Key Economic Indicators Suggest Mixed Outlook for Major Currencies
Market Analysis for Week Number 49 2023
DERBYSHIRE UK, Dec 03, 2023, Week 49. This week, a selection of new data releases are out with a culmination into the US non farm payrolls on Friday.
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US DOLLAR
DXY is Bearish: Price is starting the month below the monthly pivot point near 104.2. Upside retracements could potentially reach the monthly pivot R1 near 106.2 if it can break through the weekly pivot point near 103.6.
United-States Economic Situation and Outlook: The US economy is currently in a state of transition. The Federal Reserve is raising interest rates in an effort to combat inflation, which has been running at historically high levels. This has led to some slowing of economic growth, but the economy is still expected to expand in 2023. Inflation is expected to moderate in the coming months, and the Federal Reserve is likely to slow the pace or possibly halt rate hikes. This should help to support economic growth. The labour market remains strong, with unemployment at near-record lows. This is likely to continue to support consumer spending.
Long-Term Direction of the US Dollar: The long-term direction of the US dollar will depend on the relative strength of the US economy compared to other major economies. If the US economy continues to outperform other economies, the dollar is likely to strengthen. However, if other economies start to grow faster than the US economy, the dollar could weaken. In the short term, the dollar is likely to be volatile as investors await the next move from the Federal Reserve. However, in the long term, the dollar is likely to remain a strong currency due to the fundamental strength of the US economy.
Market Sentiment: The overall sentiment towards the US dollar is negative in the short term. Investors are uncertain about the Federal Reserve's next move on interest rates, and this uncertainty is likely to keep the dollar volatile.
Short-Term Direction of the US Dollar: Based on the current market sentiment, the US dollar is likely to trade lower in the near term. However, the direction of the dollar could also be affected by upcoming economic data releases, the tone of Fed commentary, and the overall risk appetite of investors. If economic data continues to come in weak, and the Fed signals that it is nearing the end of its tightening cycle, the dollar could sell off further. However, if economic data surprises to the upside and the Fed suggests that it could still raise rates further, the dollar could rebound. Overall, the outlook for the US dollar in the short term is uncertain. The currency is likely to remain under pressure until investors get more clarity from the Fed.
Upcoming Key Events:
Tue 05 Dec 2023 15:00 USD ISM Services PMI: A stronger-than-expected ISM Services PMI reading could support the US dollar, as it would suggest that the US economy is still growing at a solid pace. This would increase the likelihood that the Fed will continue to raise interest rates, which would make the US dollar more attractive to investors.
Wed 06 Dec 2023 13:15 USD ADP Non-Farm Employment Change: A stronger-than-expected ADP Non-Farm Employment Change reading could also support the US dollar, as it would suggest that the US labour market is still strong. This would also increase the likelihood that the Fed will continue to raise interest rates.
Thu 07 Dec 2023 13:30 USD Unemployment Claims: A weaker-than-expected Unemployment Claims reading could put downward pressure on the US dollar, as it would suggest that the US labour market is weakening. This could reduce the likelihood that the Fed will continue to raise interest rates.
Fri 08 Dec 2023 13:30 USD Average Hourly Earnings m/m: A stronger-than-expected Average Hourly Earnings m/m reading could support the US dollar, as it would suggest that inflation is rising. This would increase the likelihood that the Fed will raise interest rates more aggressively.
Fri 08 Dec 2023 13:30 USD Non-Farm Employment Change: A stronger-than-expected Non-Farm Employment Change reading could support the US dollar, as it would suggest that the US economy is still growing at a solid pace and that the US labour market is still strong. This would increase the likelihood that the Fed will continue to raise interest rates.
Fri 08 Dec 2023 13:30 USD Unemployment Rate: A lower-than-expected Unemployment Rate reading could support the US dollar, as it would suggest that the US labour market is still strong. This would increase the likelihood that the Fed will continue to raise interest rates.
Wed 13 Dec 2023 19:00 USD Federal Funds Rate: A more hawkish-than-expected Fed Funds Rate decision could support the US dollar, as it would suggest that the Fed is committed to bringing inflation under control. This would make the US dollar more attractive to investors.
Wed 13 Dec 2023 19:00 USD FOMC Economic Projections: More hawkish-than-expected FOMC Economic Projections could also support the US dollar, as it would suggest that the Fed expects inflation to remain high for longer. This would also make the US dollar more attractive to investors.
Wed 13 Dec 2023 19:00 USD FOMC Statement: A more hawkish-than-expected FOMC Statement could also support the US dollar, for the same reasons as above.
Reasons to Sell the USD
Dovish Fed Stance: If the Federal Reserve signals a more dovish stance on interest rates, it could indicate a slower pace of tightening or even a potential rate cut. This could weaken the USD as investors seek higher-yielding assets.
Weak Economic Data: Disappointing economic data, such as lower-than-expected GDP growth, consumer spending, or employment figures, could raise concerns about the US economy's strength. This could lead to downward pressure on the USD.
Elevated Global Risk Aversion: Periods of heightened global risk aversion, often triggered by geopolitical tensions or financial crises, could prompt investors to move away from riskier assets like stocks and commodities and seek refuge in safe-haven currencies like the Japanese yen or Swiss franc. This could weaken the USD.
Stronger Foreign Currencies: If other major currencies, such as the euro or Chinese yuan, exhibit stronger-than-expected growth or economic stability, it could boost their appeal against the USD.
Technical Indications: Traders closely monitor technical indicators like moving averages, support and resistance levels, and momentum indicators to assess the USD's trend and anticipate potential reversals. A bearish trend signal could prompt traders to sell.
Reasons to Buy the USD
Hawkish Fed Stance: If the Federal Reserve maintains a hawkish stance on interest rates, signalling a commitment to combating inflation through rate hikes, it could attract investors seeking higher yields. This could strengthen the USD.
Positive Economic Data: Strong economic data, such as higher-than-expected GDP growth, consumer spending, or employment figures, could reinforce confidence in the US economy's resilience. This could support the USD's value.
Reduced Global Risk Aversion: As global risk aversion subsides, investors may shift back to riskier assets, potentially boosting demand for the USD.
Weaker Foreign Currencies: Economic or political challenges in other major economies could weaken their currencies relative to the USD.
Technical Indications: Conversely, bullish technical indicators could signal an upward trend in the USD's value, prompting traders to buy.
The decision to sell or buy the USD hinges on a careful assessment of a multitude of factors, including the Federal Reserve's monetary policy stance, economic data releases, global risk sentiment, and the relative strength of other major currencies. Traders and investors should continuously monitor these factors and make informed decisions based on their risk tolerance and investment goals.
Paid-subscribers can view the Dollar Trade Plans here.
UK POUND
GBP/USD is Bullish: Price is starting above the monthly pivot point near 1.25. Downside retracements could potentially reach the monthly pivot S1 near 1.225 if it can break through the weekly pivot point near 1.255
United Kingdom Economic Situation and Outlook: The United Kingdom's economy is currently experiencing a period of slow growth and high inflation. The benchmark interest rate is at 5.25 percent, and GDP growth is expected to be 0.10 percent by the end of this quarter. Inflation is expected to be 4.20 percent by the end of this quarter, but it is projected to trend down to 2.70 percent in 2024 and 1.70 percent in 2025. Retail sales decreased 0.30 percent in October of 2023 over the previous month, and the unemployment rate remained unchanged at 4.20 percent in September.
Long-Term Direction of the UK Pound: The long-term direction of the UK pound will depend on a number of factors, including the trajectory of the UK economy, global economic conditions, and political developments. However, based on the current outlook for the UK economy, the pound is expected to remain relatively stable in the long term. Overall, the outlook for the UK pound is mixed. The pound is expected to remain relatively stable in the long term, but there are a number of risks that could weigh on the currency.
Market Sentiment: The UK Pound has been on an upward trend in recent weeks, gaining ground against the US Dollar and reaching its highest level since late August. This positive sentiment is being driven by expectations that the Bank of England will implement a more hawkish monetary policy stance to combat inflation.
Short-Term Direction of the UK Pound: Based on the current outlook, the UK Pound is likely to continue its upward trend in the short term. This could see the Pound break above the $1.30 mark in the coming weeks. However, it is important to note that the Pound is volatile and could be susceptible to pullbacks if economic data disappoints or if there are any unexpected changes in the Bank of England's monetary policy stance.
Upcoming Key Events:
December 5th: Construction PMI forecast to fall to 45.6, down from 46.9. A weaker-than-expected reading could weigh on the pound, as it would suggest that the UK construction sector is continuing to contract.
December 6th: BOE Governor Bailey speaks. His comments on the UK economy and monetary policy will be closely watched by investors, and could have a significant impact on the pound.
December 7th: Claimant Count Change and Average Earnings Index 3m/y released. These data points will provide insights into the state of the UK labour market. A stronger-than-expected Claimant Count Change or Average Earnings Index could boost the pound, as it would suggest that the UK economy is growing.
December 13th: GDP m/m released. This data point will provide an update on the UK economy's growth performance. A stronger-than-expected reading could boost the pound, while a weaker-than-expected reading could weigh on the currency.
December 14th: Monetary Policy Summary and MPC Official Bank Rate Votes released. These releases will provide insights into the Bank of England's monetary policy stance. If the Bank of England signals that it is likely to raise interest rates further, this could boost the pound. However, if the Bank of England signals that it is becoming more cautious about raising interest rates, this could weigh on the pound.
December 20th: CPI y/y released. This data point will provide an update on the UK's inflation rate. A higher-than-expected inflation rate could lead to expectations of more aggressive interest rate hikes from the Bank of England, which could boost the pound. However, a lower-than-expected inflation rate could raise concerns about a recession, which could weigh on the pound.
Reasons to Sell the GBP:
Mixed signals from the UK economy: The UK economy is currently experiencing a period of slow growth and high inflation. This could weigh on the GBP in the short term.
Uncertain monetary policy stance: The Bank of England's monetary policy stance is uncertain. If the Bank of England signals that it is more likely to cut rates, this could weigh on the GBP.
Political uncertainty: The UK is facing a number of political challenges, including Brexit and the war in Ukraine. This could increase uncertainty and weigh on the GBP.
Reasons to Buy the GBP:
Potential for a decline in inflation: Inflation is expected to trend down in the UK over the next two years. This could support the GBP in the long term.
Potential for an improvement in economic growth: Economic growth is expected to pick up in the UK in 2024 and 2025. This could support the GBP in the long term.
Resolution to political uncertainty: There is a possibility that some of the UK's political challenges will be resolved in the coming years. This could reduce uncertainty and support the GBP.
Overall, the decision of whether to sell or buy the GBP is a complex one that will depend on a number of factors, including the investor's risk tolerance and investment horizon.
Paid-subscribers can view the UK Pound Trade Plans here.
EURO
EUR/USD is Bullish: Price is starting above the monthly pivot point near 1.08. Downside retracements could potentially reach the monthly pivot S1 near 1.06 if it can break through the weekly pivot point near 1.092
Euro-Area Economic Situation and Outlook: The Euro-area economy is facing a number of challenges, including high inflation, rising interest rates, and a weakening growth outlook. However, there are also some positive signs, such as declining unemployment and improving retail sales.
Interest rates: The European Central Bank (ECB) has raised interest rates aggressively in recent months in an effort to combat inflation. Interest rates are now at 4.50 percent, and are expected to remain high in the near term.
GDP growth: The Euro-area economy contracted by 0.1 percent in the third quarter of 2023. Growth is expected to be sluggish in the near term, but is projected to pick up in 2024.
Inflation: Inflation in the Euro-area decreased to 2.40 percent in November from 2.90 percent in October of 2023. Inflation is expected to remain elevated in the near term, but is projected to trend down towards the ECB's target of 2 percent in 2024.
Retail sales: Retail sales in the Euro-area decreased by 0.30 percent in September of 2023. Retail sales are expected to rebound in the near term, but are projected to grow slowly in 2024.
Unemployment: The unemployment rate in the Euro-area remained unchanged at 6.50 percent in October. Unemployment is expected to edge up in the near term, but is projected to remain stable in 2024.
Long-Term Direction of the Euro: The long-term direction of the Euro will depend on a number of factors, including the path of the Euro-area economy, the ECB's monetary policy, and global economic conditions. However, based on the current outlook, the Euro is expected to remain relatively stable against the US dollar in the long term.
Market Sentiment: Market sentiment is currently bullish on the euro. This is due to a number of factors, including:
Cooling inflation: Inflation in the Eurozone is falling faster than expected, which has raised hopes that the ECB will be able to cut interest rates sooner than previously thought. This is positive for the euro, as it makes borrowing in the eurozone cheaper.
Dovish Fed: The US Federal Reserve has signalled that it is nearing the end of its interest rate hike cycle. This has also been positive for the euro, as it has reduced the relative attractiveness of the US dollar.
Short-Term Direction of the Euro: Based on the current sentiment, the euro is likely to continue to strengthen in the short term. However, there are a number of risks that could derail this rally, including:
A deterioration in the economic outlook: If the eurozone economy weakens, this could put downward pressure on the euro.
A hawkish surprise from the ECB: If the ECB takes a more hawkish stance than expected, this could also weigh on the euro.
Overall, the outlook for the euro is positive in the short term. However, investors should be aware of the risks involved and should monitor economic data and central bank commentary closely."
Upcoming Key Events:
December 4, 2023: ECB President Lagarde Speaks: Forecast: Previous speech supported the Euro. A hawkish tone from Lagarde could strengthen the Euro further.
December 13, 2023: Main Refinancing Rate: Forecast: Expected to remain at 2.00%. A surprise rate increase would be bullish for the Euro.
December 13, 2023: Monetary Policy Statement: Forecast: Expected to be dovish, reiterating the ECB's commitment to maintaining loose monetary policy. A more hawkish statement would be bullish for the Euro.
December 13, 2023: ECB Press Conference: Forecast: Lagarde's comments will be closely scrutinised for any signs of a shift in the ECB's dovish stance. Hawkish comments would be bullish for the Euro.
December 18, 2023: German ifo Business Climate: Forecast: Expected to improve slightly. A stronger-than-expected reading would be bullish for the Euro, as it would suggest that the German economy is weathering the energy crisis better than expected.
Reasons to Buy the EUR:
Cooling inflation: Inflation in the Eurozone is falling faster than expected, which has raised hopes that the ECB will be able to cut interest rates sooner than previously thought. This is positive for the euro, as it makes borrowing in the eurozone cheaper.
Dovish Fed: The US Federal Reserve has signalled that it is nearing the end of its interest rate hike cycle. This has also been positive for the euro, as it has reduced the relative attractiveness of the US dollar.
Improving German ifo Business Climate: The German ifo Business Climate index is expected to improve slightly in December. A stronger-than-expected reading would be bullish for the euro, as it would suggest that the German economy is weathering the energy crisis better than expected.
Reasons to Sell the EUR:
A deterioration in the economic outlook: If the eurozone economy weakens, this could put downward pressure on the euro.
A hawkish surprise from the ECB: If the ECB takes a more hawkish stance than expected, this could also weigh on the euro.
Global economic risks: The global economy is facing a number of risks, including a potential recession in the US and a slowdown in China. These risks could weigh on the euro.
Paid-subscribers can view the Euro Trade Plans here.
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
Funded account from th e5ers.com
Member of the eToro Popular Investors Program
Regular contributor to FXStreet.com analysis and education pages
Returned 27% in 2022 and 5.8% in 2023 H1
Forex focused
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Disclaimer
Past performance is not indicative of future results
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