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All eyes on Westminster as we wait to see if Hunt will quell market concerns on the UK's fiscal outlook  As FX trading gets underway in Asia late on Sunday, the dollar has slipped yet again, which is a continuation of the move from last week, when the dollar fell 3.5% on a broad-basis and US stocks surged 6%. The market mood appears upbeat as we start another week, as expectations of a Fed pivot, China dropping its zero covid policy and the Russian withdrawal from the strategically important Ukranian city of Kherson all helping to boost sentiment. The key driver for risk sentiment remains weaker US inflation data, which focussed minds on the longed-for pivot from the Fed to smaller rate increases. This narrative was given a boost on Friday when the University of Michigan consumer confidence indicator for the US came in lower than expected across all measures for November. Right now, weaker data is good news for the market as a slowing economy also builds the case for a Fed pivot. As we start a new week, the UK Chancellor’s Autumn Statement (and UK Budget version 2) is scheduled for Thursday, UK inflation is released, along with a… Read More »A weak start for the dollar as we wait for key economic releases and UK budget

GBPUSD awaits budget catalyst The pound edges higher as Britain may look to restore markets’ confidence with a new budget. Sterling has recouped losses from the September budget firesale. Traders are awaiting a new announcement while riding on the dollar’s softness. Heightened volatility could be expected this week as British finance minister Jeremy Hunt presents his plan to fill a £50 billion fiscal hole. After the market sanctioned Mr Kwarteng’s unfunded tax cuts, fiscal discipline with a mix of public spending cuts and tax rises would alleviate worries about Britain’s finances. 1.2300 is the next hurdle as the recovery goes on. 1.1150 is the closest support. USDJPY tumbles on lower inflation The Japanese yen soared over the prospect of a narrowing interest differential with the US counterpart. Following months of parabolic ride, a weaker US CPI finally gave traders an excuse to exit an overcrowded trade. The market has been watching Japan’s falling foreign reserves and pondering whether Tokyo would commit more of its war chest to prop up its currency. But now a greater fall than the one from Japanese authorities’ intervention indicates that prolonged weakness has released the reversal tension, making the yen the main beneficiary of the… Read More »Are we there yet? Falling inflation pops up risk assets

As the Fed tightens monetary policy, fears of overdoing it are rising. However, the US central bank is far from overtightening. It increases the odds of stagflation and a bullish time for gold. As central banks all over the world are tightening their monetary policies, more and more analysts, including Paul Krugman, are afraid that Powell and his colleagues are hiking interest rates too aggressively, risking going too far. They believe that inflation will soon decline, so the Fed is braking too hard. Well, as always, there is some truth in these opinions. The inflation rate is likely to decrease as the growth in the money supply decelerates and even declines below the pre-pandemic rates (see the chart below). And monetary policy operates with a long lag, which means that the effects of the hawkish Fed’s actions haven’t been fully felt by the economy. Hence, the central bankers could easily overdo. After all, they are so incompetent that overreacting to inflation after a long period of underreactin wouldn’t be surprising at all. However, even my students are aware of lags in monetary policy, so there is a chance that someone from the army of PhDs working for the Fed has… Read More »Stagflation is coming, and Gold’s gonna love it

We have just seen the latest US inflation update in the form of the Consumer Price Index (CPI). The consensus expectation was for an increase of 7.9% year-on-year for Headline CPI. To everyone’s astonishment it came in lower at +7.7%. Core CPI, which excludes food and energy, also came in below expectations at +6.3% year-on-year, against a forecast of +6.6%. In addition, the month-on-month data showed signs of slowing, which was a relief given recent gains. This was exceptionally good news for investors as inflation, with just one exception this summer, has come in above expectations since the beginning of this year. Now it looks as if we can confirm that Headline CPI peaked, for this cycle, back in July at 9.1%. Bear in mind, the US Federal Reserve was very late in its response to surging inflation, raising rates by just 25 basis points in March this year. At that time inflation was running at 7.9%, up from 1.7% 12 twelve months previously. Since then, the Fed has raised rates by an additional 350 basis points, taking the upper range of its key Fed Funds rate to 4.0%, its highest level since December 2007. In addition, the futures market… Read More »Inflation comes in below expectations

Today is Veteran’s Day – and I (we) salute all of our men and women who have served this great country. As many of you know – my wife and I are very involved with the Headstrong Project – A national-facing mental health treatment practice of choice for our nation’s military, veterans and associated family members.  Operating as a non- profit we offer stigma free, bureaucracy free and cost free evidenced based, trauma focused treatment.  Currently we are treating more than 1500 veterans/month in over 44 states across the nation. Now – try the Italian Wedding Soup for a Thanksgiving first course. Yesterday I said that it was going to be all about the economic data….(now that we have the election behind us) and that data point was going to be the latest CPI report……there was speculation that it was going to come in with a 7 handle (I was in the 8 handle camp)…and that if it did, then we would see markets rally. We would see some analysts and members of the administration tell us how great of a job they are doing….that the Inflation Reduction Act was working!  How great is that?  Well, the CPI did surprise… Read More »CPI weaker, stocks explode higher and salute a veteran today

United States: October prices give Fed ability to slow pace of rate hikes Relief in October inflation gives the FOMC the ability to slow the pace of rate hikes ahead. But make no mistake, the Fed’s job of taming inflation remains far from over. We still expect it to raise the federal funds rate 50 bps at its next policy meeting in December, and now look for the policy rate to reach a peak of 5.25% by March, 25 bps more than we previously forecast, due to near-term resilience in spending and labor market strength. Next week: Retail Sales (Wed), Industrial Prod. (Wed), Housing Starts/Existing Home Sales (Thu/Fri). International: Mixed inflation trends from Latin America This week saw some mixed inflation trends from Latin America. Mexico’s October CPI slowed to 8.41% year-over-year and energy prices slowed along with fruit and vegetables prices. However, the core CPI quickened further, and as a result, we fully expect the Bank of Mexico to raise its policy rate by 75 bps points this week. In Brazil, October inflation slowed further to 6.36% year-over-year, with lower taxes and gasoline prices as key drivers of the deceleration in recent months. Next week: Japan GDP (Tue), China… Read More »Weekly economic and financial commentary

The EURUSD driving average is located at 1.0805. Recall past writings. The target on a break of the 5 year average at 1.1400's was 1.0800 but EUR/USD decided to travel an additional 800 pips to 0.9500 bottoms. DXY 95 break at the 5 year average targeted 103.00's and decided to travel an additional 1100 pips to 114.00's. The EUR/USD drop to 0.9500's and DXY rise to 114.00's was unaccounted by 5 and 50 year averages or 600 monthly averages. Where was the true average? 60, 80 year monthly averages. In the life of trading and markets, we may never see again a market price so over and undervalued to trade at 50 year averages, especially from normal currencies such as EUR/USD and DXY. Only cross pairs and JPY contains ability to trade to such extraordinary depths yet remains rare. For the first time since March 22 when EUR/USD broke below 1.0800, EURUSD at 1.0223 normalized to account for a respectable average but only for the short term. Longer term, EUR/USD remains deeply oversold from target averages at 1.1100's, 1.1300's and 1.1600's. Next targets longer term are found at 1.0592, 1.0798 and 1.0967 upon a break at 1.0805. Not only is… Read More »Currency market: FX next week and EURUSD long term

The central bank 'pivot' narrative got a boost from US CPI inflation surprising on the downside, falling back to 7.7% in October amid easing core inflation pressures. Terminal rate expectations declined and markets are now pricing only a 50bp Fed hike in December, challenging our call of a 75bp increase. Equity markets rallied on the prospect of less Fed tightening and the roller-coaster moves in yields continued, with spread tightening also seen in European rates. Geopolitical headlines of Russia withdrawing from the city of Kherson added to the volatility, as did comments from a range of ECB members suggesting that the recession view is gaining ground, although in contrast to the Fed, with no slackening of the hiking pace yet in sight. The rally in Chinese equities got a boost from an easing of quarantine rules for travellers, but new infections have climbed higher especially in the manufacturing hub of Guangzhou. Commodity prices, including oil, rose more than 1% on the back of broad USD weakening. We remain sceptical that a turnaround in the strict zero-Covid stance is coming anytime soon, and continue to think EUR/USD will decline back below parity despite the most recent uptick. As votes in the… Read More »Weekly Focus: Geopolitics takes centre stage

China retail sales (Oct) – 15/11 – last week’s China trade numbers for October showed that imports and exports fell into negative territory, speaking to the fact that the Chinese economy has continued to underperform. In August consumer spending rebounded strongly, rising 5.4%, however this improvement wasn’t sustained into September, as sales fell back to 2.5%. This suggests that the August pickup was primarily down to pent-up demand being released. China’s zero-covid policy will continue to drive the numbers here, and while we’ve heard that the Chinese government is wargaming some re-opening scenarios, prompting some optimism that it could happen soon, this comes across as wishful thinking. With the weather starting to get colder and heading into winter infections can only go one way. That fact will make any sort of reopening impossible unless China changes tack. This seems unlikely; therefore, we can expect to see many months of poor retail sales numbers as we head into 2023. October retail sales are likely to slow from the numbers we saw in September with a rise of 0.7% expected. Industrial production is expected to slow from 6.3% to 5.2%.                     UK Wages/Unemployment… Read More »The Week Ahead: UK budget, UK CPI, China retail sales, Vodafone, Burberry and Walmart results

Gold keeps firm bullish tone on Friday and extends strong rally from $1616 (Nov 3) low, trading at the highest levels since mid-August. The yellow metal’s price accelerated sharply higher on talks that the Fed may ease its hawkish policy, with the notion being boosted by US CPI data which showed that inflation cooled further in October, adding to hopes that the US central bank could start tempering its aggressive stance in raising interest rates. Fresh weakness of the dollar also contributed in boosting gold’s appeal. Daily chart studies are bullish but overbought, suggesting that bulls may pause for consolidation, with limited dips, as gold is on track to end the second week in green and also for the biggest weekly advance in over 2 years. This adds to the bullish signals on formation of reversal pattern on weekly chart. Bulls need to clear key barriers at $1789/$/$1803 zone (Fibo 38.2% of $2070/$1616 / psychological / 200DMA) to confirm reversal signal and open way for stronger recovery. Today’s low offers initial support at $1747, followed by former top at $1729 (Oct 4) and broken Fibo 23.6%  ($1722). Res: 1756; 1782; 1788; 1800 Sup: 1747; 1729; 1722; 1711