The Week Ahead – Bulls charge in the hope of Fed pivot
USDCAD holds as BoC may go dovish
The Canadian dollar slips as the Bank of Canada may deliver smaller-sized interest rate hikes. While inflation has remained high for October, signs of peaking could open the door to a slower pace of tightening. The central bank has shifted its focus to fine-tune the terminal rate and not to overshoot, as going beyond the level needed to tame prices would flare up recessionary pressures. Looking forward, the market may price in small increments by the BoC with a 25bp hike at the December policy meeting. The upside risk for the loonie would be a 50bp surprise. The pair is looking to recover to 1.3800. 1.3250 is the first support.
AUDUSD climbs as recession risk fades
The Australian dollar continues to climb as signs of peaking inflation lift riskier currencies. Monthly CPI in Australia has risen 6.9% in October, falling from 7.3% in September, helped by a sharp fall in costs of fresh produce and holidays. The RBA had expected prices to reach about 8% by the year’s end, but more signs that inflation might be peaking could be a pleasant surprise for policymakers. Gearing down the tightening may halt the drift towards a recession, and ultimately put growth-sensitive aussie back on track. The pair has regained momentum and is heading to August’s high at 0.7130. 0.6600 is the closest support.
XAUUSD bounces as dollar sinks
Gold soars as the US dollar retreats amid changes in the Fed’s tone. In a surprisingly dovish speech, Fed Chair Powell said the central bank could slow down the pace of rate hikes. Even though he cautioned that the restrictive policy would remain in place for some time, the prospect of interest rates plateauing in the near future is enough for the bulls to take the leap. Tumbling Treasury yields make way for the non-yielding metal, prompting the bears to cover their positions. An exodus from an oversubscribed long US dollar trade would also support gold. The price is recovering towards 1875 and 1725 is a fresh support.
SPX 500 surges over dovish Fed
The S&P 500 bounces as investors bet on a pivot in the US monetary policy. The Fed’s call about scaling back its tightening could be the turning point the bulls have been waiting for. With a smaller sized hike by as soon as December, investors hope that the Fed’s hawkish rhetoric would be a thing of the past. Meanwhile, China could be pressured to relax its Covid restrictions after a turbulent week across major cities. The second economy’s reopening would ease global supply chain strains and inflationary pressures, further supporting the pivot argument. The index may test last summer’s peak at 4320 with 3930 as a fresh support.