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Markets

Strong ADP US job growth (+571k) and an impressively strong services ISM (66.7)understandably only caused a mild rise in USD yields and the dollar as investors awaited the Fed policy announcement. The Fed as expected gave the go ahead to start tapering bond purchases by $15bn/m from this month ($10bn Treasuries; $5bn MBS). At the same time, Chair Powell reiterated that the Fed is not at the point yet to consider raising interest rates. The drivers of inflation are more persistent than expected, but the Fed still can afford to be patient. Most of the supply issues behind the current rise of inflation are still seen abating next year and there is a way to go to reach the goal of maximum employment (which, by the way, isn’t that easy to measure). At first sight, yesterday’s Fed stance can be labeled as some kind of ‘soft tapering’. We see it as more neutral as Powell didn’t aggressively push back on current market expectations for rate hikes next year. In this respect, the Fed chair sees a chance for the employment goal to be reached in the second half of next year. On markets, expectations for two rate hikes next year didn’t change. The Fed giving more weight to employment than to the inflation caused the US curve to steepen (2y +0.6 bps, 30y +6.1 bps) mainly due to higher inflation expectations. German yields were little changed except for the 30y (-2.9 bps). The dollar suffered a mild setback with DXY closing below 94 (93.85) and EUR/USD closing at 1.1612, but this morning’s price action suggests no lasting damage for the US currency. Equity markets were happy with the gradual approach. The Dow, S&P and the Nasdaq all succeeded record closes.

Today’s eco calendar includes the weekly US jobless claims, EMU PPI and a long list of ECB speakers, but the focus will turn to other central bank policy decisions. The Norges Bank is expected to take a pause after its September hike. The Czech national Bank will continue its anti-inflation crusade, with consensus anticipating a 75 bps rate hike. At the Bank of England, it will probably be a close call whether it will raise rates (from 0.1% 0.25%) already this month. We slightly prefer a scenario of a delay till December. This might be mildly negative for sterling short-term, but any sustained EUR/GBP upside is probably hampered by persistent euro softness. This is also the case for EUR/USD. The dollar maintains interest rate support even after yesterday’s balanced Fed-message. EUR/USD 1.1530 is intermediate support ahead of the key 1.1495 area. On European interest rate markets, we look out whether yesterday’s post-Fed raise in US yields will help a bottoming process. The 0.17% area for the 10y EMU swap should hold to prevent a weakening of the ST technical picture.

News headlines

The Polish central bank (NBP) raised policy rates with a bigger-than-expected 75 bps hike after a surprise 40 bps hike last month. The reference rate now stands at 1.25%. Contrary to Central-European peers, Poland has long shunned higher rates but is catching up as inflation is searing. Prices rose 6.8% y/y in October and are expected to increase further to 7%+ early next year. Governor Glapinski said the hike was necessary to avoid second-round effects, adding that another one in December was more likely than not. The NBP expects yearly inflation to be well above the midpoint target of 2.5% across the policy horizon (2021-2023). Growth this year is seen at 4.9-5.8%, 3.8-5.9% in 2022 and 3.8-6.1% in 2023. The policy statement doesn’t mention the NBP will keep buying government bonds. Glapinski later cleared out that they have “practically ended” QE. The rallied yesterday from EUR/PLN 4.61 to 4.58.

Russian inflation surged further October. Headline CPI quickened 1.11% m/m to 8.13% y/y - the fastest pace since 2016. Food prices jumped 10.1% amid a weather-delayed harvest. Core measures however also rose with 0.85% m/m to be at a yearly 8.03%, also a 5-year high. Unabating inflation, even after a total of 325 bps rate increases, opens the door for the central bank of Russia to go big once again. Governor Nabiullina flagged the possibility at the previous meeting of a 100 bps rate hike. That would bring the policy rate at 8.5%, the highest level since 2017. The Russian ruble lost ground yesterday to EUR/RUB 83.46 though the move occurred already before the inflation release.

Daily Pivots: (S1) 155.33; (P) 155.70; (R1) 156.44; More...

GBP/JPY is staying in correction from 158.19 and outlook is unchanged. Deeper fall cannot be ruled out, but downside should be contained above 153.66 support to bring rebound. On the upside, above 158.19 will resume larger up trend from 123.94. Next target will be 61.8% projection of 136.96 to 156.05 from 148.93 at 160.72.

In the bigger picture, rise from 123.94 is seen as the third leg of the pattern from 122.75 (2016 low). The stay above 55 week EMA affirms medium term bullishness. Current rise should now target 61.8% retracement 195.86 (2015 high) to 122.75 at 167.93 next. In any case, outlook will remain bullish as long as 148.93 structural support hold, even in case of deep pull back.

Daily Pivots: (S1) 131.96; (P) 132.19; (R1) 132.61; More....

EUR/JPY is still bounded in consolidation from 133.44 and intraday bias remains neutral. Deeper fall cannot be ruled out, but downside should be contained above 130.45 resistance turned support to bring rebound. On the upside, above 133.44 will target 134.11 high first. Firm break there will resume larger up trend from 114.42. Next target is 61.8% projection of 121.63 to 134.11 from 127.91 at 135.62.

In the bigger picture, rise from 114.42 (2020 low) is still in progress and the strong support support from 55 week EMA affirms medium term bullishness. Further rise would be seen to retest 137.49 (2018 high). Decisive break there will resume the whole long term rise from 109.03 (2016 low). Next target will be 100% projection of 109.03 to 137.49 from 114.42 at 142.88. This will now remain the favored case as long as 127.91 support holds.

Daily Pivots: (S1) 0.8467; (P) 0.8490; (R1) 0.8507; More...

Intraday bias in EUR/GBP is turned neutral as rebound from 0.8401 lost momentum. On the upside, break of 0.8512 will resume the rebound to 0.8656 resistance. Rejection by 55 day EMA (now at 0.8506) will retain near term bearishness. Further break of 0.8401 low will resume larger down trend from 0.9499 to 0.8276 key long term support next.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8656 resistance holds, towards long term support at 0.8276. However, firm break of 0.8656 resistance would argue that a medium term bottom was already formed. Stronger rise would be seen to 0.8861 support turned resistance to confirm completion of the corrective pattern.

Daily Pivots: (S1) 1.5548; (P) 1.5585; (R1) 1.5624; More...

Intraday bias in EUR/AUD is mildly on the upside as rebound from 1.5354 would target 55 day EMA (now at 1.5788). On the downside, break of 1.5354 will resume the fall from 1.6434 to retest 1.5250 low. Sustained break there will resume larger down trend from 1.9799.

In the bigger picture, the down trend from 1.9799 (2020 high) is in progress. Firm break of 1.5250 low will confirm resumption nand target 61.8% retracement of 1.1602 (2012 low) to 1.9799 at 1.4733. Sustained break there could bring more downside acceleration to 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623. In any case, break of 1.6434 resistance is needed to signal medium term bottoming, or outlook will stay bearish.

Daily Pivots: (S1) 1.0562; (P) 1.0578; (R1) 1.0603; More....

With 1.0678 resistance intact, further decline is expected in EUR/CHF. Current down trend from 1.1149 should target 100% projection of 1.1149 to 1.0694 from 1.0936 at 1.0481. On the upside, however, break of 1.0678 will indicate short term bottoming and bring stronger rebound.

In the bigger picture, current downside momentum argues that fall from 1.1149 is probably resuming the downside from 1.2004 (2018 high). Next focus is 1.0505 (2020 low). Decisive break there will confirm this bearish case and target 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223 next. Strong support from 1.0505 will bring rebound first. But outlook will stay bearish as long as 1.0936 resistance holds.

The US dollar retreated while stocks wavered after the Federal Reserve delivered its interest rate decision. As was widely expected, the bank decided to leave its interest rate unchanged at the range of 0% and 0.25%. The dot plot showed that the bank will have 7+ interest rates by 2024. Meanwhile, the bank also decided to start tapering its asset purchases. It reduced its monthly asset purchases by about $15 billion. The decision came shortly after data by ADP showed that the private sector added more than 500k jobs in October.

The British pound held steady in the overnight session as investors waited for the upcoming Bank of England (BOE) interest rate decision. Economists expect that the BOE will announce the start of tapering of its asset purchases. Besides, while the country is going through challenges, it is still doing well. For example, data published on Wednesday showed that the house price index (HPI) and the services PMI rose in October. The BOE is also expected to leave its interest rate intact. Analysts will also watch the number of BOE members who will vote to hike rates.

The economic calendar will have several important economic events today. For example, in Switzerland, SECO will publish the estimated consumer confidence situation for the fourth quarter. This is an important assessment because it influences consumer spending. Meanwhile, Markit will publish the latest services and composite PMI numbers for October. Like in the UK, there is a possibility that the data will be relatively positive. In Canada, the statistics agency will release the latest trade numbers.

EURGBP

The EURGBP declined sharply ahead of the BOE decision. It moved to a low of 0.8475, which was the lowest level since Monday. This price was slightly above the key support at 0.8470, which was the neckline of the head and shoulders pattern. It remains above the 25-day and 50-day moving averages. Also, the pair is approaching the 23.6% Fibonacci retracement level. Therefore, the view is that the pair will rebound after the BOE decision.

XBRUSD

The price of crude oil retreated in the overnight session after the relatively weak US inventory build data. Inventories rose by about 3.6 million last week, which was higher than the expected 2.25 million. The pair declined to a low of 82.75, which was the lowest level since October 27th. It also moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has been in a downward trend. Therefore, the pair will likely keep falling for now.

EURUSD

The EURUSD pair wavered after the Fed decision. The pair is trading at 1.1590, which was slightly higher than the lowest level on Wednesday. Still, the pair is where it has been since Tuesday. It is along with the short and longer-term moving averages. The pair’s Average True Range (ATR) has also declined, which is a sign of low volatility. Therefore, the pair will likely remain in this range ahead of the US jobs data.

Daily Pivots: (S1) 1.2365; (P) 1.2411; (R1) 1.2440; More...

USD/CAD is staying in consolidation from 1.2286 and intraday bias remains neutral first. Outlook is unchanged that in case of stronger recovery, upside should be limited by 1.2497 resistance. On the downside, break of 1.2286 will resume the fall from 1.2947 to 161.8% projection of 1.2947 to 1.2492 from 1.2894 at 1.2158 next. However, firm break of 1.2497 will turn bias back to the upside for stronger rebound.

In the bigger picture, the rejection by 38.2% retracement of 1.4667 to 1.2005 at 1.3022 argues that rebound from 1.2005 is merely a corrective rise, which is complete. More importantly, the down trend from 1.4667 (2020 high) is not over yet. Sustained break of 1.2005 will extend the down trend to next long term fibonacci level at 61.8% retracement of 0.9406 to 1.4689 at 1.1424. In any case, outlook will not turn bullish as long as 1.2947 resistance holds.

Major US indices rallied to fresh record yet, again, because the tapering announcement from the Federal Reserve (Fed) yesterday was rather dovish. From this month onwards, the Fed will be buying $15 billion less of treasuries and MBS, but the average American will unlikely feel the difference of the latter policy change, except from a slight pressure on mortgage rates says Bloomberg. The buying of bonds should come to an end sometime by mid-2022, but until that day, the Fed will continue expanding its balance sheet to record levels, and that will continue backing the inflation pressures, and the stock markets! So we can comfortably expect to see the record rally in US equities to extend, because a growing number of average households will be attracted to the stock markets as that’s going to be the only way to help them keeping up with inflation rising at a speed of more than 5% annually. In other words, the best way to fight against the rising diaper prices, is to buy the P&G shares, or perhaps Bitcoin.

So, the risk is on and people continue hunting for the next big daily bargain, and new IPOs are excellent candidates for a try. Yesterday, the sustainable, wool shoes maker Allbirds went public, and it had a good first day, the stock price more than doubled, and closed the session up by 93%. Not bad at all. The next most-watched IPO is next week’s Rivian, which is a Ford and Amazon-backed electric car maker.

We have two important events on today’s macro calendar. One is the Bank of England (BoE) meeting, and the other is the OPEC decision.

OPEC is under a growing pressure from the US, Japan and others to boost supply to help easing the global energy crisis. There is little chance that Saudis will give in to that pressure in my opinion, but there is still hope to see them increase supply by a little bit more than the actual 400’000 bpd, to make a little bit more money and help us spend a better winter, without of course letting the prices fall by much. The only thing that worries me a little is that the potential above the $85 has been limited in the US crude, and we see a growing pressure for testing the levels below the $80pb. Yesterday, the major catalyzer of the decline has been a bigger build in the US inventories. The most recent EIA data showed that the US crude stockpiles increased by 3.3 million barrels versus some 2-million-barrel rise penciled in by analysts. Normally, during a strong trend, the bulls see the latter as an opportunity to buy the dip, but the short-term direction will sure depend on how OPEC is willing to play next.

The BoE will be meeting today, and the official expectations is a no change. But the activity on the MPC SONIA futures a different story, with a slightly higher probability of seeing the first rate hike happen as soon as today, to tame the rising inflationary pressures. And if it is not today, it will probably be the next MPC meeting, where the market prices in less than 15% chances of seeing the rates stay at the current levels. With all this, will we finally see the pound gain against the US dollar? The risks are clearly tilted to the upside for the pound, if nothing, due to the divergence between a cautiously hawkish Fed, and a perhaps more daringly hawkish BoE.

Daily Pivots: (S1) 0.7422; (P) 0.7440; (R1) 0.7468; More...

Intraday bias in AUD/USD is mildly on the downside for 55 day EMA (now at 0.7394). Sustained break there will argue that rebound from 0.7105 is complete with three waves up to 0.7555. That would also argue that fall from 0.8006 is ready to resume through 0.7105 low. On the upside, break of 0.7555 will turn bias back to the upside and resume the rebound instead.

In the bigger picture, with 0.6991 cluster support (38.2% retracement of 0.5506 to 0.8006 at 0.7051) intact, we're seeing price action from 0.8006 as a correction only. That is, up trend from 0.5506 low would resume after the correction completes. In that case, main focus will be 0.8135 key resistance (2018 high). Sustained break there will carry larger bullish implications. However, sustained break of 0.6991 will argue that the whole medium term trend has indeed reversed.