The Week Ahead 12th – 16th September: jumbo-sized rate hikes

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The Week Ahead 12th - 16th September: jumbo-sized rate hikes

Welcome to the Key to Markets preview of the Week Ahead.

Currency Pair Performance

5-day performance as of September 8th, 2022. 09:30 GMT.

10 Big Stories Last Week

In case you missed it...

Liz Truss became Prime Minister. Helping with energy bills is top of the agenda as she announced a cap on energy prices at £2500, funded by colossal government borrowing. Yields on the 10-year gilt shot higher.

ECB hiked rates by 75 basis points. The central bank agreed on a jumbo-sized rate hike amid its battle against record-high inflation. This move followed a 50 basis point hike in July.

GBP/USD fell to a 37-year low. A combination of USD strength and the bleak UK economic outlook pulled the pair to a low of 1.1407, a level last seen in 1985.

cut Nord Stream 1 gas flow.  cut gas flow along the pipeline to Europe indefinitely in response to the G7 agreeing to a price cap on n oil and threatened to cut oil supplies as well.

Apple launched the iPhone 14. At the "Far Out" event, the tech giant also launched a new watch, AirPods Pro, and other products. The latest releases come at a challenging time for the consumer.

USD hit a 20-year high. The USD ripped higher, reaching a fresh 2-decade high, as hawkish Federal Reserve bets ramped up. Central bank divergence boosted USD/JPY to up near 145.

China's trade surplus shrank. The trade balance was $79.39 billion in August, down from $101.26 billion in July, amid COVID lockdowns and sluggish manufacturing. USD/CNH nears 7.00

OPEC+ cut oil production. The oil cartel cuts oil output for October by 100k barrels, reversing September's 100k increase. Separately oil dropped to an 8-month low on demand concerns.

BoC hiked rates by 75 basis points. The move was expected and took the benchmark rate to 3.25%, a 14-year high. The bank signalled that more rate hikes were needed. USD/CAD fell from an 8-week high.

India takes over the UK as the world's 5th largest economy. According to IMF projections, India, the world's fastest-growing major economy, is now behind the US, China, Japan, and Germany.

Chart of the Week

Markets are losing confidence in the UK. Investors are dumping the pound along with UK government debt amid the gloomy outlook for the economy.

GBP/USD dropped to its lowest level in 37 years, and UK Gilt yields surged as Liz Truss became Prime Minister.

Truss's plan to cap household energy bills is being met by a sharp selloff in sterling and the bond market as investors focus on the extra borrowing expected under Liz Truss.

Indeed Kwasi Kwarteng, the newly appointed Chancellor of the Exchequer, said that borrowing would go up in the near term.

Yields on the ten year Gilt rose to its highest level since 2011.

5 Things to Watch This Week

1. BoE rate decision

The BoE hiked rates by 50 basis points, its largest rate hike in 27 years, in August, taking the base rate to 1.75%. Since the last meeting, inflation in the UK hit double digits, and PMI data see the UK on the brink of recession. However, will Truss' energy support programme bring a change of outlook from the BoE, given that it could slow inflation? The BoE is expected to vote in favour of another 50-basis point hike. GBP/USD traded at a 37-year low last week; can a supersized hike and government fiscal support improve sterling's prospects?

2. US CPI

US consumer price inflation cooled to 8.5% YoY in July, thanks to lower petrol prices, but remained close to multi-decade highs. There have been tentative signs in the economy that inflation could be cooling, as seen in the Fed's Beige Book. Crude oil prices also fell 9% across the month. Expectations are for CPI to fall -0.1% MoM in August after rising 0% change in July. Cooling inflation could help ease bets of aggressive Fed hikes.

3. US retail sales

US retail sales rose just 0.8% MoM in July, stagnating as inflation dented demand and fuel buying dropped. Rising prices are forcing more households to spend more cautiously. With inflation still elevated and interest rates rising, caution among consumers could continue, although the strong jobs market could help sentiment.

4. UK GDP

The UK economy contracted -0.1% MoM in June and could contract further in July. As energy bills rise and disposable incomes fall, add an untimely labour market crunch, a tumbling pound, and the UK economy is on its knees. According to the latest PMI data, Britain is entering a recession. All eyes will be on Liz Truss and her plans to help support the dire state of the economy.

5. China retail sales

Concerns over the health of the Chinese economy have grown in recent weeks as data disappoints and COVID lockdown restrictions are again on the rise. This week Chinese retail sales will provide insight into the strength of the Chinese consumer, with sales expected to rise 4% YoY in August after missing forecasts in July.

Economic Calendar Highlights

Source: Economic Calendar – FXStreet

Technical Analysis:

TA of the major asset classes (Forex – Commodities – Indices...).

EUR/USD (H4 Candlestick Chart)

EUR/USD is trading inside a parallel channel between 0.991 and 1.008. The market broke above a bearish trend line and it is heading toward the higher end of the channel (1.008). More sellers could re-enter the daily downtrend around the 1.008 mark to push the price down toward 0.991. A move above 1.008 could lead to a move higher toward 1.019.

GBP/USD (H4 Candlestick Chart)

The British Pound is also inside a range pattern. The market is moving toward the higher end of this range. More sellers might rejoin the downtrend near the area of confluence made by the bearish trend line and the strong resistance around the 1.159 mark. This could lead to a move lower toward the bottom of the channel (1.144). However, if the price breaks above the confluence area, we could see the pound testing 1.176.

USD/JPY (H4 Candlestick Chart)

USD/JPY is still in an uptrend where higher lows and highs have been posted. The market is about to post a correction toward the area of confluence made of the bullish trend line, 50 % Fibonacci retracement level and the strong support 142.6. More buyers could rejoin the uptrend near this area and push the price up toward 147.4. A close below 142.6 could cause a move back towards 140.1.

AUD/USD (H4 Candlestick Chart)

The Aussie posted a corrective move to the bearish trend line where more sellers pushed the price back lower. The price is getting ready to test the next support level around the 0.663 level, which is the end of the CD wave using the ABCD pattern. However, if the market moves back above 0.677, it could prompt a reversal and a move higher toward 0.683.

USD/CAD (H4 Candlestick Chart)

Loonie is in a clear upward movement where higher highs and lows have been posted. The market entered inside a parallel channel where the price found bulls near its lower end. The price is now heading toward the 1.320 mark after posting higher lows. Failing to sustain above the 1.310 mark could lead to a reversal and a move lower toward 1.306.

Gold (H4 Candlestick Chart)

Gold is moving to the downside by posting lower lows and highs. The market is clearly respecting the bearish trend line. More sellers could rejoin the downtrend at the area of confluence made of the bearish trend line and the resistance level (1722). This could lead to a move lower toward the 1689 mark. A close above 1,722 could cause a move higher toward 1,765.

Brent Oil (H4 Candlestick Chart)

UKBRENTOIL is posting lower highs and lows, signalling a downtrend. A higher correction could be seen to the bearish trend line before a new bearish impulsive wave that pushes the price toward the 84 mark. However, if the price breaks the 89 mark, this could lead to a bullish reversal and a move higher toward 92.

US500 (H4 Candlestick Chart)

The US500 has been hammered by sellers with lower highs and lows printed along with big-bodied bearish bars. The price entered inside a parallel channel where more sellers are about to rejoin the downtrend near the higher end of the range. This move could lead to a move lower to test the 3,912 mark. Failing to sustain below 3,990, could lead to a move higher toward 4,070.

Thank you very much for reading - and have a great week trading!

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