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The Week Ahead 24th-28th October: UK under the spotlight

Started by PocketOption, Oct 21, 2022, 02:03 pm

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PocketOption

The Week Ahead 24th-28th October: UK under the spotlight

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


Currency Pair Performance


5-day performance as of October 20th, 2022. 11:30 GMT



Source: finviz.com



10 Big Stories Last Week


In case you missed it...


Liz Truss resigns. The British Prime Minister resigned after 44 days in office, making it the shortest term ever.


UK Chancellor Hunt's mini-budget U-turn. Jeremy Hunt scraps most of the mini-budget and announces spending cuts to balance the books and restore confidence in the UK economy. Gilts rose.


China delays key data. China did not release Q3 GDP, retail sales, or trade balance data as scheduled and gave no reason. A possible explanation could be to not distract from the National Congress.


BofA rose 10% on upbeat earnings. The Bank of America beat on both the top and bottom lines and saw net interest income rise by the most in a decade. US bank's earnings have broadly beaten forecasts


US considers SPR oil release. The Biden administration is reportedly planning on another 15 million barrel reserves release and could consider significantly more over the winter months.


USD/JPY rises to a new 32-year high. Central bank divergence lifted the pair to 150. The Japanese authorities warned over the FX rate.


Netflix jumps to a 6-month high. The streaming giant added 2.4 million subscribers, recouping those lost in H1 and forecast 4.5 million subscribers in Q4. The stocks jumped 11%


UK CPI rises to a 40-year high. UK inflation rose back up to double digits at 10.1% YoY in September, up from 9.9%. The data prompted bets that the BoE could hike by 1% in November.


Tesla falls on earnings. The EV maker reported mixed results with EPS at $1.05 ahead of forecast of $1.01. However, revenue missed expectations at $21.45 billion, and operating margin also disappointed, suggesting profitability is struggling amid higher input costs are.


Amazon faces a $1 billion lawsuit. The e-commerce giant could face a lawsuit in the UK over allegations of favouring its own product. Amazon has faced similar probes in Europe.



Chart of the Week



Source: @LizYoungStrat


Small cap stocks, which generally have a market cap below $2 billion, tend to be affected less by currency fluctuations than larger firms. With the US dollar index up 7% across Q3, the stronger USD is expected to hit large cap corporate earnings.


Furthermore, small caps often outperform large caps coming out of a recession. Liz Young, head of investment strategy at SoFi said "small caps have outperformed large caps coming out of a recession 6 of the last 6 times."


So, while large caps continue to trend lower with lower lows, small caps could be considered the better play, with a greater possibility of leading the market higher?



5 Things to Watch This Week

1. ECB rate meeting


With inflation at a record 9.9% YoY in September and soft data showing signs of a recession, the window within which the ECB can hike rates aggressively could be narrowing. However, with inflation still five times the ECB's 2% target, any form of a dovish pivot is unlikely right now. The ECB is expected to raise interest rates by 75 basis points when it meets on October 27 as it fights inflation which is five times its 2% target.


2. UK to install new Prime Minister


The Conservative Party are in disarray again but there is some hope the country will not be without a competent Prime Minister for too long. Graham Brady, Chairman of the infamous 1922 Comittee that controls the process of electing new Conservative party leaders has promised a new Prime Minister will be in place by Friday. The British pound could see volatility as the 'big dogs' of the Tories battle to take Truss' place. Former Chancellor Rishi Sunak and ousted Prime Minister Boris Johnson are among the main contenders.


3. Big tech earnings begin


The likes of Apple, Amazon, Alphabet, Microsoft, and Meta are set to report next week. The earnings come as big tech share prices have fallen steeply across the year amid a broader market selloff. The Nasdaq trades 33% lower compared to the S&P500's 23% decline. Even so, brokers remain very bullish on Big Tech; all have a Buy rating, despite most seeing average target price fall. Investors will look to see how rampant inflation, USD strength, and rising recession fears impact earnings and the outlook.


4. BoJ rate announcement


The BoJ is the most dovish major central bank, and this becomes even more noticeable as the Federal Reserve keeps hiking interest rates aggressively. In the September meeting, the BoJ stuck to its ultra-low rate policy, pushing the yen to 145.00. Since then, the yen has fallen further to 150, despite the BoJ buying bonds to support the debt market. There have been no hints from the BoJ that they will change course from its ultra-lose policy, instead insisting that the fragile recovery and weak domestic demand means the dovish stance is necessary.


5. US GDP Q3


This is the first look at US economic growth in the July-September period. After two straight quarters of declines which saw the US fall into a technical recession, economic growth is expected to rebound in Q3. Although the upbeat outlook for Q3 macro risks is rising, suggesting that any rebound in economic growth could be short-lived.


Economic Calendar Highlights



Source: FXStreet.com



Technical Analysis:

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


EUR/USD (Daily Candlestick Chart)



EUR/USD is still in a clear downward movement where it is posting lower highs and lows. The price left an engulfing bearish pattern near the 61.80 % Fibonacci retracement level signalling that the sellers are in control of the market. Further movement to the downside is expected toward the next support level 0.963. A move above 0.987 would indicate a bullish reversal.


GBP/USD (Daily Candlestick Chart)



The British Pound is bouncing inside a parallel channel. The market found sellers at the top of this range. We are expecting a move lower since the main direction of the trend is downward. So there is a high chance that the 1.094 could be tested by next week. If the price breaks above 1.138, we could see a reversal and a move higher toward 1.150.


USD/JPY (Daily Candlestick Chart)



USD/JPY is still in an upward movement after breaking the parallel channel to the upside. We are expecting another move higher toward 153.4 to complete the ABCD pattern. However, if the market failed to sustain above 148.78 level this would negate our bullish bias.


AUD/USD (Daily Candlestick Chart)



The Aussie is still below the strong resistance (0.635) which indicates that the sellers are overwhelming the buyers. Since on the weekly time frame the market is in a downtrend, then we expect further movement to the downside to the 0.600 mark to complete the ABCD pattern. However, if the price moves back above 0.635, it could prompt a move higher toward the top of the channel (0.654).


USD/CAD (Daily Candlestick Chart)



After an aggressive move to the upside, Loonie entered inside a parallel channel formation. The market tested its lower end and bounced higher which could lead to a move higher to the next resistance level 1.384. Failing to sustain above the 1.370, this would negate our bullish view.


Gold (Daily Candlestick Chart)



Selling has resumed in gold after a bullish correction since the price is still in a downtrend. A deep correction could be seen from 1,620 to 1,660 level where more sellers could rejoin the downtrend near this zone and move it back to the 1,620 mark. However, succeeding to break 1,660 could lead to a move higher to test the 1,681 mark.


Brent Oil (Daily Candlestick Chart)



UKBRENTOIL is still overall in a downtrend, however a higher correction has been posted to the 91.78 mark. Our expectation is a fakeout above this zone which will attract more sellers and the price could be pushed back to the 86.75. But, If the price breaks and closes above 91.78, this could lead to a reversal and a move higher to 97.75.


US500 (Daily Candlestick Chart)



US500 is traded inside a parallel channel formation where sellers manage to reverse the price lower at the top of the range. Since the main direction of the trend is downward, then we expect a further movement to the downside to test the lower end of this range (3,582). Succeeding to close and break above 3,722 would imply a move back up to 3,766.


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


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