The stronger than expected consumer inflation data from the US basically sealed the case for a 75bps hike by Fed next. Dollar ended as the strongest one last week, as supported by risk aversion too. But the greenback could only close above prior week’s high against Canadian and New Zealand Dollar, suggesting that momentum was relatively unconvincing. Yen recovered on intervention threat by Japan, and closed as second strongest, followed by Euro.
Commodity currencies ended as worst performers on risk sentiment. It’s hard to say which one of Aussie, Kiwi and Loonie has an advantage over the others. Yet, it’s the weakness in Pound that caught most attention, which hit multi-decade lows against Dollar and Swiss Franc.
Market fully pricing in 75bps Fed hike, Dollar index bounded in range
After stronger than expected August CPI reading from the US, markets are now fully pricing in a 75bps rate hike by FOMC this Wednesday on September 21. Indeed, there is 18% chance of a 100bps hike. Fed is likely not to upset market expectations for now, and show panic. But there could be hawkish surprises from the new economic projections and dot plot, which indicates higher terminal rate for current cycle, and a longer period to stay there.
Major US stock indexes closed deeper lower, reversing all of prior week’s rebound. S&P 500’s close on Friday was not a very bad one. But further decline would be in favor as long as 4119.28 resistance holds. Current fall from 4325.28 is seen as part of the corrective pattern from 4818.62, which could fall through 3636.87 to 50% retracement of 2191.86 to 4818.62 at 3505.24 before completion.
10 year-yield extended recent rise from 2.525 and breached 3.483 resistance, but could’s close above. There could still be strong resistance from 3.483 to bring reversal, to extend the corrective pattern from there with a third leg (down). Yet, sustained break of 3.483 would indicate resumption of larger up trend. In that bullish case, next target is 61.8% projection of 1.343 to 3.483 from 2.525 at 3.847.
Dollar index bounded last week but stayed below 110.78 short term top. More consolidative trading could be seen in the near term. While bearish divergence condition in daily MACD indicates loss of upside momentum, there is so sign of reversal. Current up trend should resume sooner or later through 110.78. That could happen with either an up trend resumption in USD/JPY, or down trend resumption in EUR/USD, or both, in reaction to FOMC.
Yen recovered on jawboning, but no change in bearish trend
Talking about USD/JPY, the pair will also face another event of BoJ rate decision on Thursday. BoJ should remain firmly on hold on monetary policy, and reiterate the need to do so. Last week rebound in Yen was somewhat attributable to jawboning of Japanese officials. But it should be noted that Japan is concerned with rapid, one-sided depreciation in the exchange rate only. That is, they’re concerned about the speed, rather than the direction of Yen. Such message would be echoed by comments of BoJ Governor Haruhiko Kuroda.
Technically, outlook is USD/JPY remains clearly bullish. Any further retreat should be contained by1 39.37 resistance turned support. Break of 144.98 resistance would pave the way to 147.68 long term resistance. Break there will target 161.8% projection of 126.35 to 139.37 from 130.38 at 151.44 next.
GBP/CHF hit multi-decade low ahead of BoE and SNB
Two more central banks will meet this week, including BoE and SNB. Sterling lost much ground last week after data showed headline CPI slowing, while retail sales contracted in both volume and value term. While BoE is expected to deliver another 50bps hike, the path after that is less certain than other major counterparts. SNB is expected to join the 75bps hike club, and finally leave negative interest rate behind. The central bank will also continue to give a node to Franc’s appreciation, which could help cap inflation.
GBPCHF broke through pandemic trough last week and hit a new multi-decade low. Both daily and weekly MACD suggests that it’s still in downside acceleration mode. Near term outlook will stay bearish as long as 1.1187 resistance holds. Next target is 200% projection of 1.3070 to 1.2134 from 1.2598 at 1.0726. This target could be easily reached should BoE sounds a bit more dovish than market expected.
Gold breaking down, could 55 month EMA save it?
Another major development in the markets last week was the break of a key support level at around 1680 in Gold. The selloff came on the back on aggressive tightening by global major central banks, not just Fed.
Technically, Gold should have completed a long term double top reversal pattern (2074.74, 2070.06). Yet, it’s trying to draw support from 55 month EMA (now at 1652.71), which might give it a life. In any case, near term outlook will stay bearish as long as 1734.92 resistance holds. Current fall would target 61.8% projection of 2070.06 to 1680.83 from 1807.66 at 1567.11.
However, break of 1734.92 would argue that the 55 month EMA has done it job, and stronger rebound would be seen back to 1807.66 resistance, for confirming near term bottoming.
USD/CAD’s up trend from 1.2005 resumed last week and hit as high as 1.3306. Initial bias stays on the upside this week for 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. Break there will target medium term fibonacci level at 1.3650. On the downside, below 1.3238 minor support will turn intraday bias neutral first. But retreat should be contained well above 1.2952 support to bring another rally.
In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2716 support holds.
In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern only. That is, up trend from 0.9506 (2007 low) is still expected to resume at a later stage. This will remain the favored case as long as 1.2061 support holds, which is close to 50% retracement of 0.9406 to 1.4689 at 1.2048.