The Week Ahead – Central Banks stuck between Growth and Inflation
GBPUSD recovers as BOE pressured to act
The pound consolidates gains as traders await the Bank of England meeting. Its outperformance reflects the pressure to tighten amid soaring prices.
CPI shot up to 3.1% in September with no sign of easing. The Office for Budget Responsibility expects inflation to average 4% over the next year. The latest hawkish comments from the BOE’s boss Andrew Bailey have stirred up expectations of a hike before Christmas.
However, a slowdown in UK growth momentum and the post-Brexit trade tangle with the EU mean that the central bank is walking a tightrope between growth and inflation.
1.3900 is a key resistance to watch with 1.3570 as support.
AUDUSD surges on potential RBA tightening
The Australian dollar climbs to a three-month high amid growing hopes for RBA’s monetary tightening.
Australia’s core inflation rose to a six-year high in September, and the reopening is likely to exacerbate the supply and demand imbalance. Despite policymakers’ insistence that there will be no rate hikes before 2024, they are facing intense pressure to intervene.
The Aussie’s rolling momentum suggests that the market expects the RBA to shift to an aggressive stance and start the rate hike cycle in 2022. A bullish breakout above 0.7600 would set 0.7800 as the next target. 0.7300 is fresh support in case of a pullback.
XAUUSD recoups losses on weaker yields
Gold recovers from the September sell-off as market participants wait for the Fed policy meeting. The central bank will need to juggle between slowing growth and surging inflation expectations.
The upside risk for gold is if policymakers stay cautious and proceed with gradual tapering. Then the 10-year US Treasury yields would continue on their decline. In turn, this would make the non-yielding metal attractive.
The price may break above the major hurdle at 1830, which would raise bids to the psychological level of 1900. On the flip side, a BOC-like scenario, where a more hawkish Fed decides to end its QE faster, would send the metal below 1760.
SPX 500 rallies on solid corporate earnings
The S&P 500 reached a new all-time high as companies report impressive profits.
The markets already priced in the Fed’s tapering, but haven’t pinpointed the first interest rate hike yet. This means that stock markets can still enjoy the ride in a low-rate environment.
Robust earnings in the third quarter indicate that Corporate America has been able to navigate through supply disruptions and labor shortages. Out of half of the companies that have reported earnings, over 80% have beaten analyst consensus.
A fresh peak at 4600 is an indication that the uptrend has resumed with 4800 as the next stop. The recent low at 4450 is the closest support.