Volatility on Tuesday is likely to increase as investors return to the trading floor after the US bank holiday. No major economic news was made public in the past 24 hours, and none are set for today. However, investors have been following the Secretary of State’s visit to China. According to President Biden and President Xi, the talks were positive, and the two countries will schedule further talks on bilateral relations. The news is deemed to be positive for both economies and regional equities. However, this has yet to be witnessed in the price action.
The US Dollar and the Dollar Index appreciated throughout Monday, but the bullish price movement was relatively weak. The price action of major currency pairs formed a slight retracement in favour of the Dollar but maintained higher highs and lows. Analysts can also see sell orders remain relatively scarce when monitoring order flow charts. The US Dollar index this morning is slightly lower, trading at 102.50. The best-performing currency over the past 24 hours is the Euro, which is increasing in value against all major currencies.
GBP/USD - Investors Eye Inflation Data
The exchange rate declined by 0.30% during yesterday’s trading session and is also 0.16% lower this morning. However, the retracement is significantly weaker than the previous bullish impulse wave, which measures more than 1.15%. Traders looking to speculate the exchange rate will decline will be looking for the price to fall below 1.27660 as a very minimum. As mentioned in yesterday’s market analysis, the price of the Pound is speculated to be overbought. However, this is only likely if inflation remains high.
Investors will concentrate on the outcome of four events to determine the exchange rate’s intrinsic value. For the Pound, investors will focus on the UK’s inflation date, the Bank of England’s rate decision and the monetary policy committee’s votes. Analysts expect the UK inflation rate to read 8.4%, more than double the US inflation rate. If the inflation data is higher than expected, the Bank of England may consider a larger hike or hike at the same pace but for longer. Most economists believe the Bank of England will hike 25 basis points. However, some economists believe the terminal rate may rise to 6.00%.
Investors will also monitor how the nine monetary policy committee members vote to keep interest rates unchanged. Previously, the committee was two members taking a dovish stance. If all nine members vote for a hike, it would again be deemed positive for the Pound. According to the latest reports, UK mortgage costs could rise on average by £2,900 over the next 12 months. However, as mentioned yesterday, BlackRock continues to believe the Bank of England will not be able to raise rates as high as 6%.
DAX Slips Amid Policy Uncertainty
The DAX declines during this morning’s Asian session, and investors continue to sell as the European market opens. Investors had mixed feelings about the DAX and the European Central Bank’s position on the monetary policy. Some investors view the lowering of the hike from 0.50% to 0.25% as positive for the DAX. In addition, some investors also believe the ECB will not return to 50 basis points or continue to increase as inflation within the region significantly declines. However, other investors view the hike as negative as the cost of debt will rise within the area.
The DAX has declined by just over 2% since renewing its all-time highs, and is now re-entering the previous price range. The corrective wave is managing to form a “lower low” but is yet to break out of the €16,078 level. This level is a strong psychological level for traders, as it previously has been marked as a support level. On the lower timeframes, technical indicators, including the Volume Weighted Average Price, signal a downward price movement.
Investors will also be monitoring the Federal Reserve Chairmen’s two-day testimony. The Chairmen previously indicated a minimum of two rate hikes this year, and investors will be looking for signals that these hikes are likely. The global stock market can be under pressure if the chairman sounds relatively hawkish. This includes the DAX and other regional EU indices.
Summary:
- According to President Biden and President Xi, the two countries will schedule further talks on bilateral relations.
- The US Dollar and the Dollar Index appreciated throughout Monday, but the bullish price movement was relatively weak.
- For the Pound, investors will focus on the UK’s inflation date, the Bank of England’s rate decision, and the monetary policy committee’s votes.
- The DAX declines due to fundamental and technical reasons. Investors monitor if further hikes and indications of hikes will dampen sentiment towards the stock market globally.
