The Weekly Close Out

Dollar Index (DXY):

The dollar kicked off this week on a softer footing as news hit the wires that dove Lael Brainard had been interviewed at the White House for the role of Fed Chair, however, prediction markets still have a 77% probability of Powell being re-elected. Additionally, with Biden sounding concerned with the higher cost of living, it would make more sense for a more neutral/hawkish Chair to be re-elected. Wednesday’s red hot CPI print certainly injected more life into the moribund price action we’d seen of late. There were beats across the board with headline inflation the highest since 1982 and after stripping out more volatile factors, core was still printing north of 4% (highest since 1991). The increases were broad-based as well as components which are more sticky such as housing inflation.

That sparked a dramatic hawkish repricing in STIRs (2.5 hikes now priced by end of 2022 and first hike by July 2022). This is more hawkish than the Fed’s median dots up until 2024 where the markets expectations are lower on policy error anxiety from tightening too fast. Also, 2-year yields (proxy for Fed policy rates) repriced higher, leading to a widening of rate differentials in favour of the greenback. Furthermore, a poor 30-year auctions lit a fire under yields at the long end of the curve which shoved real yields higher and added to the dollar’s momentum. This is the right hand side of the dollar smile in action. There was also some geopolitical tensions with Russia perhaps invading Ukraine again and Covid worsening in mainland Europe, which could bring the LHS of the dollar smile back into play (safe haven flows).

(Source: TradingView - Past performance is not indicative of future performance.)

USD has run quite hard over the last two days, so fresh longs will need to be cautious potentially waiting for a pullback before reloading. We could see some profit taking as a result. Price is making a doji which can lead to a change in price direction as it indicates a stale mate between buyers and sellers. It is significant however that we're through the 95 level. The RSI is just below overbought, but looks to be rolling over. Targets wise, to the upside I'd look towards 95.5/96. On the downside look towards the 94.5 support with the 21-day EMA and 50-day SMA below there.

EURUSD:

Both technical and fundamentals aren’t looking great for the EURUSD as it makes fresh year to date lows on the back of averse widening in the front end differential of the US and eurozone. Eurozone money markets now price in two full, 10bps ECB rate hikes by Dec 2022, which is about as likely as me starting ahead of Mohammed Salah for Liverpool. Despite Governing Council member Robert Holzmann stating the ECB could halt their QE by September 2022 if inflation looks to have sustainably returned to the official target, Lagarde still insists a rate hike next year is highly unlikely. We got some updated economic forecasts from the European Commission yesterday with growth upgraded to 5% for 2021 (4.8% prev). Inflation, the more interesting data point given its effect on money market expectations saw some decent upgrades for 2021 (2.4%) and 2022 (2.2%), then declining to 1.4% in 2023 – below the ECB’s target of 2% Those forecasts further relinquish the credibility of two 10bps hikes before the end of 2022 from the ECB. The covid situation is not looking great either with many countries now close to implementing mobility restrictions. Next week eurozone CPI drops, which could see further tightening of the Eonia curve.

(Source: TradingView - Past performance is not indicative of future performance.)

EURUSD looks to be eyeing 1.14 as it sliced through the 1.15 support. The RSI is indicating some negative divergence as price makes new lows, but the indicator makes higher lows. Could we see a short covering rally into the 1.15 area? That's the score on the door on the upside and on the downside I'd be looking towards 1.14.

GBPUSD:

GBPUSD has also hit the skids and moved lower making new YTD lows. Again, like the euro it’s a dollar story driving this cross. There was some GDP data out for the UK with Q3 QoQ disappointing slightly as it missed expectations, coming in at 1.3% (exp 1.5%). The MoM figure for September was better than expected at 0.6% vs 0.4% exp. We also had Bailey on the wires again, digging himself an ever deeper hole on the comms mess from last week. On the Brexit front, there is still a ton of uncertainty as to whether the UK will trigger Article 16 and what the EU’s reaction would be. Both Chief Negotiators are meeting today. Brexit Risk Premium has the potential to be priced in and weigh on the pound. Next week we’ll get labour and CPI data which could influence market expectations around OIS pricing.

(Source: TradingView - Past performance is not indicative of future performance.)

GBPUSD has sliced through the 1.34 support level with the lower line of the descending channel just below. A break of this level, sees next major support at 1.33. The RSI has this morning rolled back upwards and is making negative divergence with price (potentially portending a relief rally in the cross). All the moving averages are pointing downwards, not a great sign trend wise. Price rallies look like they're going to be used to add short for the time being with plenty of resistance above - 21-day EMA, 50-day SMA and horizontal lines. Zooming out to a longer time frame such as the monthly chart, shows what could be a double top pattern. If this plays out the projected target would be around the 1.20 level. Targets wise, on the downside – 1.335/1.330 and on the upside 1.355.

USDJPY:

Dollar yen liked the spike higher in US 10-year yields and responded with a nice bid. The cross has stalled a bit now as some steam is released in yields. I also worry about how much higher this cross can go (obviously dependent on where US yields go to) as the dramatic gains have pulled forward returns from future periods. USDJPY has sliced back up through the 113.5 mini range support and the 21-day EMA. The RSI is right on the 58 level. Target on the upside would be previous range resistance at 114.5 and on the downside 113.5.

Gold:

Gold is finding some technical resistance as well as real yields moving in an unfavourable direction, causing some profit taking. The dollar strength also obviously doesn’t help. Despite this gold has been still quite strong, holding onto its gains. Tensions geopolitically may have also seen modest safe haven flows. The move looks to have been driven by “hot money” as observing ETF flows doesn’t indicate that much excitement by the move in spot gold. The inflation debate rages on and is at the heart of the fundamental story for gold. I think for gold to hit $2000, real rates will need to reverse lower and make fresh lows. Remember at Pepperstone you can buy gold in the weakest currency (GBP, AUD or EUR) and short in the strongest currency (dollar) to boost your P&L from the currency kicker.

(Source: TradingView - Past performance is not indicative of future performance.)

Gold is right on its $1860 resistance level. It has really had a strong run over the past week, smashing through $1830 (very strong resistance). The RSI tagged 70, overbought levels and looks to be rolling over slightly now. Where to next if $1860 is broken? $1900 comes into play, but some may even say $2000 - punchy indeed. On the downside, if this is a head fake move then previous resistance $1830 would be a key support level

Oil:

So what are the factors running the show for oil at the moment. Netherlands, Germany and China all are struggling with Covid and this quite clearly keeps demand lower if mobility restrictions ramp up. Lukashenko over in Belarus is also stating he may shut off gas pipelines if sanctions are implemented due to the migration issue. Some are now saying an SPR release may actually be bullish for crude as it highlights just how tight the demand supply equation really is. US official inventory data showed a build in stocks as opposed to the expected drawdown. The dollar strength is also a headwind for oil.

(Source: TradingView - Past performance is not indicative of future performance.)

Oil continues to fluctuate around the $82.50 level as it tries to find its next direction of travel. The RIS is back below the 58 line. Price is being squeezed between the 21-day EMA and 50-day SMA ($80). Targets wise, on the downside look towards $80. On the upside, $82.50 then $83.