The Week Ahead – Growing Concerns About Fast Tightening
GBPUSD tumbles amid fears of recession
The pound plunges as fears of an economic slowdown in Britain take hold amid a cost of living crisis.
The Bank of England has adopted a softer tone recently by acknowledging that its policy is walking a tight line between inflation and recession. The central bank may proceed with another 0.25% hike this week. Nonetheless, markets have scaled back bets on the magnitude of upcoming rate hikes.
As the sterling reaches a 21-month low against the greenback, a dovish repricing in interest rate expectations may continue to weigh on the currency. 1.2270 would be the next stop and 1.2800 an intermediate resistance.
AUDUSD consolidates as RBA meets
The Australian dollar steadies ahead of the RBA meeting. Australia’s consumer prices accelerated in the first quarter to a 20-year high, fueling speculation that the RBA may start policy normalization soon.
Wage growth is gaining momentum amid a tight labor market. It not only compounds the impacts of global supply disruptions but also suggests that inflation is here to stay. Markets are pricing in a cash rate target of 0.5% in June at the latest.
However, one may not exclude the possibility of a surprise rate hike this week. In this case, the Aussie could bounce back above 0.7300. A dip below 0.7100 would send the pair to 0.6970.
XAUUSD weakens as dollar surges
Gold fell to a two-month low as the US dollar rallies across the board. The latter’s upward trajectory has been a main headwind for the precious metal.
Expectations of aggressive policy tightening by the Fed have made the dollar a formidable safe-haven alternative to gold during these times of uncertainty. In contrast to economic risks in Europe and Asia, sounder US fundamentals may allow the Fed to go full throttle without a hitch.
A combination of rising US yields and weakness in other major currencies further boosts demand for the buck at the expense of bullion. The price may slip towards 1840. And 1930 has turned into a resistance.
SPX 500 struggles over mixed corporate guidance
The S&P 500 softens as weaker consumer confidence drags corporate outlook. A mixed bag of quarterly earnings acts as a confirmation that supply chain disruptions and surging labor costs have taken a toll on profit margins.
Downbeat revenue forecasts point to a slowdown in corporate and household spending. further weighing on investor sentiment. The US economy contracted for the first time since the start of the pandemic.
In turn, this fuelled concerns that abrupt monetary tightening could wreck the recovery. The index is struggling to hold onto this year’s lows near 4150. 4500 is a major resistance ahead.