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The Week Ahead – ECB may need to justify harder for more hikes

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EURUSD retreats as ECB may pause

The euro drifts lower as a September rate hike could be off the table. The ECB chief economist’s optimism that inflation was easing might weigh in amid growing arguments for a policy pause. After nine consecutive rounds of tightening, policymakers are now at a crossroads with interest rates at more than two-decade highs and growth treading water for the past three quarters. But price pressures have remained stubborn and wages are still on the rise, keeping inflation persistent. Should the central bank revise down its forecast for price growth, the currency could fall below 1.0650. 1.0940 is the first resistance overhead.

GBPUSD weakens as economy remains fragile

The pound fell to a three-month low as traders place faith in a stronger US economy. Even though market participants widely expect a quarter-point rise in interest rates when the BoE meets later this month, and probably another one by the end of the year, the narrowing rate differential may not help Sterling catch up with the greenback. Proven resilience of the US economy is driving the resurgence of the dollar and might add pressure on weaker counterparts. The pound is one of the most vulnerable ones out there due to higher inflation and sensitivity to energy prices. The pair is testing 1.2300 with 1.2800 as resistance.

XAUUSD falls over dollar’s resurgence

Gold retreats as a rising US dollar dents appetite for the non-yielding precious metal. Most dollar-linked assets’ movements would be heavily influenced by traders’ hopes and dreams about the Fed policy as it is currently the dominant narrative. Amid concerns about global growth, notably in China, investors believe that the US economy runs less risk of entering a recession, or would fare better than most major economies should it happen, making the dollar a de facto safe-haven bet. With a virtually risk-free 5.5% interest rate on the dollar bill, gold may have a hard time attracting buyers above 1985 and it could drop towards 1850.

SPX 500 falters as US-China quarrel hurts mood

The S&P 500 pulls back as brewing US-China trade tensions dent market sentiment. Reports that Beijing has issued a ban on iPhone use by government employees with a potential extension to state firms have put technology-related megacaps under pressure. Growing concerns of further escalation compound lingering recession fears and might keep the bulls in check. Meanwhile, a resilient US labour market does little to steer the Fed away from its tight monetary policy. Only a noticeable slowdown in the upcoming CPI could put the index back on track. The quote is hovering above 4330 and 4640 is a key resistance ahead.

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