This week’s main economic events will be the Eurozone’s inflation data and the US Gross Domestic Product. The currency market experienced one of the most volatile weeks due to the week’s inflation data and central bank decisions. The main trends from the week before were the bearish stock market and a bullish US Dollar. The US Dollar Index rose from 105.00 to 105.60, gaining momentum after the Federal Reserve interest rate decisions and press conference. The Federal Reserve did not increase interest rates but was deemed more hawkish than other central banks.
The 10-year US Bond Yields and the US Dollar are a well-known correlation. Bond yields have significantly risen over the past week and also this morning. The 10-year Bond Yields rose 0.022% this morning, from 4.3110% to 4.4620%. One of the reasons for the rise in bond yields is interest rates and the instability within Congress regarding government debt. If escalated, this can create a low-risk appetite, supporting the Dollar and pressuring riskier assets. The stock market this morning is showing mixed results. In the Asian market, the Nikkei225 is rising, while the Hang Seng is falling 1.60%. European stocks are again slightly lower this morning.
EUR/USD - EU Inflation in Focus Along with US GDP
The Euro US Dollar exchange rate is more or less unchanged and continues to move within the price range seen on Thursday-Friday. The price range is well established, so traders should be cautious of corrections back to the range after potential breakouts. This week's exchange price will largely depend on three economic releases: European inflation data, the US PCE Core Price Index and the US Gross Domestic Product.
German inflation will be released on Thursday alongside the Spanish inflation rate. Analysts expect German inflation every month to remain stable at 0.3%. However, Spain, the fourth-largest economy in Europe, is expected to see inflation rise from 2.6% to 3.5%. The Euro may see stronger price movement if the two inflation releases read higher than expectations. Analysts expect Spanish inflation to rise due to high tourism, high commodity prices and a resilient economy. On Friday, the Spanish National Statistics department said that the Gross Domestic Product grew 0.6% in January-March from the preceding quarter and 0.5% in April-June, above its original estimates of 0.5% and 0.4%, respectively. However, fundamental analysts advise that German, French and Spanish inflation will be higher than expected to see a stronger Euro.
The CM Exchange FedWatch tool indicates that 21% of economists believe the Fed will increase interest rates in November. This is also likely to rise if the Federal Open Market Committee members continue their hawkish forward guidance. FOMC Member Mrs. Daly was the latest member to indicate another rate hike is likely. This is also why this Friday’s PCE Price Index is essential. The PCE Price Index measures inflation amongst the most bought goods and services. Analysts expect the PCE Price Index to read 0.2% as it has over the past two months. However, some analysts are advising this is unlikely, considering rising inflation. If the data is higher than 0.2%, the Dollar can potentially increase in value.
GBP/USD - Bearish Wave Pattern
The Pound, alongside the Swiss Franc, was one of the weakest currencies during the previous week. Both currencies were negatively affected by the Central Bank (Bank of England and Swiss National Bank) unexpectedly keeping interest rates unchanged. Specifically, the Bank of England was believed to raise interest rates but decided to pause, considering inflation declined over the past month. The UK is also at the highest risk of a recession, so the BoE was also tempted to hold interest rates. The UK was one of the few countries to experience declining inflation this month.
Five members of the central bank’s Monetary Policy Committee were in favour of maintaining the previous value, and four were against it. The follow-up statement notes that the regulator expects a further decline in inflationary pressure, which a correction in energy and food prices will support. The UK will release no significant economic data this week. Therefore, traders will primarily concentrate on the price and US economic releases.
The GBP/USD is forming a descending triangle pattern, which is more bearish than the EUR/USD and USD/JPY. The Pound this morning experienced mixed price movement during this morning’s session. The Pound is increasing in value against the Swiss Franc and Euro but is still struggling against the Dollar. The Dollar is slightly higher this morning against all currencies. The exchange rate has been forming a support level at 1.22320 but is now experiencing any major bullish impulse waves. If the price breaks below this level, the exchange rate will likely witness more bearish signals from crossovers and the VWAP.
Summary:
- The US Dollar Index is on the rise alongside US Treasury Yields. The Pound and the Swiss Franc were the worst-performing currencies of the week.
- The GBP/USD is forming a descending triangle pattern, which is more bearish than the EUR/USD and USD/JPY. If the exchange rate drops below the support level, sell signals will materialise.
- One of the reasons for the rise in bond yields is interest rates and the instability within Congress regarding government debt. Investors will be monitoring if the situation escalates.
- The CM Exchange FedWatch tool indicates that 21% of economists believe the Fed will increase interest rates in November. US traders will be monitoring the US GDP data and PCE Price Index.
