Market sentiment improved during the US session yesterday and stayed supported today in Asia as well. That said, although we see a positive picture overall, we will stay careful ahead of the US CPIs, as another acceleration may result in a corrective setback. In the FX world, the British pound was the second in line gainer, perhaps following fresh comments from BoE Governor Bailey, who kept supporting higher rates soon.
Equities Mixed Ahead of US Inflation Data, BoE’s Bailey Still Sees Higher Rates Soon
The US dollar traded lower against all the other major currencies on Monday and during the Asian session Tuesday, falling the most versus GBP, JPY, and NZD.
The weakening of the US dollar, combined with the strengthening of the Kiwi and the pound, suggests that markets may have traded in a risk-on fashion yesterday and today in Asia. However, the strengthening of the yen points otherwise. Therefore, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, we see that major EU indices traded lower or unchanged, with the only exception being France’s CAC 40. Later in the day, all of Wall Street’s main indices closed positive, with sentiment staying relatively supported today in Asia as well. The only index finishing in the red was Japan’s Nikkei 225.
EU indices were dragged down by tech stocks, which may have come under selling interest after Tesla CEO Elon Musk set a Twitter poll asking whether he should sell about 10% of his stock holdings, with the poll attracting 3.5mn votes, 57.9% of which voted “Yes”. The poll follows a proposal by US Senate Democrats to tax stocks of billionaires in an attempt to fill a loophole that allowed the rich to defer capital gains taxes. That said, although this weighed on the Tesla stock as well later in the US session, Wall Street inched north for another session, perhaps due to US Congress passing Joe Biden’s USD 1trln spending bill on Saturday. Now lawmakers turn to the social spending bill, which is expected to go under a House vote next week.
As for our view, with several central banks appearing less-hawkish-than-expected recently, we would expect equities to continue drifting north. However, heading into Wednesday’s US inflation data for October, we prefer to stay sidelined. Expectations are for both the headline and core CPI rates to have increased further, which could add to the view that the latest surge in inflation is not transitory after all. This could encourage market participants to bring forth their expectations with regards to a rate hike by the Fed, and may result in a rebound in the US dollar. At the same time, equities could pull back, but we don’t expect a long-lasting reversal. We believe that, despite expectations over sooner and faster rate hikes, anything pointing to economic resilience could encourage more stock buying. After all, investors may have already digested the idea of higher rates soon.
Back to the currencies, the pound was the second best performing major currency, behind the Japanese yen, recovering a decent portion of last week’s losses, triggered by the BoE’s decision not to hike interest rates and instead say that this could happen in “coming months”. Yesterday’s rebound may have been the result of fresh comments by Governor Andrew Bailey, who said that they are on a path towards raising interest rates, something that may have revived expectations over a December move. However, we are reluctant to trust Bailey. Remember that a couple of weeks ahead of last week’s gathering, he said that they have to act to contain inflation expectations, comments which encouraged market participants to price in an 80% chance for a hike at that meeting. We will rely more on the upcoming preliminary GDP data for Q3, due out on Thursday. Expectations are for a decent slowdown, which could increase speculation that a rate hike may eventually be delivered in the first months of the new year instead of December, and thereby result in a new negative wave in the pound.
DAX — Technical Outlook
The German DAX traded in a consolidative manner on Monday, after it hit a new record high at 16090 on Friday. Although we see decent chances for a setback, we consider the overall picture to be positive, and this is because the index continues to print higher highs and higher lows above the upside support line drawn from the low of October 6th.
As we already noted, the index may drift south for a while, but we expect the bulls to jump back into the action from above that upside line and aim for another test at the record of 16090. If market participants don’t stop there this time around, we would expect them to climb towards the 16300 territory, which is slightly above the 161.8% Fibonacci extension level of the September 27th — October 6th slide.
In order to abandon the bullish case, we would like to see a dip below 15770. This move could confirm the break below the aforementioned upside line and may see scope for declines towards the 15530 zone. Another dip, below 15530, could extend the fall towards the 15415 area, which provided support between October 18th and 21st, or even towards the 15295 territory, defined as a support by the inside swing high of October 3rd.
GBP/USD — Technical Outlook
GBP/USD rebounded sharply yesterday, recovering a decent portion of last week’s losses. However, the rebound stayed limited near 1.3580, still below the downside resistance line drawn from the peak of October 28th. Taking into account that the price structure is still lower highs and lower lows below that downside line, we would treat yesterday’s recovery as a corrective one, and stick to our guns that the short-term outlook is still negative.
A dip back below 1.3532 could be a sign that the bears have not left the field and may initially allow declines towards the 1.3470 zone. If they don’t stop there, we may experience extensions towards the 1.3425 level, marked by Friday’s low, or towards the 1.3412 barrier, marked by the low of September 29th.
In order to start examining whether the outlook has switched to positive, we would like to see a break above 1.3607, a resistance marked by the inside swing lows of November 2nd and 3rd. This could confirm the break above the aforementioned downside line and may set the stage for advances towards the 1.3700 zone, defined by the peak of November 4th, where another break could aim for the 1.3740 area, which provided support between October 20th and 25th.
As for Today’s Events
In terms of data, the only worth mentioning is Germany’s ZEW survey for November. Both the current conditions and economic sentiment indices are expected to have declined somewhat, to 18.0 and 20.0 from 21.6 and 22.3. This will be the 6th straight slide in the economic sentiment index and may add to concerns over how much Eurozone’s growth engine has been affected by the latest bottlenecks. This will add credence to ECB President Lagarde’s view, who said that they don’t see the conditions of a potential rate hike being met around the timing the market suggests. She will deliver a speech today, and we expect her to try and push back those expectations once again, and if she succeeds this time, the euro is likely to come under renewed selling pressure.
Besides ECB’s Christine Lagarde, we will get to hear again from BoE Governor Andrew Bailey, as well as by Fed Chair Jerome Powell.
As for tonight, during the Asian session Wednesday, we have China’s CPI and PPI for October. The CPI rate is forecast to have risen to +1.4% yoy from +0.7%, while the PPI is anticipated to have accelerated to +12.4% yoy from +10.7%.
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