Week Ahead: USD Unwinds as US Inflation Falls

Weekly Recap

This week, the big focus was back on the US Dollar with the US midterm elections and October CPI both on deck. USD had been on the back foot a little recently with traders anticipating a shift in fed sentiment in the near-future. With this context as the backdrop, this week’s USD events drew a huge amount of investor attention. 

First up we saw the midterm elections. USD fell initially on expectations of significant republican wins. However, as the initial voting results began to trickle in it soon became clear that the “red wave” many had forecasted had not happened. As of writing, the democrats only ended up giving away 7 seats, a far cry from the 40 seats Trump lost during his midterms. Despite the republicans looking likely to win the House and the Senate still in the balance, USD rallied as a republican landslide was avoided. 

Into the back end of the week then and focus shifted to the US CPI report. The Dollar fell sharply against the data which showed that inflation softened materially last month. Annual CPI was seen falling to 7.7% from the prior month’s 8.2%, below the 7.9% forecast. The reading has been interpreted as strengthening the likelihood of a smaller 50bps hike from the Fed in December, pulling USD lower for now. 

The volatility in the US Dollar was well reflected in equities markets this week. Despite some intra-week choppiness, equities eventually broke higher as the Dollar peeled off post-CPI on Thursday. The bullishness in indices was headlined by the DAX rallying 6% to its highest level since June. Across the board we saw strong gains into the end of the week potentially paving the way for the much anticipated Santa-rally as we head towards the end of the year. 

Crypto markets swung back into the spotlight this week with bitcoin plunging almost 30% lower, hitting its lowest levels in 48 months. The collapse was driven by fears of bankruptcy for crypto exchange. The company was reportedly due to be bought out by market leader Binance, in a deal which would have covered the firm’s reported $8 billion in liabilities. However, Binance pulled out of the deal at the last minute. With contagion fears across the crypto space, leading coins were seen shedding value across the week though a plunging USD fuelled some recovery on Thursday. 

Coming Up This Week

UK CPI 

The latest UK inflation data will be closely watched this week. With CPI having soared back to 40-year highs last month at 10.1%, traders will be looking to see if prices cooled last month or if they remained (or even surpassed) the prior month’s level. On the back of the largest BOE rate hike in 30 years last week, a further lift in inflation will be deeply troubling for UK investors, likely seeing GBP head firmly lower. However, if we see a fall back in inflation (as we saw in the US), this might raise hopes for a top in CPI, lifting UK sentiment somewhat. 

UK Budget 

The UK budget this week will be another key focal point for markets. Following the record turmoil we saw in UK markets in response to the controversial September 23rd mini budget, the UK government will be hoping for a more orderly response. New PM Rishi Sunak has promised to steady the UK’s economic ship but has warned that this will include uncomfortable methods such as tax hikes and spending cuts. 

US Retail Sales 

The latest US retail sales will then be the data focus into the back end of the week. With fears of a slowdown in the US, Wednesday’s data will be taken as a glimpse into the current economic performance given their use in calculating overall GDP. On the back of a softer inflation print, a lower figure should further drive USD down, bolstering the chances of a smaller hike in December. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  DAX

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The downside break of the 12430 level truly proved to be short-lived with price since reversing sharply higher from the level. The rally has seen the market breaking above the bearish trend line from YTD highs and above the 13798.75 level. While above here, the outlook remains bullish with 14803.51 the next level for bulls. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with the latest UK CPI and US retail sales 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.

Sources: Bloomberg, CNBC, Reuters

Original article provided by Trading Writers

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