considered, the market began to factor in the possibility of a 100-basis-point reduction in interest rates by the Federal Reserve in the coming year.
Before the release of the non-farm payrolls report, the market had already factored in expectations of a 79-basis-point reduction in Federal Reserve interest rates next year. At that time, the 2-year Treasury yield was trading at 4.98%, and USD/JPY was at 150.14.
The details of the report, especially those from the household survey, are less than encouraging. This has triggered significant buying in the bond market, leading to a 7-basis-point drop in yields for the 2-year bonds and a 10-basis-point decrease for 10-year bonds, bringing the yield down to 4.57%.
In Canada, October employment was lower than expected, with wage growth slowing down, unemployment increasing, and job losses primarily affecting full-time employment. This is concerning, and the soft non-farm payrolls report caused USD/CAD to decline, but apart from that, the Canadian dollar is not performing well. However, the US numbers should boost risk appetite, given that Treasury yields have dropped, which will be beneficial for the Canadian dollar.
The Eurozone’s September unemployment rate was 6.5%, which was slightly higher than the expected 6.4%. The economic situation in Europe is evidently deteriorating, but employment indicators tend to lag behind other economic factors. We might just be witnessing the beginning of a gradual increase in unemployment.
On Friday, there was a significant difference between the movements in the stock market and other areas. FX fluctuations at the end of the day were restrained, with relatively low volatility. USD/JPY edged towards the upper range, posing a potential area of interest for the upcoming week, although there was no imminent threat of surpassing the recent high of 151.74.
In contrast, equity markets experienced a robust surge in continuous buying after the first hour of trading. While Nvidia’s strategic maneuver to circumvent the Chinese chip blockade may have contributed to the rally, it was evident that the upswing was more widespread.
Interestingly, European markets did not participate in the rally, and Treasury yields rose primarily in the front end.
The UMich consumer sentiment report, featuring elevated inflation metrics, provided some support for the US dollar. This, coupled with USD buying during the fix, led to daily extremes on a few pairs, but the impact was limited to a 20-pip bump that faded later.
CAD received some independent support as oil prices rebounded, and the overall risk sentiment improved. However, this was only sufficient to erase earlier declines.
The Reserve Bank of Australia released its Statement on Monetary Policy (SoMP), a quarterly document providing updated economic forecasts and the Bank’s evaluation of risks to the economy and inflation outlook. The RBA adjusted its inflation forecasts upward, attributing the prolonged increase to heightened immigration and increased infrastructure spending. Despite this, the Australian Dollar (AUD) and other major currencies displayed minimal movement. In New Zealand, the manufacturing PMI experienced a further decline into contraction in October.
Last week, the euro was significantly impacted by central bank speakers. The Federal Reserve emerged victorious with a hawkish approach. Fed Chair Jerome Powell pushed back against dovish talk and expressed the possibility of additional interest rate hikes if required, which was advantageous for the US dollar over the week.
The euro has been negatively affected by poor Chinese economic data, which has contributed to a downward trend. This trend has further affected the already fading manufacturing sector in the region. As a result, money markets have priced in approximately 85bps of cumulative rate cuts by December 2024, in comparison to the Fed’s 75bps, thus playing into the hands of the greenback via the carry trade. The current environment favors the USD due to its comparatively stronger economy as well as the ongoing war in the Middle East, which adds to its safe haven allure.
This week is more action-packed than the previous one, with both euro area and US releases scheduled throughout the week. The focus will be on US CPI and euro CPI, respectively. Euro area headline inflation is expected to fall sharply to 2.9% from 4.3%, which could have a negative impact on the euro if it materializes.
As stated last week, we predicted a bull back of EURUSD to support level 1.06576. After this, the price is likely to move up towards the previous resistance of 1.07580. If the price breaks above 1.07580, we will see a final continuation upward towards the next resistance at 1.09482. For this scenario to hold up, the price needs to stay above 1.06289. A break below the 1.06289 area will result in a further drop in price towards the next support at 1.05000.
Throughout the current week, the GBPUSD pair has been in a downward trend due to the strengthening of the US dollar, which was fueled by rumors of a possible interest rate hike. On Thursday, hawkish comments made by Jerome Powell added further fuel to the fire, causing the Dollar Strength Index to rise by 1% this week and putting downward pressure on the GBPUSD pair.
In our previous analysis, we predicted that the price was likely to break above the resistance level of 1.23329, but it would face rejection at the resistance level 1.24310 due to the 200MA.
At present, the exchange rate for the Pound in terms of the Dollar stands at 1.22279 after experiencing a decline for five consecutive trading sessions. The pair is expected to continue its downward trend, first to the support level of 1.21000, followed by 1.19000. Notably, the pair is down 7.2% from its yearly peak. If the cable pair breaks under the support level of 1.2100, the bears are expected to have a field day as this move has the potential to flip the GBP/USD pair forecast extremely bearish.
The USDJPY has been on a five-day rally, almost reaching the previous 130-month high of 152.00. This is due to a rise in the 10-year US Treasury bond yield after a weak 30-year US bond auction and Federal Reserve (Fed) Chair Jerome Powell’s hawkish pullback.
Participants in the market are still digesting Powell’s words, which indicated that the US central bank is concerned about inflation and would raise rates if necessary. However, there are concerns that the policy is not restrictive enough, which has helped push up the USDJPY and US bond yields.
We have been following this pair’s upward channel movement since it bounced away from the 127.240 level three months ago. We believe that the market will make a fake high above the 152.280 before a final drop, signaling a change in the upward trajectory. Our forecast is that the price will break above the 152.280 resistance, resulting in a fake breakout. Afterward, the price of USDJPY will drop towards the support level of 147.500, followed by the next support area of 144.420.
GOLD (XAUUSD) FORECAST
In the past few weeks, financial markets have been anticipating that US interest rates will not increase further. However, the comments made by Powell on Thursday serve as a reminder that the Fed will take whatever action is necessary if it believes that inflation will remain high.
Late on Thursday, US Treasury yields increased significantly after a 30-year bond sale worth USD24 billion received lukewarm demand. Primary dealers were left holding almost 25% of the sale on their books, which is considerably higher than usual. As a result, the yield on the bond rose by about 17 basis points to 4.80%, thereby reversing this week’s decline in longer-dated yields.
Chair Powell’s hawkish commentary and the increase in US Treasury yields are causing the price of gold to drop. After reaching a multi-month high of 2,009. on October 27th, the precious metal has declined and is currently trading at 1,950. The 1,961. level, which was previously a resistance level, is now back in play, and the next level of resistance is the 23.6% Fibonacci level at 1,971/oz. In the short term, a support zone between 1,932. and 1,940. is expected to hold.
Gold has been in a strong bearish trend since it failed to break the 2010.00 resistance level, which continued throughout the week. Currently, gold is resting on the 200MA at 1938.38.
According to the Fibonacci retracement drawn on the weekly timeframe, the next support area is at the 0.618 Fibonacci level at 1915. However, it should be noted that gold still has the potential to complete an upward movement and reach the all-time high of 2100. However, this will only be possible if the 2010.00 level is broken first.
Three weeks ago, the Reserve Bank of New Zealand (RBNZ) conducted a monetary policy meeting and decided to keep the official discount rate OCR unchanged at 5.5%, which was in line with market expectations. RBNZ assessed developments since August as balanced and reiterated their message that the OCR is currently restrictive and should remain so. However, this disappointed the markets, which were expecting a more aggressive tone leading to a sell-off in the market.
Interestingly, despite RBNZ’s dovish stance, hedge funds took longer positions, as seen on the chart (Net %). This could be due to the golden week in China and the potential demand that could follow in NZD as the New Zealand Dollar is highly influenced by Chinese economic activities. Surprisingly, despite fundamental sellers shorting NZD due to the release of disappointing news and data from New Zealand and China, the NZD candle ended the week with a gain on October 8, 2023.
Last week, the NZD chart indicated that the NZD pair might be ready to move higher, and the hedge funds’ prediction seems to be taking shape.
On Wednesday, the New Zealand dollar regained its early losses against the US dollar after the Chinese economy grew faster than expected. Industrial output and retail sales also surpassed expectations, keeping alive hopes that growth in the world’s second-largest economy could be bottoming out.
NZD was able to recover all the losses made in the week ending November 3, 2023, indicating a potential continuation movement on this pair to the upside. The main area to watch for further movement is a break above the 1.82700 level, followed by a retracement before a final push towards the 1.84650 level and beyond.
All charts and diagrams were created using PrimeMarket Terminal. You can gain an edge and insider information with PrimeMarket Terminal. Check out our review and use “XOXOTRADERFX” for 15% off during checkout.