Week Ahead: Central Banks Tighten Further Though a Shift is Sensed

Weekly Recap

Another week comes to a close in financial markets and once again there’s plenty to recap and digest ahead of the action starting again on Monday. We’ve had a slew of central bank meetings this week with the BOC, the ECB and the BOJ all giving their October rates decisions along with plenty of major names reporting in the US earnings season. 

Recapping the central bank action first then, the BOC was seen hiking rates by 50bps on Wednesday, under the 75bps hike forecast. Governor Macklem cited his concerns over the economy and the impact of tightening as the reason for the smaller hike. CAD was seen lower on the back of the meeting with traders now judging the BOC to only have a further 25bps worth of tightening left to go before they pause. 

Following on, we saw the ECB hiking by 75bps as expected on Thursday. However, the EUR was lower on the back of the meeting as traders digested comments from ECB chief Lagarde who noted that while further hikes were likely necessary, the ECB had made substantial progress in its tightening operations. EUR was lower in response as traders took this as a sign that the ECB will opt for smaller hikes going forward. 

The BOJ was then seen sticking to its easing stance on Friday. Even in the wake of huge interventions recently and ongoing declines in JPY, the BOJ reaffirmed its commitment to keeping rates ultra-loose in order to support the economy, putting further pressure on JPY. 

It was a choppy week for stock markets with equities losing ground into the end of the week as the US Dollar rallied in response to better-than-expected GDP figures. A stronger Dollar weighed on risk sentiment along with some big names reporting earnings misses this week. Google, Microsoft. Amazon and Spotify were among the big names that posted worse-than-expected results. While Apple beat earnings forecasts, the stock still fell as the company cited concerns over the Q4 outlook and noted a sharp fall in iPhone sales. 

Coming Up This Week

  • November BOE Meeting

On the back of the market turmoil seen in response to the September mini-budget, and in light of the political shift in the UK, the November BOE meeting is drawing a huge amount of attention. Traders had been anticipating a 75bps hike, or bigger, from the BOE. However, with markets having stabilized somewhat since Liz Truss resigned and Rishi Sunak took over, market pricing is now suggesting that rate hike expectations have been scaled back. This creates clear upside risks going into the event given that inflation remains at record, 40-year highs, and is the BOE’s chief priority. 

  • November FOMC 

With the idea of a so-called ‘Fed pivot’ having taken hold again recently, leading to the correction we’ve seen in USD, the FOMC has the potential to create huge volatility. If the Fed pushes ahead with the expected 75bps hike and reaffirms its commitment to pressing on with tightening, downplaying pivot risks, USD has room to explode higher. Similarly, if there is any sense that the Fed is softening its outlook and might look to slow down tightening in the near-term, the USD unwind will accelerate quickly. 

  • October US labour reports 

On the back of the FOMC, Friday’s labour reports will likely lose some impact unless we see any material surprises. However, as the reports still give a vital insight into the health of the US economy they will still be closely watched. The reports will be especially vital if the fed is seen scaling back its hawkishness at the FOMC this week. Any idea of a potential slowing of rate hikes will put the data in sharp focus ahead of the final FOMC of the year in December. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  EURUSD

EURUSD is currently sitting at the bottom of the bearish channel which has framed price action over the last few years. With the channel low underpinning the market for now, chances of a recovery higher are growing. The key level for bulls is the 1.0459 area, a break of which opens the way for a much higher run towards the 1.0793 level above. To the downside, failure at the channel lows opens the way for a push down to .9100 next. 

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Economic Calendar

Plenty to keep an eye on this week data-wise, with the November BOE and FOMC meetings and US labour reports among other key events and releases. See the calendar below for the full schedule. 

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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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