Week Ahead: USD’s post-CPI slump sets up possible risk on rally

Weekly Recap

Most assets have made a corrective move instead of making any fresh directional push this week. The big driver behind this dynamic has been the movement in the US Dollar. USD was firmer initially on the week as traders braced for the release of September CPI on Thursday, but that wasn’t how things ended up.

With Wednesday’s PPI release coming in above forecasts, the stage was set for a bullish report. CPI did indeed come in above expectations at 8.2% annually, vs 8.1% expected, showing inflation having hit its highest level since 1982. However, despite the upside beat, the USD was seen weakening on the back of the release. This reaction likely reflects the extent to which hawkish Fed expectations are already so well developed, meaning it would have taken a larger surprise to drive fresh USD buying. 

With the USD seen falling into the end of the week, risk markets enjoyed a healthy rebound. Across the board, we saw equities, commodities and risk FX all rebounding. 

The backdrop of higher interest rates is still a restrictive factor, however, and with central banks showing little sign of slowing down in the near-term, risk sentiment looks vulnerable to further deterioration as we move closer to 2023.

One such threat is the potential for fresh lockdowns in China. Risk markets were seen tumbling at the start of the week in response to news of a surge in covid cases in China, raising the risks of new measures being implemented to restrict movement. The return of lockdowns earlier this year had a sizeable negative impact on risk markets and traders are wary of similar scenes playing out in coming months. 

In FX, away from the US Dollar, the most notable story is that of the BOE expanding the scope of its bond-buying program. The central bank adjusted its operations on Monday and Tuesday, increasing the daily limit for purchases from £5 billion to £10 billion along with allowing for index-linked gilts to be included in purchases. 

There was some speculation (and confusion) around whether the bank would stick to the October 14th deadline. The bank ultimately declared it would cease purchases as planned, which could force a U-turn from Liz Truss’ government on its fiscal plans. Traders now look to see what will happen in UK markets next week without BOE support in place.

Coming Up This Week

UK CPI 

Ahead of the keenly anticipated November BOE meeting, traders will focus firmly on the latest UK inflation data this week. Last time around CPI was seen cooling to 9.9% from 10.1% prior. Traders will now be looking to see whether this reduction continued last month or if a fresh spike was seen. The data will no doubt guide GBP positioning ahead of the BOE meeting and so we can expect plenty of GBP volatility, particularly if we see any surprises/sizeable shifts. 

Canadian CPI 

Following on from UK data, traders will then look to the latest Canadian CPI release. With the BOC having signalled that it will continue with tightening, but also seemingly nearing end the end of its planned operations, this reading will draw plenty of attention. If CPI is seen to have remained high last month, this will likely raise the chances of the BOC ultimately extending its tightening operations, driving CAD higher. However, a weaker reading will endorse expectations for a much smaller hike next time around, weighing on CAD. 

Australian labour Data

On the back of the RBA surprising markets with a smaller-than-expected rate hike last month, the latest labour data will be closely scrutinized. A strong labour market had been the backbone of the Aussie economy up to and through most of the pandemic. However, if the unemployment rate is seen creeping higher this will likely unseat AUD further, suggesting that the RBA is struggling to handle the inflation environment correctly. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  NASDAQ

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Depending on how we close out the week, the NASDAQ might put in a bullish weekly pin bar through the yearly lows here, suggesting a potential double bottom in play. If we do see a bullish close, this will put the focus on a move higher in the coming weeks with bulls looking to target the 12678.45 level next. Should the price slip back below the level, however, the bear channel looks set to continue down toward the 9735.47 level next. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with the latest UK and Canadian CPI and Aussie labour data 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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