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The Week Ahead – Extended tightening turns market risk-off

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EURUSD falls as US tightening goes on

Chart of EURUSD

The euro falls back as the rate gap between both sides of the Atlantic remains significant. With falling energy prices, spring has kicked off with a sense of relief that Europe might have dodged the bullet. The latest PMI showed expansion in the eurozone, seen as a sign of robust economic fundamentals. The much-talked-about recession, if any, would be less severe than predicted. Markets expect at least two rate increases from the ECB. However, with the Fed determined to push further, the single currency is lagging in terms of the terminal rate. The pair is testing this year’s low at 1.0500 and 1.0800 is a fresh resistance.

AUDUSD retreats as optimism fades

Chart of AUDUSD

The Australian dollar weakens as the prospect of more tightening dents market sentiment. Wage growth has remained steady, and if the labour market does not loosen quickly enough, the RBA may push the peak rates much higher than the currently expected 4.1%. The central bank has already signalled more rate hikes to come but this hawkish pivot barely supports its currency. Rather, it means that the fight against inflation is far from over and restrictive conditions could stay for the foreseeable future. Subdued risk appetite may drive the higher beta aussie lower towards 0.6650 with 0.6920 as the first hurdle.

UKOIL grinds lower over gloomy demand

Chart of UKOIL

Brent crude edges lower as rising global interest rates cast a shadow over demand. Even though the world’s central banks are in different stages of their tightening cycle, the end goal is the same: to rein in inflation by curbing growth. Some are calibrating their policy with incremental hikes, some have adopted a stop-and-go approach, and others are still pushing aggressively. Rising US stockpiles point to tepid demand in the world’s largest consumer. Meanwhile, the market barely reacted to Russia’s plan to trim exports from its western ports, which says a lot about the bearish mood. The price remains below 89.00 and may drop to 70.00.

NAS 100 drops as peak rate uncertain

Chart of US100

The Nasdaq 100 slides as the Fed remains assertive about its tightening agenda. Robust US economic data have been a double-edged sword. On the one hand, they ease fears of a recession. On the other, they may prompt more aggressive interest rate increases by the central bank, pressuring economic growth. All bets are off after the Fed struck a hawkish tone when investors were hoping for the tightening to phase out. Not knowing where the peak rate is is what rattles the market, and three 25 bp hikes are not so different from a 75 bp in one go should that happen. The index is heading to 11600 with 12800 as the closest resistance.

 

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