official Daily Market Notes by Tickmill.co.uk

[tickmill-analytics]

Dollar gains ground awaiting inflation report as US labor market shows signs of weakness

The dollar recovers on Monday after mixed NFP report released last Friday. Job gains fell short of the modest forecast of 200K, coming in at 187K, which greatly disappointed fixed income bears who was dumping bonds throughout the previous week. Yields plummeted by more than 15 basis points after the release:

However bullish reaction in bonds proved to be transitory as the inflation part of the unemployment report still indicated that the labor market retains decent potential to generate price pressures. Wage growth beat forecast coming at 0.4% MoM vs. 0.3% consensus. Unemployment also decreased to 3.5%, and as it is known, the Fed uses the inverse relationship between inflation and unemployment to shape monetary policy.

In essence, if there was any negativity, it was minor, and on Monday, the dollar started to exert pressure again, with the dollar index recovering about half of its Friday decline. The price is just a bit shy of a retest of the upper bound of the medium-term bearish channel, making the idea of shorting the dollar much more appealing:

On the chart, the zone where the dollar could renew its medium-term decline is near the 103 level.

One source of dollar support could be the U.S. stock market, which, judging by the S&P 500 chart, is clearly developing a bearish momentum:

The price rebounded from the upper bound of the ascending channel, and it had been in a downturn for the previous four days. Of course, buying interest near the key 4500 level may prevent the market to push through it easily, but in my view, a significant portion of buyers will be waiting for convergence at least with the 50-day moving average. This is roughly around the 4400 level.

A trigger for such a correction could be the U.S. inflation report this week, scheduled for release on Thursday. A decrease in core inflation from 4.8% to 4.7% is expected, along with an increase in overall inflation from 3% to 3.3%. The focus, of course, will be on core inflation, which is "cleaned" of the influence of seasonal and other short-term factors. A substantial correction of risk assets is quite likely with a combination of a weak labor market report and more resilient core inflation than expected. It might be sufficient even if inflation exceeds the forecast by 0.1% and reaches 4.8%, as in this case, asset prices will start factoring in the risks of stagflation – long-term bond yields will decrease, short-term yields will rise, and risk assets will account for the risk that the "soft landing" the Fed is diligently working towards might break at some point.

If the inflation report aligns with the forecast, there's a chance that the Producer Price Index (PPI), which will be published on Friday, will trigger a strong reaction. Last time, there was a significant response to the surprise, as PPI is a leading indicator of CPI, due to the fact that price pressure is transmitted from producer prices through costs to consumer prices.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Dollar Rally Pause: What to Expect in the Near Future?

The dollar is attempting to consolidate its gains on Monday after breaking above the upper bound of a key bearish channel:

In the search for bullish entry points, attention should be paid to the same upper channel bound, which now has a high chance of acting as a support line. On the chart, this corresponds to approximately the 103.5 level on the dollar index. The development of an upward trend in the coming month seems to be the more likely scenario in my view, given that last week on lower timeframes, there was a battle to maintain trading within the channel (breakouts and subsequent pullbacks), which enhances the significance of this line as an important market reference point.

Powell spoke at last week's Jackson Hole Symposium. Central bank heads generally deliver insightful remarks at this symposium, and this time was no exception. The market was overall satisfied with how the Fed chair tried to strike a balance between risks and the necessity for hawkish policy. This is evident from the positive closing of major indices on Friday, which, by inertia, passed on risk appetite to Monday's trading. The Federal Reserve Chairman once again did not rule out further tightening and indicated that in the context of inflation forecasts, investors should keep an eye on the labor market. It was a fairly clear statement that the central bank will be waiting for weak labor market indicators before hitting on the pause button. Additionally, the Fed Chairman stated that officials are currently concerned about inflation in the non-housing services sector, which aligns with his previous remarks on the labor market, as labor is a more significant factor of production in the services sector than capital. Wage growth in this sector currently has a faster pace compared to the production sector, which underlies the primary inflation risks. In short, the slowing pace of job growth in the services sector and clear signs of inflation deceleration in non-housing services are what Powell recommended to watch in upcoming labor and inflation reports.
The U.S. Treasury bond market reacted unusually to Powell's speech, with short-term bond yields rising while long-term bond yields remained steady or even slightly declined:

This suggests that the chances of near-term tightening have increased, while in the more distant future, the market has begun to anticipate a slightly faster inflation easing.

China rolled out new stimulus measures today, which also boosted risk appetite in markets, initially in China and then in financial markets beyond China.
Overall, lack of major market events and reports in the first half of the week favors the development of the bullish rebound in equities and the pullback in the dollar against other major currencies.

In the second half of the week, markets expect the Core PCE for July, which, despite it now being August, has the potential to surprise, as it did in June and July. On Thursday, the focus will be on the NFP report, as mentioned earlier, with an emphasis on employment in the services sector and, consequently, wage growth in it. For the EU, the market awaits inflation data for August, as well as labor market statistics for Germany. Also on Wednesday, China will release the official Manufacturing PMI, considering that China remains on the market's radar after a series of recent negative news, a significant deviation from the forecast could also impact risk appetite in external markets.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

NFP report Analysis: Job Growth and Fed Policy Outlook

The US unemployment report for August showed modest job growth, a slowdown in wage growth, and a relatively sharp jump in the unemployment rate, all clear signs that the US labor market is normalizing. It's challenging to expect inflation to accelerate in this context, so the likelihood of the Federal Reserve raising interest rates in September and possibly in November is diminishing.

Job growth in the US in August reached 187,000, slightly surpassing the modest forecast of 170,000. However, the previous two months were revised downward by a total of 110,000 jobs. The report adds weight to the argument that there is a sustained trend of weakening in hiring. In the private sector, the increase was 179,000, with 102,000 of those jobs coming from the private education and healthcare sector. A positive development in terms of its impact on inflation is the increase in the labor force participation rate – a measure calculated as the sum of unemployed and employed individuals as a percentage of the total working-age population. An increase in this rate means a "net" inflow into the category of those who are either employed or actively seeking employment, which should exert downward pressure on wages and, subsequently, consumer inflation in the US. The decline in this rate in 2020 led to the phenomenon of sustained inflation pressures, which the labor market continues to generate. With its return to normal levels, this effect is likely to be a deflationary factor:

Along with the rise in the labor force participation rate, wage growth is also starting to slow down, with August recording a 0.2% MoM increase compared to a forecast of 0.3%. This marks the first drop below 0.3% in over six months. The unemployment rate jumped from 3.5% to 3.8%, clearly indicating a slowdown in the pace of labor demand growth.

The probability of the Federal Reserve raising rates in September in the face of such soft figures is sharply decreasing, and the pause is likely to extend into November.

The markets did not see anything critical in the unemployment report in terms of recession risks in the US. Short-term Treasury yields returned to levels preceding the report release after a brief dip, and long-term bond yields even increased slightly, from 4.10% to 4.18% for 10-year Treasury bonds. Consequently, the report had no significant impact on the US dollar, which strengthened against major currencies after a brief bearish correction. The dollar index rose from 103.50 to 104 points, and the price formed a chart pattern rebounding from a support line, which previously acted as resistance, serving as a confirmation of bullish intentions:

This week, we can expect the release of the US ISM Services PMI on Wednesday, which will also include respondents' assessments of hiring conditions and price pressures and is expected to be closely watched by the market. In Europe, the third estimate of second-quarter GDP growth will be released on Thursday, and Germany's inflation report will be published on Friday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Dollar Faces Resistance Amid Oil Price Swings

The rapid bullish advance of the greenback in the past few days has confronted some selling pressure near the 105 level on the US Dollar Index (DXY). Today, the index is treading water amid a pullback in oil prices following yesterday's OPEC+ decision. It's worth noting that currencies of energy-importing nations entered downside in response to rising oil prices, as the market factors in slower growth in the respective economies (mainly the EU, the UK, and Japan) due to increased base costs (fuel prices) and potential shift in trade balance towards deficit due to rising import prices. These are two fundamental factors that prompt investors to sell EUR, JPY, and GBP, as they did in the second half of last year during the energy crisis. Near the $90 per barrel level for Brent, prices have encountered some resistance, presuming that this level will stay intact for a while, dollar peers will likely regain ground temporarily as the odds of technical pullback will increase. In this scenario, a temporary correction of the dollar index to the 104-104.50 range seems quite likely:

Saudi Arabia and Russia have announced the extension of voluntary oil production cuts by 1.3 million barrels per day for another three months until the end of this year. Prices have surged, but it should be kept in mind that along with rising energy prices, growth forecasts will likely be revised downside. The current consensus suggests that the global economy has already passed its peak in the current business cycle and is now entering a period of moderation or, in the worst case, contraction. Therefore, rising base costs will be seen more as an additional burden rather than an indicator of expansion. Additionally, the fact that the market equilibrium is shifting due to supply side adjustments rather than demand growth underscores the vulnerability of the current oil rally:

In contrast, expecting a dollar turnaround in the immediate future is dependent on a dramatic, adverse market reevaluation of the pace of the US economy's development. In this regard, special attention will be given to today's US ISM Services PMI. As usual, the focus will be on the headline reading, as well as price and employment sub-indices. The overall index is expected to nudge down from 52.7 to 52.5 points, which would suggest a slight improvement in overall service sector activity compared to the previous month. However, if the index unexpectedly falls below 50 points, the bullish prospects for the dollar could be in jeopardy.

Regarding the European Central Bank's policy, the market is currently pricing in only a 25% probability of a 25 basis point rate hike next week. With the rising oil prices, the probability is likely to be revised upward as the meeting date approaches next week. Nevertheless, speculative positions on the Euro (a noticeable excess of long positions according to CFTC data, which may be liquidated) and the situation in the energy sector make the Euro vulnerable, and the EUR/USD pair could easily fall below the support level around 1.0700, heading towards 1.0650 intermediate support zone.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

[tickmill-analytics]

Risk Appetite on the US Stock Market Wanes Amid Inflation Concerns

On Wednesday, appetite for risk in US equities decreased, with major stock indices finishing the session slightly in the red. The American market successfully passed the bearish baton to Asian and European markets as investors gradually sold off stocks amidst rising oil prices. US Treasury bond yields increased as traders apparently factor in the risks of a potential inflation resurgence due to anticipated cost-push inflation impulse, particularly due to rising fuel prices. Yields for two-year bonds crossed the 5% mark, while ten-year bonds reached 4.25%. The spread between long-term and short-term bonds changed recent direction and moved lower. This may indicate a resurgence of speculation in the market regarding a Federal Reserve interest rate hike.

A significant event from yesterday was the ISM report on US service sector activity. It provided another mixed signal: the overall index rose from 52.7 to 54.5 points, beating expectations of 52.5 points. The ISM Prices sub-index left the market bewildered, as instead of the expected decrease, it actually increased from 56.8 to 58.9 points. This suggests that, according to respondents, price pressures may have increased at increasing rate compared to the previous month. This contradicts recent CPI and PCE inflation and wage data from the NFP report. It's worth noting that the Federal Reserve's number one goal is to reduce inflation in the service sector since its price pressures largely shape the overall trend of consumer inflation in the US. Additionally, the labor-intensive nature of the industry (high labor-to-capital ratio in its output) creates a positive feedback loop of "prices-wage-prices" which largely explains inflation persistence.

Short-term bond yields increased following the report's publication, underscoring the market's surprise at the unexpected new information:

 

Consequently, the likelihood of a Fed rate hike in November has also increased. If a week ago it stood at 37.1%, it now sits at 43.5%:

The US dollar index halted its recent downward correction and rose to the 105 level on Thursday. EURUSD continues to consolidate around the 1.07 level, with minimal attempts to stage a rebound:

This behavior near the round figure increases the likelihood of a bearish breakthrough on new information towards the 1.06 area. However, the ECB is due to hold a meeting next week, and based on the rhetoric of ECB officials, the regulator is set to hike interest rate further. The potential for hawkish surprises likely rules out a significant decline and even if a downward market breakout occurs, it will likely be short-lived.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US Consumer Inflation Slightly Exceeds Expectations, ECB Prepares for Meeting: Market Overview

Consumer inflation in the United States in August came in slightly above expectations, as indicated by the report released on Wednesday. Core inflation, which excludes items or services with volatile prices, reached 0.3% for the month. While the deviation from the forecast (0.2% MoM) is not significant, it is likely enough to prompt the Federal Reserve (Fed) to maintain its projection of a single interest rate hike by year-end during the upcoming meeting.

Headline inflation deviated slightly more from the forecast due to a 10% increase in fuel prices in August, but the market had already priced in this development, reacting to the recent rally in the oil market.

The market reacted fairly indifferently to the acceleration in core inflation. This can be attributed to elevated market expectations, as the market had factored in the risk of fuel-related inflation driving up core inflation. Additionally, a slowdown in the growth of housing expenses (Shelter Inflation) from 0.4% in July to 0.3% in August played a role:

This component, which represents the most inert or "sticky" aspect of the Consumer Price Index (CPI) for services, closely reflects the underlying trend in consumer prices. The dynamics of this component could potentially offset the relatively minor acceleration in the overall core inflation figure, as it is clear that the trend is more important than month-to-month fluctuations driven by seasonal or transitory factors.

Today, the market is focused on the European Central Bank (ECB) meeting. According to interest rate derivatives pricing, the likelihood of a rate hike is estimated at around 65%. Therefore, an actual rate hike would come as somewhat of a surprise, potentially causing the European currency to strengthen and also lifting the British pound. The belief that the ECB will raise rates today gained momentum following a Reuters report suggesting that ECB economists are likely to revise their inflation forecast for the next year upward to 3%. However, it is worth considering that the cumulative tightening of policy expected by the market until the end of the year is only 23 basis points, which is roughly equivalent to a single rate hike. To drive sustainable euro appreciation, the ECB will likely need to convince the market that further tightening cannot be ruled out. The extent of dissent within the Governing Council regarding September's tightening will be crucial. If the decision is made with only a slight and minimal majority, then Lagarde's assurances that "there could be more" are unlikely to have much effect. Overall, the potential euro strength is likely to be short-lived and levels above current ones, say 1.08 for EUR/USD, could present an excellent opportunity to enter short positions ahead of the Fed's meeting next week, where the potential for hawkish surprises is much higher.

The market is not anticipating a Fed rate hike next week, but it will be looking for potential surprises in the Dot Plot, which represents the rate projections of top Fed officials collected on a single chart. Signs of disinflation are likely to leave rate projections unchanged compared to the previous Dot Plot version (one more rate hike till the end of the year):

However, the economic resilience of the United States, evident in recent incoming data, could compel officials to push back the potential rate cut in the following year to a later date. This particular development could significantly impact the market (especially long-dated fixed income assets like 10-Year Treasuries) and contribute to further strengthening of the US dollar.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Fed's Meeting Outlook: Dollar Stability Hangs in the Balance as All Eyes Turn to the Dot Plot

EURUSD has stabilized around the 1.07 level, while the dollar index hovers near the 105 mark ahead of the Federal Reserve's meeting scheduled for today. Markets are not anticipating a rate hike; however, the rhetoric regarding the November decision, which the market views as the most likely date for another, potentially final, rate increase this year, will have a significant impact on asset prices. A crucial piece of information regarding the November meeting will be the Dot Plot – the forecasts of top Fed officials regarding interest rates in 2023-2025 and the long-term period, all displayed on a single graph. Currently, it appears as follows:

The red dot on the chart represents the median forecast, indicating a rate of 5.50% for this year, which is 25 basis points above the current level.

Apart from the increase this year, there remains high uncertainty about the trajectory of rates next year. The market is concerned about when the Fed will start cutting rates next year, if at all. The Dot Plot will also clarify the Fed's stance on this issue, so any change in the median forecast for the next year will have a strong impact on market expectations today.

If the Fed excludes a rate hike this year or the Dot Plot points to a lower median rate forecast for the next year, it will send a strong bearish signal for the dollar. In general, the forecast for 2024 could be an interesting point, especially in terms of its impact on the currency market. The median forecast is likely to remain unchanged at 4.64%, indicating a potential 100 basis points cut next year. Given the resilience of the U.S. economic outlook and the reinforcement of the "higher rates for longer" concept, there is a nonzero risk that the median forecast for 2024 could be revised upward. In other aspects, only minor changes in the statement are expected, maintaining a reference to further rate increases that "may be appropriate." Additionally, Federal Reserve Chair Jerome Powell is likely to keep all options open during the press conference. Anticipate the usual resistance against rate cut expectations (which have recently been softened), especially if not signaled by a revision in the Dot Plot for 2024.

The overall message from the Federal Reserve should support the dollar: the Fed will hint at keeping the door open for further tightening if necessary and will do everything possible to undermine the idea that rate cuts are still a long way off. However, market expectations seem quite condensed around this scenario. As mentioned earlier, 2024 could be a point of greater uncertainty: leaving the Dot Plot for 2024 unchanged may not be enough to trigger a significant correction in the dollar's exchange rate, but higher 2024 forecasts could lead to another leg up for the dollar. Beyond the short-term impact, this meeting is unlikely to be a game-changer for the dollar, as the focus will remain on U.S. economic data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Cautious Optimism: S&P 500 Nears Key Reversal Zone Amidst Rising Oil Prices and Central Bank Tightening

Oil prices are vigorously rising after a week-long correction, with BRENT gaining $3 per barrel in just two days. It's worth noting that the retracement from $96 per barrel down to $92, occurred in line with a much-anticipated pullback from the upper bound of the trend channel, however hardly hinted at a reversal. Prices were swinging back and forth, with a daily range of $1.5 to $2 (indicating that buyers were holding their ground). However, yesterday's breach of the $92 level sparked a powerful bullish impulse, nearly pushing the market to the local high:

Rising oil prices undermine strength of currencies of energy-importing countries. This simple idea underpins the intense selling pressure on the EUR, GBP, and JPY and has two underlying fundamental reasons. Firstly, oil trades in dollars and rising energy prices imply demand for dollars from countries, relying on energy imports, should increase. Secondly, rising energy prices boost inflation expectations, as consumer inflation will likely respond to rising costs, namely fuel prices. Rising inflation expectations pressure central banks to deliver more policy tightening which works through demand destruction, i.e., additional economy slowdown. EURUSD has shifted its defense to 1.05, GBPUSD has fallen for the sixth consecutive session, nearly reaching 1.21, and USDJPY is eyeing a test of the 150 level. The demand for the dollar is also fueled by risk aversion, as yesterday the S&P 500 closed down by almost 1.5%, with similar dynamics seen in two other key stock indices, Nasdaq and DOW.

Today, investors are attempting to regain control and adopt a positive outlook. Major European markets are trading in positive territory, although the rally is quite modest and resembles calm before the storm. It is also noteworthy that gold has fallen below $1900 per troy ounce. This, in the context of clear signs of risk aversion in the market, indicates the presence of a factor that outweighed the demand for gold as a safe-haven asset. This factor is undoubtedly the expectations of higher central bank interest rates, which strengthened further after statements from ECB and Fed officials. For instance, Neil Kashkari, a top manager at the Fed, stated yesterday that the resilience of the American economy to high interest rates has been surprising, and if the current level of tightening does not slow down the economy, it will likely require further tightening. The official assessed the chances of a soft landing for the economy at 60%, while he associated 40% of future outcomes with an even tighter monetary policy than now.

Also of concern are the cautious remarks from Fed officials about the possible change in the neutral interest rate (i.e., one that neither stimulates nor slows down the economy). This would represent a structural shift in policy, with far-reaching consequences, especially for long-term bonds.

The S&P 500 VIX volatility index surged to 19 points yesterday, marking the highest level since May 2023:

The index itself breached the 4300 level yesterday and declined to 4265 points. It's worth noting that the price reached the lower bound of the ascending corridor, and the intensity of the correction pushed the RSI value to the classic reversal level of 30 points:

Slightly below, around the 4200-point mark, is the 200-day moving average, which has proven to be an important support level in technical analysis. In general, from the perspective of classical technical analysis, there is a very good chance that the market will view the current range of 4270-4220 as an area to consider for a reversal. Interestingly, the previous reversal in March, around 3850, also coincided with the EURUSD reversal around 1.05, which is where the pair is currently trading:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Dollar Retracement Amid Shifting Market Dynamics: A Technical Outlook

On Thursday, the dollar finally took a step back, but the rebound of its major rivals looks more like a technical retracement, as the fundamental picture hasn't changed much. The American currency was weakened by a "relief rally" in risk assets, with the S&P 500 attracting buyers in the support zone we've been discussing since the beginning of the week - 4220-4270:

The technical setup for the EURUSD pair worked almost flawlessly: the price reversed in the 1.05 area, where it had found support in January and March of this year. Market participants who bet on a false breakout of the lower bound of the bearish corridor in which the pair has been trading since mid-July of this year may have also contributed to the rebound:

The USD/JPY pair is also trying to reverse, and there were strong technical reasons for it: approaching the "round" level (150 yen per dollar) and the upper boundary of the bullish channel:

Since mid-August, USDJPY has clearly been pushing towards the upper bound of the channel, indicating that there was little resistance from sellers regarding the depreciation of the yen, despite approaching the round level. If this is indeed the case, the medium-term outlook for the yen is not particularly bright: it could easily reach a new low if the US Treasury market offers even higher yields than it does now. There are reasons to believe in such a scenario, as some US money managers are boldly assuming that the yield on the 10-year bond could reach 5% in the near future. For example, Bill Ackman. Yesterday, the 10-year bond was trading at 4.68%, and today the market is offering slightly less - 4.54%.

Inflation data for the Eurozone released today exceeded expectations: core prices in September rose by 4.5% on an annual basis, compared to a forecast of 4.8%. Such price behavior is certainly favorable for the ECB, which would very much prefer not to tighten policy when real output growth is slowing down (which is happening now), thus further burdening the economy. Price data could also explain the strengthening of the European currency, although the behavior of the currency pair is currently mostly dependent on the dollar fundamentals, which, as mentioned earlier, has not changed in the absence of macroeconomic news from the US. There is a chance that today's Core PCE report will shift expectations for the dollar, but for this, we would need to see a strong deviation from the forecast (3.9%) towards lower values. The market may also be influenced by the U. Michigan consumer sentiment report, but again, the market will probably want to see a series of data indicating a negative impulse in the US economy before challenging the Fed's "higher for longer" narrative. Therefore, the risks of the S&P 500 returning to decline next week and the dollar rising remain high.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Cautious Markets React to Disappointing Jobs Data and Oil Inventory Surge

Oil prices resumed their downward trend on Wednesday following the release of employment data from ADP:

Job growth was significantly lower than expected, with only 83K jobs added compared to the anticipated 156K. The accompanying commentary was equally disconcerting, highlighting a marked deceleration in job growth throughout September, primarily attributed to job reductions within large enterprises.

The market correction gained momentum after the weekly EIA data on oil reserves were made public. These figures revealed a substantial surge in gasoline inventories, registering a substantial increase of 6.4 million barrels, in stark contrast to the forecasted 0.1 million. An uptick in gasoline inventories often signals reduced demand for fuel, a clear economic activity indicator.

Within a span of just under two days, oil prices retreated by approximately 7%, breaching a critical upward trend:

The tepid yet concerning signal from ADP raised concerns about the recent frenzy within the US Treasury bond market. This frenzy was sparked by a sudden realization of market participants that it may take a long time for high interest rates to do their job in suppressing inflation. In addition to oil, yields on Treasury bonds have also reversed their course, with ten-year bond yields decreasing by roughly 9 basis points to 4.71%.

Nevertheless, other economic indicators released in the United States this week continue to point toward significant inflationary potential. The ISM report on service sector activity from yesterday met expectations, with headline remaining in expansion zone at 53.6 points. Initial claims for unemployment benefits, released on Thursday, saw an uptick of 207K, slightly surpassing the projected 210K. It is worth noting that the weekly increase in unemployment level, tracked by this measure, remains close to the lows of the current business cycle, suggesting that the labor market remains robust.

The US dollar has also weakened against its major counterparts, although the correction appears to have stalled around the 106.70 level on the dollar index (DXY). The market is likely awaiting the official labor market report, scheduled for release on Friday, to determine direction. However, given the lackluster ADP report, the risks associated with a negative deviation in job growth in the NFP report are increasing. Consequently, we may witness tentative efforts to sell the dollar in anticipation of this risk materializing. In the event of a weak NFP report, there is a strong possibility that the dollar index will continue its descent towards the 106 level on the DXY index, where the lower boundary of the ascending corridor is situated:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Middle East Crisis Spurs Market Volatility and Drives Oil Prices Higher

Stock markets in Asia and Europe experienced a decline on Monday, while gold prices rose, and the dollar resumed its upward movement towards local highs amid a sharp escalation of tensions in Israel. The markets also took into account past experiences of conflicts in the Middle East, which, in one instance, led to a recession due to OPEC's decision to sharply limit oil supplies. These concerns drove oil prices up by nearly 4%:

The focus of the markets this week will undoubtedly be on how events in the Middle East unfold. Investors will be monitoring the risk of a broader conflict involving primarily Arab nations, which could have serious consequences for destabilizing the oil market. Additionally, given Iran's open support for Palestine, markets are likely factoring in the potential risk of sanctions against Iranian oil, which could further exacerbate the market's supply shortage. Considering that developed countries are grappling with high inflation, a potential spike in oil prices could have a negative impact primarily on countries dependent on energy imports. The currency market, as we can see, is primarily factoring in this risk, with the European continent currencies and the Japanese yen being sold.

The yield on US debt has decreased slightly as inflation risks offset the recession risk associated with the escalation of tensions into a more serious conflict. The yield on short-term bonds has barely changed since the start of trading today, while the yield on long-term bonds has decreased from 4.79% to 4.71%.

The macroeconomic situation also favors the strength of the US dollar. A significant argument in favor of at least holding the dollar is the US unemployment report for September, released last Friday. Job growth totaled 336K, nearly double the forecast, and the figures for the previous two months were revised up by a total of 119K. The range of estimates for September's job growth had varied from 90K to 250K, so the surprise to expectations was significant. Furthermore, the official report's figures failed to predict both ADP and ISM hiring data, as well as NFIB small business data. However, it is worth noting that the JOLTS report on job openings and the series of data on initial claims for unemployment benefits surprised on the upside, steadily decreasing in September toward a cyclical minimum.

Speaking of key events on the economic calendar this week, the Federal Reserve's meeting minutes and the Producer Price Index on Wednesday, US CPI for September, and the European Central Bank's meeting minutes on Thursday, as well as the University of Michigan's consumer sentiment data on Friday, should be highlighted. The US CPI is of particular interest to the market as the inflation trajectory currently holds the greatest importance for the Federal Reserve's policy, which is exerting all efforts to return it to the target level. A slowdown in overall inflation from 3.7% to 3.6% is expected, but labor market conditions suggest there are good chances of deviations towards higher values. Both this circumstance and the technical outlook for the dollar indicate that the risks are tilted towards further strengthening:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Markets React to Middle East Crisis: Dollar's Dive, Bond Yields, and Gold Stability

The wave of risk aversion on Monday, following the tragic events in Israel, is gradually fading away. There appears to be a growing market consensus that the conflict will remain local, and third-party countries won't get involved. The market's reaction on Monday still lingers in the oil market; prices are hesitant to drop after surging by nearly 4%. Gold prices have also remained quite stable, consolidating near the $1950 level per ounce.

The dollar index has dipped to the 106 level and is trading near the lower boundary of the upward trading channel:

It's worth noting that along with the drop in the dollar, Treasury bond yields have also significantly retreated. This basically suggests that the reasons for the dollar's weakening can be attributed to a reassessment of market expectations, either related to inflation or the Federal Reserve's interest rate trajectory. Indeed, yesterday, we heard a rather unexpected comment from the head of the Dallas Fed, Logan, who mentioned that under certain conditions, the Fed's interest rate has varying effects on the economy, depending on the risk premium incorporated into long-term Treasury bond yields. This indirect change can be tracked through the yield spread between long-term and short-term bonds. For example, the spread between the yields of 10-year and 2-year Treasury bonds has increased by almost 50 basis points since the beginning of September:

This increase in the yield spread means that the risk premium associated with longer-term investments in the economy has also risen, which, according to Logan, strengthens the 'cooling' effect of policy tightening. Ultimately, this could imply that fewer rate hikes may be needed.

The markets have interpreted Logan's musings as a signal that the dynamics of yields are starting to concern the Fed and that Fed officials might lean towards eschewing further tightening. Long-term bond yields have dropped by nearly 15 basis points, from 4.80% to 4.65%:

Other Fed officials haven't expressed similar speculations yet, so it's premature to talk about a change in the Fed's narrative. Consequently, the stability of yield decreases, spurred by Logan's comments, is in question. There's also a chance that market participants are factoring in a dovish surprise in the upcoming U.S. CPI report to be published on Thursday. Notably, weak wage growth in the U.S. in September is one sign that inflationary pressures in the economy continue to ease.

Based on the expected bond market response to the Fed's comments, the downward correction of the dollar is likely nearing its end. The technical analysis presented at the beginning of the article on the dollar index also suggests that prices may have reached a zone where buyer interest will resurface. European currencies remain vulnerable to a decline, as markets, as we can see, are not rushing to price out the risks of negative consequences of the Middle East conflict on oil prices. Looking at the technical chart of EURUSD, a potential zone is evident where the upward correction could encounter seller resistance – 1.0630-1.0650:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[MrD]

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[tickmill-analytics]

Market Jitters, Surprising Retail Sales, and the Dollar's Rollercoaster Ride

Events in the Middle East are keeping the market on edge. Stock markets, if they go up at all, are doing so with caution. There's a little bit of growth followed by some corrections. Today, the main European exchanges and U.S. index futures are down by about half a percent. Gold is hanging onto its gains from last Friday, thanks to the geopolitical tension, making it a hot item.

The dollar is holding its ground.

The big deal today in terms of economic news is the report on U.S. retail sales. This report is probably the third most important after the NFP (non-farm payrolls) and the inflation report. Despite a negative sign from household credit card spending, the report surprised on the upside. Retail sales for the month increased by 0.7% compared to the previous month, and core sales, which give a better idea of consumption trends, rose by 0.6%. These numbers are much higher than the expected 0.3% and 0.2%. Notably, the previous figures were also revised significantly upward, to 0.8% and 0.9% respectively. This data pulled the dollar out of the red where it started the session and put it on an upward trend:

Yields on long-term bonds, like the 10-year Treasuries, shot up on the news, challenging recent highs around 4.90%. Verbal interventions from the central bank officials about high long-term bond yields having a tightening effect on the economy, reducing the need for tightening by the central bank, triggered a correction in Treasuries. This correction only lasted a week, and then rates started rising again, effectively ignoring the events in the Middle East:

This week, on Thursday, Federal Reserve Chairman Powell is speaking. In light of recent comments from several Fed top brass that recent yield curve behavior might reduce the need for a rate hike, Powell has a tough task ahead. He'll have to somehow comment on the incoming data to give the impression that the Fed has everything under control. It's known that the effectiveness of the Fed's policy depends heavily on whether it influences market expectations. If the Fed 'misses the mark' by suggesting one thing and the economy requires another, market participants may start making their own forecasts about what the Fed will do. That's why the Fed's influence on their expectations will diminish, and the efficiency of monetary policy will take a hit.

Also, today we'll get data on international capital flows into U.S. Treasury bonds (TIC Flow) for August. This publication updates us on what major foreign countries are doing with their U.S. debt. China's holdings of U.S. debt have fallen from $1.04 trillion at the beginning of 2022 to $821 billion. Further decreases could cause problems in the U.S. bond market and raise questions about whether rising U.S. bond yields due to an increase in the term premium are actually good news for the dollar.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Global Economic Snapshot: China's Resilience, Surprising US Data, and UK Inflation Shockwaves

Significant improvements were seen on the macroeconomic front on Wednesday following the release of data from China. The third-quarter GDP growth came in at 4.9% on an annual basis, surpassing expectations of 4.4%. Industrial production (4.5% versus a forecast of 4.3%) and even often-underperforming retail sales (5.5% versus 4.9%) also exceeded expectations. Official unemployment in China has dropped to 5%. Among the key implications for global markets, we can consider improved forecasts for energy consumption (China being the second-largest net oil exporter) and a revision of growth forecasts for all major economies. This is because the growth of the Chinese economy largely reflects external demand for Chinese goods and services. Following this news, oil prices rose by more than 1%, with Brent crude testing the $93 per barrel mark, its highest since early October. Since the escalation in the Middle East, prices have risen by nearly 10%, putting pressure on countries heavily dependent on energy imports:

In the United States, retail sales figures released yesterday also exceeded expectations. September's growth compared to the previous month more than doubled forecasts. US industrial production also surprised on the upside, with a month-on-month increase of 0.3%. The Federal Reserve is striving to keep its policy flexibility, stating that more time is needed to assess the possibility of another rate hike this year. Richmond Fed Chief Barkin made this announcement yesterday. Meanwhile, US Treasury yields reached local highs today, with the yield on the 10-year bond reaching 4.85% and the 2-year bond hitting 5.24%, its highest level since 2006:

Today's inflation data in the UK also surprised on the upside, increasing the likelihood of a tightening by the Bank of England in the upcoming meeting. Core inflation came in at 6.1% (forecast 6%), while headline inflation reached 6.7% against a forecast of 6.6%. The report prevented the British pound from falling, and GBPUSD is consolidating near the opening level (around 1.22). However, the price remains within a descending channel with attempts by buyers to take the initiative:

From the chart, it's evident that the short-term resistance level for the pair will be around 1.2250. If it breaks and holds above 1.225 for at least a few days, the pound is likely to attract more buyers. However, if sellers manage to defend this level, pound weakness from a technical perspective may intensify, and the pair could head toward the recent low at 1.20.

The dynamics of European currencies are now heavily influenced by the conflict in the Middle East. Markets vividly remember the recession in developed countries caused by the energy crisis of 1973 when Arab OPEC members sharply reduced production to influence global prices in their favor. The markets are likely to be inclined to consider this risk now, preparing for further rallies, and the likelihood of this scenario increases with each new escalation.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Rising Treasury Yields and Labor Market Resilience: Shifting Tides in U.S. Financial Markets

Yields on Treasury bonds have revisited recent local highs, compelling equity investors to reassess their discounted cash flow stock valuations. The yield on the 10-year bond touched 4.99% on Thursday, while the 2-year bond yield advanced to 5.25%. The market capitalization of major U.S. stock indices dipped by 1-1.5% yesterday, and today, there's cautious growth. However, the risks are skewed toward further declines.

Several robust macroeconomic reports on the U.S. economy today included initial claims for unemployment benefits, which increased by only 198,000, close to the current business cycle's low of 182,000, which began post-pandemic:

In the U.S., individuals classified as unemployed are those who have been unable to find work for more than four weeks. Thus, a decrease in initial claims for unemployment benefits suggests that finding employment has become easier. This aligns with the growth in job vacancies reported by the JOLTS agency. The latest figures indicated a sharp rise in job openings compared to the previous month:

When the influx of unemployed individuals slows down, it generally reflects increased household confidence in future income, leading to higher consumer optimism and a greater willingness to spend rather than save. In turn, this fuels economic growth.

Reduced initial claims for unemployment benefits also mirror increased corporate confidence, reflecting business owners' expectations regarding changes in demand for their goods or services. If they anticipate higher demand, they are more likely to increase their workforce.

However, the shift in U.S. Treasury bond yields does not entirely resemble a mid-term Fed cycle reassessment. Data on U.S. government debt ownership shows that China is actively reducing its holdings of U.S. debt obligations, with its share shrinking by another $16 billion in August:

Since the beginning of 2022, China has sold $235 billion worth of U.S. bonds. There is a risk that at some point, the correlation between U.S. Treasury bond yields and the U.S. dollar will shift from positive to negative. For now, though, investors are focused on incoming data on the U.S. economy and the Fed's response to this information.

Considering that the incoming data is increasing pressure on the Fed to signal another rate hike to the markets, there's a growing risk that the upward movement of the dollar will persist, and risk assets will face even greater pressure. Regarding the S&P 500, the risk of a retest of the lower trendline of the ascending channel is rising, as the initial failed attempt did not lead to a sustainable rebound and a return to an upward trajectory:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Daily Market Update: US PMI Surprises, Currency Market Reactions, Oil Retreats, and Fed Chair's Balancing Act

US Dollar Resilience Amid Surprising PMI Data

The US Dollar, often at the center of the currency markets, exhibited resilience in the face of mounting bearish pressure. This defiance was fueled by the release of Composite PMI data from S&P Global, which exceeded expectations by rising to 51 points in October. This figure indicates a slight MoM expansion in both the manufacturing and services sectors in the United States, even as multiple headwinds and downside risks persist. The Services PMI, in particular, delivered a positive surprise, climbing from 50.1 in September to 50.9 in October, surpassing the consensus estimate of 49.8 points:

PMI data is a vital leading indicator for investors, providing valuable insights into economic health and potential trends. The Purchasing Managers' Index (PMI) measures business conditions, and a reading above 50 signifies expansion, while a reading below 50 suggests contraction. Investors closely monitor PMI data as it offers a glimpse into the direction of economic growth and can significantly influence financial markets.

Australian Dollar's Rollercoaster Ride

The Australian Dollar experienced a rollercoaster ride as inflation slowed less than expected in the third quarter, dropping from 6% to 5.4% year-on-year, slightly missing the estimated 5.3%. The initial optimism surrounding the possibility of RBA tightening gave way to the broader strength of the US Dollar, causing the AUDUSD to erase its gains. Compounded by a lackluster performance in commodity markets and renewed concerns over China's economic performance, commodity-based currencies like the AUD and NZD faced downside pressure.

Oil Prices Extend Retreat Amid Easing Geopolitical Concerns

The retreat in oil prices continued as the escalation of Middle East tensions began to ease, alleviating market concerns about OPEC supply disruptions. WTI oil prices found support near the $83 per barrel mark, effectively erasing previous gains that were driven by geopolitical instability. Market focus is now shifting toward data that may impact the outlook for oil demand.

Gold's Dance with Uncertainty

Gold, often seen as a safe-haven asset, exhibited a swift rise amid the Middle East crisis, which had driven investors toward safety. However, in recent days, Gold has been moving within a descending channel as buying pressure wanes, though sellers remain cautious:

Uncertainty surrounding the ongoing crisis continues to hang over the market, preventing a clear direction for this precious metal.

Germany IFO Business Climate Report and Its Impact on EURUSD

Germany's IFO Business Climate report exceeded expectations with a headline reading of 86.9 points, surpassing the estimated 85.9. However, despite this positive news, the Euro faced headwinds due to Dollar strength, driven by robust US data and rising yields. This dynamic played out as EURUSD struggled to sustain upward momentum.

Equity Markets and the Bond Yields Conundrum

European stocks and US equity futures remained under bearish pressure on Wednesday. Concerns about the potential rise in market interest rates (bond yields) were reignited by positive US data updates and the de-escalation of geopolitical tensions. While US stocks managed to stage a bounce on Tuesday, the influence of US rates may soon reassert itself.

Bond yields affect equity prices through the discount rate. When bond yields rise, it makes alternative investments, like bonds, more attractive compared to equities, which can lead to lower stock prices.

Fed Chair Powell's Balancing Act

The day ahead holds a significant event in the form of Fed Chair Powell's speech. Powell faces the challenging task of balancing the strong US data that implies the need for interest rate hikes with the Fed's desire to remain patient and gather more data. There is a recognition of the potential for policy transmission lags, which can skew the true impact of high interest rates and make additional rate hikes potentially harmful to the economy.
 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

Market Update: Bond Yields Recede, Dollar Faces Downside Risks, and Labor Market Signals

Bond Market Dynamics: Yields Retreat and Fed Speculation

In the last couple of sessions, bond yields have been on a roller-coaster ride, witnessing declines both at the short and long end of the curve. The 10-year bond yield, which peaked at 5% last week, has now retreated to 4.62%, while the 2-year bond yield has fallen from 5.24% to 4.98%. These movements have significant implications, primarily due to their impact on the market's perception of the Federal Reserve's monetary policy.

The market has effectively priced out the possibility of a rate hike from the Fed in December, while expectations for rate cuts in 2024 have increased. This shift is attributed to the market's dovish interpretation of the recent Fed meeting. Chairman Jerome Powell's stance during the meeting raised doubts about the need for further tightening, given the batch of weaker-than-expected fundamental data on the U.S. economy this week. Key data points from the first half of the week, such as Manufacturing PMI, ADP jobs data, and an unexpected uptick in initial claims data, have all added to the argument against imminent tightening. 

For instance, the unexpected cessation of the recent downward trend in unemployment claims data is noteworthy. The headline reading revealed 217K new claims, slightly missing the consensus estimate of 210K. The previous week's figure was also revised higher to 212K. Continued claims, an indicator of people remaining unemployed, ticked higher to 1818K, surpassing the 1800K estimate. Continuing claims has been on the rise from September indicating that difficulty in finding new job increases:

This rising trend in unemployment claims may signify a deterioration in the labor market, which, in turn, could have a dampening effect on inflation. The link between rising unemployment claims and the labor market's health is crucial. As more people struggle to find employment, it can lead to reduced consumer spending and demand, thereby acting as a potential brake on inflation.

Dollar's Bullish Momentum and Overbought Status

The U.S. dollar has displayed bullish momentum, reaching its highest level since late November 2022. However, it's essential to consider that the dollar could be considered overbought, especially given the Federal Reserve's proximity to the end of a tightening cycle, as indicated by Powell during the last meeting. This scenario suggests that the risks for the dollar are currently skewed towards the downside:

Non-Manufacturing PMI and NFP

Today, essential reports to watch are the NFP and the PMI report for the non-manufacturing sector from the Institute for Supply Management (ISM). The services sector, accounting for nearly 70% of U.S. output, is a vital indicator for measuring the overall health and direction of the U.S. economy. The consensus estimate stands at 53 points, slightly lower than the September reading of 53.6 points. This report, along with two additional PMI reports from S&P Global, though less crucial than the ISM's report, will collectively provide investors with a clearer picture of the U.S. economy's performance in October. 

Consensus estimate for growth in jobs count is 180K, significantly less than stellar September print of 336K. The range of estimate is 125K – 300K. A reading below 100K should be the clear signal for dollar fall, however if jobs growth will be in line with estimates or slightly weaker, we are unlikely to see significant dollar downtrend. Wage growth is expected to decelerate from 4.2% to 4.0% and unemployment to remain unchanged at 3.8%.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US Market Rally Faces Crucial Test as S&P 500 Nears 4500 Points

S&P 500 and other US stock indices closed with a solid gain on Friday. After breaking through the bearish channel last week, the SPX index spent most of the week consolidating near the 4350 level, but on Friday, it made a confident leap, surpassing the 4400 mark. The rally since early November has been quite impressive, with SPX showing intraday growth, resulting in a 6.5% increase in its market capitalization, excluding two trading days. Such episodes in the index's history have been no more than 10.

The outlook for the continuation of the US market rally will depend on the upcoming economic data this week. Comments from Federal Reserve Chair Powell and other officials last week suggest that the Fed could raise rates again in December if the data indicates the need for such a move. Key reports this week include the Consumer Price Index on Tuesday, retail sales data on Wednesday, unemployment claims on Thursday, and housing construction data on Friday.

Expectations for headline US inflation MoM in October are set at 0.1%, while core inflation is expected to be at 0.3%, following the previous 0.3% in October. The sharp drop in gasoline prices this month is likely to trigger a "domino effect," reducing inflationary pressure in other categories, potentially keeping the overall Consumer Price Index and Producer Price Index near the previous month's level:

Preliminary statistics indicate a decline in car sales in October, and credit card spending has also fallen short of expectations, indicating a potential slowdown in consumer spending. US industrial production is also facing a downward impetus, as evidenced by the weak ISM index in the manufacturing sector, which is likely to impact the Producer Price Index (PPI) published on Thursday. Risks are also growing in the construction sector, considering that mortgage rates have risen to 8%, apparently acting as a catalyst for a significant slowdown in potential buyer traffic.

Regarding core inflation, market participants are likely to focus on two main components: service inflation and rental inflation (Shelter). Despite moderate overall figures last month, markets viewed changes in the CPI as a hawkish risk, given the accelerated inflation in the services sector.

As the SPX index approaches the key psychological resistance level of 4500 points, market participants may use the incoming data this week to secure profits, likely causing a slight correction before the market can readjust for a pre-holiday rally with a potential test of the 4500 level as a breakout point. A correction in the stock market would be a positive development for the dollar, which could strengthen up to the upper limit of the current bearish channel, corresponding to the 106.30 area:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[tickmill-analytics]

US Inflation Report for October Alters Dollar Outlook

The latest US inflation report for October appears to have cast doubt on the prospects of a strengthening dollar in the medium term. Details from the report revealed that two crucial components of the index – the service sector and rental rates – experienced a sharp slowdown in price growth. Alongside the production price index, which indicated monthly deflation, these data significantly reduced the likelihood of a December Federal Reserve rate hike (futures are currently pricing in a 0% probability). Additionally, the market has begun factoring in the scenario that the Fed's rate cut in 2024 may commence earlier, with the overall size of cuts for the year exceeding previous expectations (now around 100 basis points). Despite a positive retail sales report, the situation failed to recover, leading to a dollar and Treasury bond yield collapse. The US dollar index has clearly formed resistance around the 104.50 level in the latter half of this week:

Unexpectedly weak initial jobless claims data were released on Thursday – a high-frequency indicator allowing assessment of the weekly pace of layoffs in the US economy. The number of initial claims rose to 231K, while long-term unemployment claims also increased more than anticipated, indicating that the job search difficulty for the unemployed continued to rise:

Following the release of weak labor market statistics, the dollar index fell to 104 but rebounded by the end of the day. Today, towards the end of the week, the downward movement resumed, though the 104 level is likely to hold. There was a surge in buying in both short-term and long-term Treasuries at the beginning of the European session, triggering dollar sales. However, closer to 104, selling pressure noticeably diminished.

Today also saw disappointing retail sales data in the UK and the Eurozone's second estimate of inflation, which met expectations. Considering the openness and size of the US economy, markets are likely to begin factoring in deteriorating economic data in EU countries, the UK, Japan, and other developed nations. The ongoing downward trend of the dollar, without clear signals from the Fed indicating a pause, will likely need to be accompanied by stability in economic indicators in those countries or positive surprises in the data. In this regard, attention should be directed to next week's Eurozone PMI data, scheduled for Thursday, and Japanese inflation figures, set to be released on Friday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.