Events Suggest Dollar Strength and Will the ECB Hold
Market Analysis for Week Number 43 2023
Derbyshire, UK – October 22nd, 2023: Study the Economic Events of Interest section below for hints on how to trade the upcoming week. The focus event of the week will be the ECB rate decision on Thursday where a hold is expected. There is a slew of US data that is likely to strengthen the greenback although weakness is possible should there be deviations.
Decisions to trade are made at your own monetary risk.
US dollar strength supported by higher rates-for-longer amidst a resilient US economy
Macroeconomics: The Federal Reserve is maintaining high interest rates to curb inflation, even if it slows growth. The economy is performing slightly better than expected, with positive outlooks for GDP and an indifferent outlook for inflation and unemployment. The DXY appreciated in 2022 due to inflation and is now on an uptrend, reflecting expectations of prolonged high-interest rates.
The U.S. economy is cooling but still strong, with GDP growth above 2%, inflation stabilising around 3.5%, and employment remaining low. In global affairs, the Israel-Hamas War began in October 2023, and the Ukraine-Russia conflict continues, impacting the global economy. The U.S.-China trade war persists, contributing to global uncertainty.
CME Group 30-Day Fed Fund futures:
99% in favour of a hold at the November meeting having climbed from 80% a few weeks ago.
80% in favour of a hold at the December meeting having climbed from 65% a few weeks ago.
Technical: The DXY has gained and lost value in sympathy with the US inflation rate which peaked in late 2022. The current uptrend of the DXY formed in July 2023 when investors began to reposition for the likelihood that the Fed will keep rates higher-for-longer due to the US economy being more resilient than anticipated.
Intermarkets are also reflective of this resilient economy narrative and subsequent higher-for-longer rates:
The moving averages (MA) of the S&P 500 are above the index which is falling and aligned in such a way that indicates an outlook of potentially economic slowdown.
The moving averages (MA) of the six-month treasury bond yield are below the current yield and aligned in such a way that indicates an outlook of potentially lower rates.
Euro weakness pressured by stronger dollar and growth pessimism
Macroeconomics: The European Central Bank's (ECB) hawkish stance to combat high inflation is dampening economic growth, which is now expected to be 0.7% in 2023. The EUR/USD has been volatile, gaining and losing value in a contrarian correlation with inflation rates. The outlook for growth in the euro area is mixed, with a risk of recession. Inflation is expected to remain elevated in the near term, but is likely to start to fall towards the end of the year. The Russia-EU gas dispute has added uncertainty to the economic outlook.
Technical: The EUR/USD has gained and lost value in a contrarian correlation with inflation rates which peaked in late 2022. The current downtrend of the EUR/USD formed in July 2023 when investors began to reposition for the likelihood that the Fed will keep rates higher-for-longer due to the US economy being more resilient than anticipated.
Intermarkets are also reflective of this resilient US economy narrative and subsequent higher-for-longer rates:
The moving averages (MA) of the DAX are above the index which is falling and aligned in such a way that indicates an outlook of potentially economic slowdown.
The moving averages (MA) of the six-month German bund yields are below the current yield and aligned in such a way that indicates an outlook of potentially stable rates.
Pound weakness pressured by stronger dollar and growth pessimism
Macroeconomics: The Bank of England is attempting to balance the need to curb inflation with the risk of recession. The economy is underperforming against forecasts, with a pessimistic outlook for GDP and unemployment. Inflation is expected to fall, but at a slower pace than growth. The GBP/USD is in a downtrend due to investor expectations that the Fed will keep rates higher for longer. The UK economy is on a knife edge, with growth expected to remain close to zero in the coming months. The cost-of-living crisis is putting pressure on consumers' spending power. The war in Ukraine is exacerbating the situation by causing energy prices to soar and disrupting supply chains. As a result, the value of the pound is falling.
Technical: The GBP/USD has gained and lost value in a contrarian correlation with US inflation rates which peaked in late 2022. The current downtrend of the GBP/USD formed in July 2023 when investors began to reposition for the likelihood that the Fed will keep rates higher-for-longer due to the US economy being more resilient than anticipated.
Intermarkets are also reflective of this resilient US economy narrative and subsequent higher-for-longer rates:
The moving averages (MA) of the FTSE 100 are above the index which is falling and aligned in such a way that indicates an outlook of potentially economic slowdown.
The moving averages (MA) of the six-month Gilt bond yields are above the current yield and aligned in such a way that indicates an outlook of potentially stable rates.
Economic Events of Interest
This shows the market expectations at time of writing, monitor for deviations as these can have significant impacts on market moves.
Tuesday, October 24th
0700 (GMT +1) UK Unemployment Rate: Same as previous expected, indifferent for GBP
0900 (GMT +1) EA PMI Flash: Similar as previous expected, indifferent for EUR
0930 (GMT +1) UK PMI Flash: Similar as previous expected, indifferent for GBP
Wednesday, October 25th
0935 (GMT +1) US Fed Chair Powell Speech:
1800 (GMT +1) EA ECB President Lagarde Speech:
Thursday, October 26th
1315 (GMT +1) EA ECB Rate Decision: Same as previous expected, indifferent for EUR
1330 (GMT +1) US Durable Goods Orders: Far higher than previous expected, bullish for USD
1330 (GMT +1) US GDP Growth Rate Adv.: Far higher than previous expected, bullish for USD
1345 (GMT +1) EA ECB Press Conference:
Friday, October 27th
1330 (GMT +1) US Core PCE Price Index: Higher than previous expected, bullish for USD
1330 (GMT +1) US Personal Income/ Spending: Same as previous expected, indifferent for USD
Gavin Pearson
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