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Although the dollar ended last week on a positive note, it’s been trading in a corrective fashion overall for more than a week now, due to growing speculation that the Fed may soon need to start reducing the pace of its rate increases. Although this is not expected to happen this week, investors are sitting on the edge of their seats in anticipation of clues and signals with regards to the future course of action. The decision and the statement are scheduled to be made public on Wednesday at 18:00 GMT, with a press conference by Fed Chair Powell to be held thirty minutes later.

The switch

When they last met, Federal Reserve officials delivered their third consecutive 75bps rate increase and updated their projections to point to a terminal rate of 4.6% in 2023 and not any cuts until 2024. Up until a couple of weeks ago, they were all singing from the same hawkish song sheet, which combined with the hotter-than-expected inflation numbers for September, allowed investors to lift their terminal rate up to 5%. Even with a rate cut in the equation, interest rates at the end of 2023 were seen higher than the Fed’s own projection for the year. In other words, the market turned more hawkish than the Fed itself.

However, the whole aggressive-Fed narrative came into question a couple of weeks ago, when reports suggested a slowdown in rate increases from December onwards, with the view being echoed by some policymakers thereafter. What added more credence to the newborn dogma was the disappointing PMI and housing data last week, as well as the Bank of Canada’s decision to announce a smaller-than-expected hike and note that it is getting closer to ending this historic tightening crusade. This may have been interpreted as setting the tone for other major central banks, and indeed investors were proven right just a day later, when the ECB also opened the door to slower rate increases.

The decision

Investors are in full agreement that the Committee will serve its fourth consecutive triple hike on Wednesday, but they are split on whether the December increment will be of 50 or 75 basis points. And that’s still the case even after last week’s better-than-expected GDP data for Q3.

However, despite the sparkly GDP rate, a dive into the details revealed a different story. Domestic demand hit its lowest in two years due to the Fed’s aggressive hikes, while residential investment contracted for the sixth straight quarter. The nation’s economic health was overstated due to tumbling imports resulting in a shrinking trade deficit. Combined with the fact that the effects of the past cumulative tightening are not being fully felt yet, this suggests that there is still the likelihood of a modest downturn early next year.

Ergo, Powell and his colleagues may confirm the narrative of slower future hikes due to growing economic risks. They may have begun considering the risk of overdoing it as inflation tends to react slowly to higher rates, let alone now that the distortions to the economy caused by the pandemic are still not fully resolved. Given that the market still sees rates higher than the Fed does in December next year, such an outcome could result in some more dollar selling as there is no more Fed hawkishness to be priced in. However, Powell may try to pass the message in a way that it does not give rise to substantial loosening of financial conditions.

The reaction

Therefore, a potential retreat in the dollar may not be suggestive of a trend reversal genesis. After all, with other major central banks also hinting at slower rate increases, the Fed could hold onto first place on the hawks’ league. Traders may liquidate some more of their long dollar positions on Wednesday, but they may re-enter the game at lower, more attractive levels. A sanguine employment report on Friday could be a justification for doing so. Otherwise, the correction may extend for a while longer.

From a technical standpoint, the recent weakness in the greenback helped euro/dollar climb above the downtrend line drawn from the high of February 10, and although the pair pulled back on Friday, it stayed above that line. This keeps the case of a rebound firmly on the table. If the bulls indeed regain control, they could initially aim for another test at Friday’s high of 1.0100 or near the 1.0200 zone, marked by the peak of September 13. A break higher could pave the way towards 1.0370, slightly below the 200-exponential moving average. This is the territory around where traders may decide to buy dollars again.

Now, in case the Fed appears much more hawkish than expected, showing no signs of remorse, euro/dollar may quickly break back below the downside line and slide to the 0.9700 or 0.9535 zones. A breach of the latter support area would confirm a lower low on the bigger timeframes and may allow extensions towards the 0.9335 zone, defined as a support by the inside swing high of September 17, 2001.

The Reserve Bank of Australia (RBA) took the initiative to slow the pace of its rate hikes in October after five months of rapid increases. The latest inflation release, however, raised speculation that a U-turn to outsized rate moves could be possible during Tuesday’s policy meeting. A resumption of the hawkish stance could lift the aussie, albeit temporarily.

Sharp rate hikes back under the spotlight

Fears that a continuous aggressive monetary tightening could backfire with undesirable economic shocks in the foreseeable future made the case for a smaller 25 bps rate hike at the start of October. The RBA was the first among major central banks to surprisingly ease its hawkish rhetoric, though the latest inflation report signaled that the shift was premature.

Despite 225 bps of significant rate increases over the past five months, the headline CPI advanced above expectations to unlock a new 32-year high at 7.3% y/y in the third quarter. Strikingly, the core measures rose at a much faster pace, suggesting that Australia is not different from other major economies which are struggling to contain growth in consumer prices. Consequently, the data sparked conversations for a reversal to 50bps rate hikes, although most analysts keep seeing only a modest 25 bps rate increase for this meeting.

On Monday, the final trading day in October, the market major is declining, balancing near 0.9940.

Active growth of the instrument stopped right after the European Central Bank last week lifted the interest rate to 2.00% annual. This was just the decision know long before, so on facts investors just took the profit.

The main event of this week will be the meeting of the US Federal Reserve System. The is hardly any doubt that the interest rate will grow by 75 base points to 4.00% annual. Much depends on the comments of the Fed: investors need to understand whether the rate will keep growing at such speed.

EUR/USD volatility will grow on Wednesday.

On H4, the market performed a wave of growth to 1.0090. Today the market continues developing a correction. The level of 0.770 is likely to be reached. Then a wave of growth may start for 0.9920. Practically, a consolidation range is likely to form between these two levels. With an escape upwards, another structure of growth is likely to develop to 1.0440. Technically, this scenario is confirmed by the MACD: its signal line is under zero and keeps going down to new lows.

On H1, EUR/USD has completed a structure of a wave of decline to 0.9930. At the moment, the market has formed a consolidation area above it. We expect an escape downwards and a decline to 0.9766. After this level is reached, a link of growth might develop to 0.9930, from where the trend may continue to 1.0440. Technically, the scenario is confirmed by the Stochastic oscillator: its signal line is headed downwards, to 50. Upon breaking this away, the trend should continue to 20.

Eurostat’s preliminary estimate indicated an acceleration of annual inflation in the euro region from 9.9% immediately to 10.7%. Economists, on average, expected no change, and this difference of 0.8 percentage points is one of the most prominent indicators economists predict quite accurately on average.

But it’s not only this surprise that we want to point out, but also how fast price growth has spread beyond energy and food categories. Core inflation accelerated to 5% YoY in September, adding 0.6% MoM. Non-energy industrial goods rose at 1.2% MoM and 6.0% YoY.

These dynamics should signal that the ECB should not reduce the pace of monetary tightening. No doubt the ECB had this or very comparable data available for last Thursday’s meeting but chose to act within market expectations with a rate hike of 75 points.

A softer policy than required by the macroeconomic context is likely to be one of the reasons for the pressure on the euro on Monday. The EURUSD is testing the 0.9900 level and the 50-day moving average from above. A sharp dip below would make the previous breakout be considered false. A breakup of the rising trend from the end of September would set the pair to create a global low, disappointing the recent buyers.

At the same time, the market is unlikely to make an essential move beyond local trends before the results of Wednesday evening’s Fed meeting. The FOMC is expected to raise rates by 75 points for the fourth consecutive time but will indicate a smaller rate hike in the future, which could reduce traction in dollar-denominated assets.

The Euro accelerated lower on Monday as increase dollar longs in anticipation of another hawkish action by Fed on Nov 2 policy meeting and weighed by fresh rise of inflation in the Eurozone that threatens of deepening of crisis in the bloc.

Fresh extension of pullback from new highest since Sep 13 (1.0093) which paused last Friday and breaks through daily Tenkan-sen (0.9899), pressuring next pivot at 0.9880 (Fibo 38.2% of 0.9535/1.0093 recovery).

The action is supported by fading bullish momentum and south-heading stochastic/RSI and pressured by falling daily cloud, which capped recovery leg last week.

Sustained break of 0.9880 Fibo support is needed to confirm bearish near-term stance and confirm a double-top at 1.0088/93 that would risk deeper drop towards 0.9814 (50% retracement/daily Kijun-sen) and 0.9748 (Fibo 61.8%) in extension.

Res: 0.9899; 0.9926; 0.9961; 1.0000.
Sup: 0.9880; 0.9843; 0.9814; 0.9748.

The Australian dollar remains at the back foot and extends pullback from Oct 27 recovery high at 0.6522, into third consecutive day, pressured by renewed risk aversion.

Violation of pivotal Fibo support at 0.6387 (38.2% of 0.6170/0.6522 upleg) faces headwinds from 10/20DMA bull-cross (0.6359), with break lower to add to reversal signals, although daily studies are mixed.

Larger pictures (weekly/monthly) maintain firm bearish structure, however, overbought conditions and formation of monthly long-legged Doji, adds to mixed outlook.

RBA policy meeting and China’s Caixin manufacturing PMI are in focus as key events on Tuesday and could provide fresh direction signals.

The central bank of Australia is expected to raise its interest rate by 25 basis points to 2.85%, while manufacturing PMI is expected to rise to 49.0 in Oct from 48.1 in September.

Res: 0.6426; 0.6439; 0.6479; 0.6522.
Sup: 0.6346; 0.6304; 0.6272; 0.6253.

• We expect the Bank of England (BoE) to hike the Bank Rate by 75bp on Thursday 3 November, but in our view it is a close call between 50bp and 75bp.
• We keep the rest of our forecast intact, expecting the Bank Rate to peak at 3.75%.
• We expect fewer hikes than priced in markets as we emphasise the weak growth outlook. In our base case, we expect headwinds for GBP upon announcement.

BoE call. We expect the Bank of England (BoE) to hike the Bank Rate by 75bp on 3 November bringing it to 3.00%. Markets are currently pricing close to 75bp. Given the past months immense sell-off in gilt markets, we see the hawkish camp prevailing as an opportunity to restore market credibility as inflation remains significantly above target.

However, we expect the Bank to return to its more dovish stance as recession risks are becoming more pronounced and the growth outlook is increasingly becoming weaker. Likewise, the BoE tends to ear on the side of caution, why we expect a return to smaller increment hikes. BoE's Broadbent said that market pricing was too aggressive further highlighted this. For these reasons, we also see it as a closer call between 75bp and 50bp than what markets are currently pricing. We keep the rest of our forecast unchanged, expecting a 50bp hikes in December followed by a final 25bp hike in February 2023, which is fewer hikes than priced in markets (currently 270bps until August 2023).

Note, that there will be updated inflation and GDP forecasts published at this meeting.

After initially delaying its outright selling of government bonds by a month due to market conditions, we expect no changes regarding the QT-communication. We thus expect that BoE will continue with the planned reduction of GBP80bn over the next 12 months starting 1 November. During 2022, sales are set to be in short- and medium term (up to 20Y).

Fiscal policy. Chancellor Jeremy Hunt recently announced that energy support measures will be scaled back, now only capping yearly energy bills for the next 6 months instead of previously for two years. Targeted support is set to kick in after the 6 months, with no further details presented at this point. With increased focus on closing the fiscal gap, we see fiscal policy as being less inflationary as expected under former PM Liz Truss. In turn, this could result in inflation becoming less persistent, which in our view makes a less aggressive rate path more likely.

Growth outlook. We continue to expect the UK to head into recession but earlier than expected with the first negative p GDP growth print as early as Q3. The fiscal stimulus will slightly dampen the fall, although it will not be enough to fully offset the erosion of real wage growth. PMIs are now showing weakness across the line, with all components posing values below 50. Likewise, the labour market remains very tight with high wage pressure.

FX. In our base case of a 75bp hike, we expect EUR/GBP to move slightly higher on announcement. As we expect the BoE to highlight the gloomy growth outlook for the UK economy amid rising recession risk, we expect EUR/GBP to continue its move higher during the press conference.

AUD/USD is down for a third straight day. The Australian dollar is trading at 0.6383, down o.46%.

Will RBA deliver a 0.50% hike?

The RBA kicks off a busy week of central bank decisions when it meets on Tuesday. This will be followed by the Federal Reserve on Wednesday and the Bank of England on Thursday.

The RBA has delivered a steep rate-tightening cycle this year and the upcoming meeting will be live, as it remains unclear what the RBA has in store for the markets. The markets have priced in a second-straight 25-basis point hike, which would bring the cash rate to 2.85%, its highest level since April 2013. There is, however, a 20% chance that the RBA will hike by a steep 50 basis points, given that the Bank’s focus is on curbing inflation and the battle remains far from over. Headline inflation jumped to 7.3%, up from 6.1% in Q2, while core inflation hit 6.1%, up from 4.9%. The RBA expects headline inflation to peak at 7.5%, but other views have inflation rising as high as 8.0%.

RBA Governor Lowe has caught the markets wrong-footed before – the 50 bp move in June was larger than expected, and the 25 bp in October was a surprise dovish pivot. This makes it tricky to predict the extent of the rate hike on Tuesday –  the markets are leaning heavily towards a 25 bp increase, but a 50 bp move should not be discounted.

For the Federal Reserve, inflation is also a key concern. The Fed’s preferred inflation gauge, the PCE core index, rose to 5.1% in September, up from 4.9% a month earlier. That cements a 75 bp rate hike on Wednesday, even though there has been talk of the Fed easing up due to concerns about the economic outlook.

AUD/USD Technical

• AUD/USD is testing support at 0.6403. The next support level is 0.6283
• There is resistance at 0.6532 and 0.6652

Daily Pivots: (S1) 146.36; (P) 147.11; (R1) 148.23; More...

USD/JPY rebounds notably today but stays below 149.69 resistance. Intraday bias remains neutral first. Another fall could be seen, but downside should be contained by 38.2% retracement of 130.38 to 151.93 at 143.69 to bring rebound. On the upside, above 149.69 minor resistance will bring stronger rebound back towards 151.93 high. But upside should be limited there to continue the corrective pattern.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). 147.68 (1998 high) was already met and there is no clearly sign of topping yet. In any case, break of 140.33 support is needed to be the first sign of medium term topping. Otherwise, further rise is in favor to next target at 160.16 (1990 high).