Markets evaluated rate-hike expectations after central banks committed to tackle inflation

September 1, 2022

US stocks declined on Thursday, as traders recalibrated rate-hike expectations after central banks across the globe vowed to step up their fights against inflation. Federal Reserve officials in recent days quashed hopes of a dovish pivot, a view that had helped fuel bets that this year’s bear market is over. Since then, investors have been sifting through sometimes conflicting economic data for further policy clues. While job openings data on Tuesday underscored tightness in the labour market, revamped ADP data on Wednesday showed US companies increased headcount at a relatively sluggish pace in August. All eyes will be on the job report on Friday for further hints about the central bank’s path.

The S&P500 and Dow Jone Industrial Average benchmarks slid on Wednesday, as all major indices had their worst month since June. Ten out of eleven sectors in S&P500 stayed in negative territory, as Material performed the worst among all groups, dropping with a 1.21% loss on daily basis. The Dow Jone Industrial Average fell 0.9%, the Nasdaq100 slipped by 0.6%, and the MSCI world index decreased by 0.8% on the last day of August.

Main Pairs Movement

The US dollar was little changed on Wednesday, as European Central Bank members have joined the fight to combat inflation, also expressing strong determination at the Jackson Hole symposium. The DXY index witnessed new transactions and touched a daily high level above 109.2 during the early UK trading session, then weighted by heavy selling pressure and fell to a daily low level below 108.4 at the beginning of the US session.

The GBP/USD slipped with a 0.29% loss on daily basis for the day, as strong US greenback across the board. The cables stably climbed to a daily high level above 1.169 in the middle of the Asia session, then tumbled and oscillated in a big range from 1.160 to 1.165 during the US session. Meantime, EUR/USD surged to a daily high level above 1.007, as hawkish central bankers. The pair advanced by 0.39% daily basis for the day.

Gold plunged with a 0.75% loss on Wednesday, as aggressive Federal Reserve bets. XAU/USD extended its weakness on the last day in August, while the yellow metal displayed a pullback during the UK trading session, then weighted by downside traction to keep falling to a month-low below $1,710 marks.

Technical Analysis

EUR/USD (4-Hour Chart)

The EUR/USD pair advanced on Wednesday, regaining positive traction and extended its daily gains toward the 1.0050 area in the early US session amid renewed US dollar weakness. The pair is now trading at 1.0045, posting a 0.33% gain daily. EUR/USD stays in the positive territory amid a weaker US dollar across the board, as the disappointing ADP employment report from the US undermined the greenback and helped the EUR/USD pair to find demand. The data showed on Wednesday that private sector employment in the US rose by 132K in August, failing to meet the market expectation for an increase of 288K. For the Euro, the expectations of a 75 bps rate hike at the ECB event in September have provided support to the shared currency, as higher-than-expected inflation figures in the euro area might result in potential shifts to a more hawkish stance from ECB’s policymakers.

For the technical aspect, the RSI indicator is 59 as of writing, suggesting that the upside is preserving strength as the RSI climbs higher toward 60. As for the Bollinger Bands, the price witnessed heavy buying and rose sharply towards the upper band, therefore the upside momentum should persist. In conclusion, we think the market will be bullish as the pair is heading to test the 1.0089 resistance. The rising RSI also reflects bull signals.

Resistance: 1.0089, 1.0171, 1.0246

Support: 1.0016, 0.9980, 0.9917

GBP/USD (4-Hour Chart)

The GBP/USD pair edged lower on Wednesday, remaining under bearish pressure and turned south towards the 1.161 area heading into the US trading session amid the risk-averse market environment. At the time of writing, the cable stays in negative territory with a 0.07% loss for the day. Despite the weaker US ADP private sector employment data having exerted bearish pressure on the US dollar during the second half of the day, the fact that investors continue to reprice aggressive ECB and Fed rate hike expectations might limit the losses for the greenback. For the British pound, the worsening energy crisis in the UK and the rising expectations for a more aggressive policy tightening by the Fed continued to act as a headwind for the GBP/USD pair. The market focus now shifts to the US Nonfarm Payrolls report this Friday.

For the technical aspect, the RSI indicator is 35 as of writing, suggesting that there is more room on the downside before the pair’s technical rebound as the RSI stays above 30. As for the Bollinger Bands, the price preserved its bearish strength and dropped toward the lower band, therefore the downside traction should persist. In conclusion, we think the market will be bearish as the pair is testing the 1.1655 support. Sustained weakness below that critical support should lead to a steeper decline toward a two-year low set near the 1.1500 area.

Resistance: 1.1738, 1.1780, 1.1853

Support: 1.1655, 1.1476

XAU/USD (4-Hour Chart)

Gold price turned south in the European session and fell to a fresh monthly low below the $1,710 level on Wednesday. However, the price recovers from the monthly low in the US session as US yields retreat and the US dollar index turns negative after ADP data. The employment numbers came in below expectations with the private sector adding 132K jobs versus the 300K of market consensus.

For the technical aspect, the RSI indicator is 34 as of writing, maintaining a downtrend in the near term, which suggests that the price is still in bearish mode. As for the Bollinger Bands, gold price edged lower along with the lower bound, but maintained slightly above it, showing that correction risk is relatively low at the moment. In conclusion, we think the market is still under bearish pressure as the price couldn’t advance above the former high but closed at a lower low below the $1,710 level, suggesting that any rebound is still seen as a selling opportunity by market participants. Price is now testing support region at $1,715 level as of writing. If the price closes negative below $1,715 on the 4H chart, it may head to test the next pivotal support at the $1,685 level. For more price action, market participants now pay close attention to ISM Manufacturing on Thursday and Nonfarm Payrolls on Friday, which largely determines the following path of gold price.

Resistance: 1765, 1803

Support: 1715, 1685

Economic Data