Volatility ahead as The Fed Grapple with Geopolitical Uncertainty
Market Analysis for Week Number 44 2023
Derbyshire, UK – October 29th, 2023: Hello and welcome to the market analysis report for Week 44 2023. Regular readers should note that the currency reports are no longer being pushed out over email, however, they will be regularly updated and remain free to read at this link https://jeepsontrading.substack.com/s/reports.
Study the Economic Events of Interest section for hints on how to trade the upcoming week. The focus event of the week will be the Fed’s rate decision on Wednesday where a hold is expected. The Bank of England also has a policy decision this week followed up by a potentially disappointing GDP report on Friday. It is likely that the dollar begins to weaken fundamentally as the outlook for growth in the US turns bearish although geopolitical uncertainty due to Israel’s war with Hamas may keep it bid for now.
Decisions to trade are made at your own monetary risk.
US dollar in an uptrend, supported by higher rates for longer and rising geopolitical risks
Macroeconomics: In October 2023, global economic uncertainty is on the rise due to conflicts like the Israel-Hamas and Ukraine wars, leading to increased demand for the US dollar as a safe-haven currency. While the US experienced strong GDP growth in Q3 2023, it also grappled with high inflation and stagnant retail sales. Q4 2023 is projected to bring economic slowdown, lower inflation, and rising unemployment. The value of the US dollar is on an uptrend due to expectations of higher interest rates from the Federal Reserve to combat inflation. The Fed's focus on controlling inflation may slow economic growth, but a recession seems unlikely, and some interest rate cuts are expected for 2024.
The full macro report for the US dollar includes a breakdown of monetary policy, economic indicators, market narratives and geopolitics. It can be read here.
CME Group 30-Day Fed Fund futures:
98% in favour of a hold at the November meeting remaining similar to last week.
79% in favour of a hold at the December meeting remaining similar to last week.
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.
In the previous month, the DXY has advanced this uptrend as economic indicators support the "Resilient US Economy" narrative.
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 a potential rate hold.
Euro in a downtrend, pressured by stronger dollar and growth pessimism
Macroeconomics: The war in Ukraine is having a significant impact on the euro-area economy. The geopolitical situation between Russia and the EU has deteriorated, and Russia has cut gas supplies to Europe. This has led to higher energy prices and disruptions to supply chains, which are putting upward pressure on inflation and weighing on the economy. The euro-area economy is slowing and at risk of recession. Inflation is falling, but this is due to a decline in demand, which is also applying bearish pressure to the economy. Unemployment is stable, but this is seen as indifferent to the economic outlook. The EUR/USD has gained and lost value in a contrarian correlation with US inflation rates. 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. In the previous month, the EUR/USD has been moving up as it retraces the downtrend as economic indicators pointed to a slowing US economy during Q3.
The full macro report for the Euro includes a breakdown of monetary policy, economic indicators, market narratives and geopolitics. It can be found here.
Technical: The EUR/USD has gained and lost value in a contrarian correlation with US 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.
In the previous month, the EUR/USD has been moving up as it retraces the downtrend as economic indicators pointed to a slowing US economy.
Intermarkets are not reflective of the recent EUR/USD uptrend and are more inline with the longer-term downtrend due to the higher-for-longer rates narrative:
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 a potential rate hold.
Paid-subscribers have access to the euro trade plans which can be found here.
Pound in a downtrend, pressured by stronger dollar and growth pessimism
Macroeconomics: The UK economy is facing a number of challenges, including the cost of living crisis, the war in Ukraine, and the risk of recession. These challenges are putting downward pressure on the value of the pound. The Bank of England is tightening monetary policy to bring inflation under control, but this is likely to slow economic growth. The US economy is relatively stronger than the UK economy, which is putting additional bearish pressure on the GBP/USD.
The full macro report for the Pound includes a breakdown of monetary policy, economic indicators, market narratives and geopolitics. It can be found here.
Technical: The GBP/USD has gained and lost value in a contrarian correlation with US inflation rates which peaked in late 2022. The GBP/USD is currently in a downtrend which 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.
In the previous month, the GBP/USD has reversed this downtrend to form an uptrend as soft US jobs data pushed back on the "Resilient US Economy" narrative.
Intermarkets are not reflective of the recent GBP/USD uptrend and are more inline with the longer-term downtrend due to the higher-for-longer rates narrative:
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 a potential rate hold.
Paid-subscribers have access to the pound sterling trade plans which can be found here.
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 31st
1100 (GMT) EA GDP: Lower than previous expected, bearish for EUR
1100 (GMT) EA CPI: Much lower than previous expected, indifferent for EUR
Wednesday, November 1st
1500 (GMT) US Manufacturing PMI: Same as previous expected, indifferent for USD
1500 (GMT) US JOLTS: Similar to previous expected, indifferent for USD
1900 (GMT) Fed Monetary Policy: Rate hold expected, indifferent for USD but monitor for sentiment shifts during the press conference
Thursday, November 2nd
1300 (GMT) BoE Monetary Policy: Rate hold expected, indifferent for GBP but monitor for sentiment shifts during the press conference / policy reports
Friday, November 3rd
0800 (GMT) UK GDP: Lower than previous expected, bearish for GBP
1100 (GMT) EA Unemployment: Similar to previous expected, indifferent for EUR
1330 (GMT) US NFP: Lower than previous expected, bearish for USD
1330 (GMT) US Unemployment: Similar to previous expected, indifferent for USD
1500 (GMT) US Services PMI: Similar to previous expected, indifferent for USD
Wednesday, November 8th
1100 (GMT) EA Retail Sales: Higher than previous expected, bullish for USD
Friday, November 10th
0800 (GMT) GB GDP: Contraction expected, bearish for GBP
1430 (GMT) US Michigan Consumer Sentiment Prel: Forecast tbc
Gavin Pearson
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Specialises in forex G7 currencies
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