Market News Report - 13 October 2024The US dollar was buoyant this week against many currencies, continuing the same trend from the previous week. CHF was a close second, while the Japanese yen found itself among the weakest currencies.
Let's dive into what we should expect for each major forex market in our latest fundamental report.
Market Overview
Below is a brief technical and fundamental analysis breakdown for all major currencies.
US dollar (USD)
Short-term outlook: bearish.
Despite a recent 50 basis points (bps) rate cut, the Fed may not need to cut rates as aggressively going forward. This is partly due to positive job numbers and earnings data that exceeded expectations.
Still, the central bank has signalled the potential for two 25 bps drops by the end of this year. Meanwhile, a 50 bps cut has pretty much been priced out, with STIR (short-term interest rate) markets seeing a 14% chance of a hold next month.
After weeks of ranging around the key support area at 100.157, the DXY made its intention known to head north. We spoke about a potential technically-driven retracement (despite the bearish fundamentals).
Meanwhile, the key resistance is far away at 107.348, which will remain untouched for some time.
Long-term outlook: weak bearish.
The latest strong NFP report has raised expectations for a 25 bps rate cut (instead of 50 bps), which is giving USD a boost in the near term. So, there is no extreme dovish pricing anymore. While the bearish bias remains, the dollar may gain amid a broad pullback.
Euro (EUR)
Short-term outlook: bearish.
As usual, the STIR (short-term interest markets) were predictably accurate as the European Central Bank (ECB) cut the interest rate a few weeks ago. While 'being mum' about forward guidance, they revised core inflation projections higher.
Also, the past week saw weaker economic data across various European nations. Finally, short-term interest rate (STIR) markets have indicated a 92% chance of a rate cut at the October 17 meeting.
The euro has finally made its bearish intention known on the charts after spending weeks near the resistance at 1.12757. Meanwhile, this market isn't too far away from the key support at 1.07774.
Long-term outlook: bearish.
The ECB has yet to commit to a specific future path with the interest rate for some time. Due to lingering concerns over services inflation, a rate cut has become more likely than before and will be a key driver soon.
British pound (GBP)
Short-term outlook: bearish.
The Bank of England (BoE) kept the interest rate steady in its recent meeting. Still, the language indicates that they need to be “restrictive for sufficiently long.” Also, the central bank's higher-ups stressed "a gradual need" to cut rates.
As with the ECB, the central bank's current key theme is fighting persistent inflation in the United Kingdom. So, it makes more sense to be dovish than hawkish. Not long ago, Governor Bailey hinted that "aggressive rate cuts" were possible if inflation went lower.
This week, watch out for several key economic releases for GBP, such as the YoY inflation rate and unemployment rate.
We mentioned that the past week's downturn may be the start of a more serious bear move. So far, that's what the pound is experiencing. The next resistance target is 1.34825, while the nearest key support is at 1.26156.
Long-term outlook: weak bearish.
Sequential rate cuts by the BoE may soon be a reality. Also, expect any weak CPI, labour, and GDP data to back up the bearish bias. However, the central bank hopes for lower service inflation, which may provide relief.
Another interesting point is the latest CFTC (Commodity Futures Trading Commission) report, showing that GBP longs have been stretched to the upside. So, bullishness should be limited at some point.
Japanese yen (JPY)
Short-term outlook: bullish.
The primary bullish catalyst is the Bank of Japan’s (BoJ) recent decision to hike the interest rate. STIR markets expect a hold (99% probability) at the next meeting but a hike at the start of next year.
Governor Ueda of the BoJ noted that despite domestic economic recovery, recent exchange rate movements have reduced the upside risk of inflation (which has been on an upward trajectory). All of this backs up the potential for a rate hold or hike.
Keep an eye on the latest YoY inflation for JPY this Friday.
The 140.252 support area is proving quite strong, boosting the yen since mid-September. Still, the major resistance (at 161.950) is too far for traders to worry about.
Long-term outlook: weak bullish.
Lower US Treasury yields are one potential bullish catalyst for the yen (the opposite is true). Inflation pressures and wage growth would also provide upward momentum. We should also consider that the dovish tendencies of other major central banks and worsening US macro conditions are JPY-positive
Still, as a slight downer, near-term inflation risks subsiding (according to the BoJ) reduce the urgency for a rate hiking cycle.
Australian dollar (AUD)
Short-term outlook: weak bullish.
The Reserve Bank of Australia (RBA) kept the interest rate unchanged during the Sept. 25 meeting. They further stated that they "did not explicitly consider rate hikes" for the future, which is a marginally dovish statement.
The Aussie remains sensitive to China’s recent economic woes, especially with declining iron ore prices from the country’s steelmakers. As always, it depends on drops or rises in economic data like GDP, inflation, and labour.
After failing to break the 0.69426 resistance level several times, the Aussie retraced noticeably from this area. Still, this market is bullish and far from the major support level at 0.63484.
Long-term outlook: weak bullish.
The RBA has certainly changed their tune from hawkish to slightly hawkish/dovish. Overall, it's crucial to be data-dependent with the Aussie, especially with core inflation as the RBA's key focus area.
However, the Australian dollar is pro-cyclical, meaning exposure to the economies of other countries.
New Zealand dollar (NZD)
Short-term outlook: weak bearish.
Unsurprisingly, the Reserve Bank of New Zealand (RBNZD) cut its interest rate by 50 bps last Wednesday and sees further easing ahead. This affirms another cut next month of potentially the same magnitude.
Furthermore, the central bank is confident that inflation will remain in the target zone, adding more impetus to the bearish bias.
Due to the recent rate cut, the Kiwi has been on a downward spiral, proving the strength of the major resistance level at 0.63696. Conversely, the major support is at 0.58498.
Long-term outlook: bearish.
The central bank's latest dovish stance (where it cut the interest rate) firmly puts the Kiwi in a 'bearish bracket.' They also revised the OCR rates lower and signaled steady winnings in the inflation battle.
Canadian dollar (CAD)
Short-term outlook: bearish.
The Bank of Canada (BoC) recently dropped the interest rate to 4.25%, as anticipated by the markets for some time. Further cuts in the next few meetings are on the cards (with a 37% chance of a 50 bps cut next month), with the long-term target being 3%.
Unemployment, weak economic growth, and mortgage stress are the key drivers for this dovishness.
Watch out for the new YoY inflation rate for the Canadian dollar on Tuesday.
While the short-term fundamental biases of USD and CAD are bearish, CAD is weaker on the charts. USD/CAD is making a steady uptick towards the key resistance at 1.39468, while the key support lies down at 1.33586.
Long-term outlook: weak bearish.
Expectations of a rate cut remain the focal point. Governor Macklem himself stated a while ago that it's reasonable to expect more cuts in the future. Any big misses in the upcoming data for GBP, inflation, and GDP will probably boost the chance of a rate cut. STIR markets see a 63% chance of the latter happening later this month.
Also, mortgage stress remains a major factor in this interest rate policy, and the BoC will have to cut rates to alleviate it.
Expect encouraging oil prices and general economic data improvement to save the Canadian dollar's blushes.
Swiss franc (CHF)
Short-term outlook: bearish.
STIR markets were, as usual, correct in their 43% chance of a 25bps rate cut (from 1.25% to 1%) recently. In the Sept. 26 meeting, the Swiss National (SNB) indicated its preparedness to intervene in the FX market and further rate cuts in the coming quarters.
The central bank's new Chair (Schlegel) said they "cannot rule out negative rates." Finally, the September CPI came in weak at 0.8%, against the expected year-on-year 1.1%.
Still, the Swiss franc can strengthen during geopolitical tensions, such as a worsening Middle East crisis.
USD/CHF has just broken out of the range (but only just) discussed in our last report. While remaining largely bearish, this market could return closer to the major support level at 0.83326 or climb its way to the higher major resistance level at 0.92244.
Long-term outlook: weak bearish.
The bearish sentiment remains after the last SNB meeting, while inflation is being tamed with lower revisions. We should also remember that the SNB's intervention prevents the appreciation of the Swiss franc.
The new chairman is more keen to cut rates than his predecessor, Jordan. STIR markets are currently pricing a 23% chance of a 50 bps cut at the December meeting.
On the flip side, 'safe haven flows' and geopolitical risks can be positively supportive for the currency. As with other central banks, inflation is a crucial metric in the SNB's policy rates.
Conclusion
In summary:
-There are plenty of new inflation rate announcements to diarise this week.
-The euro's interest rate decision is the most anticipated news event heading into the new week.
- All our fundamental outlooks for each currency remain unchanged except for a higher bearish inclination for NZD.
As always, hope for the best and prepare for the worst. This report should help you determine your bias toward each currency in the short and long term.
