The Week Ahead – BoE to contain gilt crash and save Sterling

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The Week Ahead - BoE to contain gilt crash and save Sterling

GBPUSD slides amid gilts firesale

Sterling drifts lower amid a liquidity crunch in the UK's gilt market. In an attempt to prevent the market's collapse, the Bank of England has been forced to step in to buy back bonds owned by the country’s major pension funds. The systemic risk is yet to dissipate and investors would rather cut their pound exposure. Reduced liquidity and headline catalysts mean that extreme volatility could be expected ahead. Governor Andrew Bailey has called for an end to the emergency support. But traders hope the central bank will extend the lifeline or another market rout may push the pound below 1.0500. 1.1700 is the first resistance.

USDCAD rises on safe-haven demand

The Canadian dollar slips as markets' pessimism takes a toll on risk-sensitive currencies. Canada’s falling unemployment rate would encourage the BoC to ramp up interest rate increases. Another hot inflation reading this week may offer some support to the loonie. However, Canada is a major producer of oil, and its currency highly depends on the global economic outlook. Worries of a widespread recession engineered by central banks would dampen the prospect of a swift recovery. The risk-off environment would continue to favour the safe-haven greenback which is heading towards 1.4200. 1.3500 is a fresh support.

XAUUSD weakens as cash yield soars

Bullion struggles as the US dollar hits a 20-year high. The precious metal has definitely failed its traditional role as an inflation hedge which ironically has been fulfilled by cash these days. Investors have rotated into cash to capture soaring interest rates. As US inflation remained near 40-year highs, there is no sign of a slowdown in the tightening. Calling a top in the dollar would be tantamount to standing in front of a train. Repeated statements from Fed officials to maintain the course of action would keep casting a cloud over anything commodity-related. The bounce off 1615 might be short-lived and 1730 is the closest resistance.

NAS 100 slips as uncertainties compound

The Nasdaq 100 stays under pressure as the Fed would not yield. In a textbook 'buy the rumour, sell the news’ equity markets clawed back some losses following higher-than-expected US CPI. Another 75bp rate hike seems to be a done deal. The negativity already had been priced in, triggering short-covering instead. More volatility could be expected ahead as the market’s grim fundamentals remain unchanged. The IMF has warned that compounding pressures from inflation, geopolitical instability and high interest rates could cause a global recession. Uncertainties may drive the index to 10000 and 11700 is the first resistance.

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