Central Banks Gearing up for Jumbo Rate Hikes?

Trading changed drastically between different trading sessions on Monday. At first, we could clearly see a “risk off” sentiment in the Asian and European sessions as most assets, other than the US Dollar, saw very strong declines. The US stock market reached a new price low and crude oil declined by 3.75% before correcting.

Then, as the US trading session opened, the market saw a surge in risk-based assets such as the stock market, crude oil, and cryptocurrencies. But even with the price corrections, the assets still remain under pressure from jumbo rate hikes from the Federal Reserve and global Central Banks in general. However, traders should definitely take note of the correlation which has formed between the US Dollar and multiple asset categories.

Additionally, the Japanese inflation figures have now reached an 8-year-high and the Bank of Japan has not indicated any monetary policy alterations so far. The bank’s policy is still in the stimulation zone which has resulted in a chunk of the Yen’s value being bitten off. Investors are contemplating whether the BoJ will signal a change later this week.

GBP/USD

The price of the GBP/USD originally saw a strong price decline and was close to reaching new price lows. The current price low for the exchange is 1.1349, but the price has now formed a strong retracement and is trading close to the previous resistance levels formed on Friday. The price has also found strong resistance at the 150-day average price movement. If it is unable to form a bullish breakout, the price may potentially decline again.

GBP/USD 30-minute chart on September 20th

The price movement this week will largely depend on the market’s reaction to the Federal Reserve’s scheduled events as well as the Bank of England. The inflation data for both the US and UK has declined slightly but still remains at damaging levels. The US inflation levels fell from 8.5% to 8.3%, this is still much higher than the 2% target. Economists are also worried that the core inflation figures actually rose by 0.6%. The story in the UK is very similar.

So, the question now is; how will the Fed react? And how will it affect the price of the Dollar? Most investors believe that the regulator will act aggressively and increase the interest rate by either 75 or 100 basis points. Currently, the market is learning towards a 75 basis point hike. Therefore a 1% hike will have a stronger effect on the Dollar. Normally, “hawkish” monetary policies support the position of the USD against alternative assets.

In the UK, investors are concentrating on 2 events. Firstly, the Bank of England’s interest rate alteration. Secondly, the government’s presentation of the country’s emergency budget. Traders should keep in mind that both monetary and fiscal policy can affect the price of the GBP.

XAU/USD

The price of the instrument has formed a resistance level at $1,679.91 which has come into effect on 3 occasions over the past 3 days. The price is, of course, correlated with the US Dollar but is seeing a weaker bullish price movement when compared to US Dollar currency pairs and other commodities. So, traders are questioning whether the asset will see a delayed effect or another collapse.

The price of gold will continue to be influenced by the US Dollar, monetary policy, and the worsening economic conditions. If interest rates trigger a strong recession, the price can indeed find support as a safe haven asset, but to see strong bullish price movement in the longer term the asset would require a weakening Dollar.

The US Commodity Future Trading Commission (CFTC) has confirmed that the number of speculative positions has decreased but bears currently hold the lead.

XAU/USD 2-hour chart on September 20th

Quick Summary:

• Risk off sentiment witnessed during yesterday’s European and Asian sessions.
• Investors wait for clarity from the Fed and Bank of England.
• 75 bp hike is the main prediction for the Fed and 50 for BoE.
• Japanese inflation reaches 8 year high
• The US Trading Session saw a surge of buyers but the prices remain under pressure.