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FX awaits big risk events to kick off the week

The mighty dollar has stabilised this week and rebounded from fresh three-month lows it made during yesterday’s European trading session. That greenback weakness came despite the protests in China over the government’s zero Covid policies which prompted a swing against risky assets like stocks. There is a slightly more positive view around this near-term driver this morning.

DXY

Investors are betting that China may soon shift away from Covid-zero and towards economic re-opening. It seems there is the country might have reached a point where the economic and social costs have become too big and now outweigh the health costs from a gradual reopening. This may not be seen until the elderly are fully vaccinated or the warmer season over the summer. That said, there is little evidence of this so far with a strong police presence still evident.

Powell speech could grab the headlines

Fed Chair Powell will be on the wires later today (18:30 GMT) discussing the economic outlook and labour markets. This has the potential to be market-moving guidance just before the Fed's blackout period. Despite the downside miss in the October CPI report, expectations are for Powell to reiterate the key messages from the November FOMC press conference. This attempted to move the emphasis away from a slower pace of rate hikes in December and towards the Fed’s broader tightening campaign. That may mean the peak rate in the Fed funds is higher than previously seen in the FOMC’s September dot plot and projections.

This more hawkish tilt, away from the dovish pivot narrative that the market is keen to see, should support for the big dollar. The DXY index, which includes six major currencies, touched the widely followed 200-day simple moving average yesterday. This currently sits at 105.48. Next support below this comes in at a major long-term Fibonacci retracement level (38.2%) of the long-term dollar uptrend at 105.01. The next upside target for dollar bulls comes in just below 108.

DXY

Eurozone Inflation expected to ease

The euro area flash inflation data for November will be the market highlight this morning. Figures from Spain and Germany yesterday indicate an easing of the region’s headline inflation from October's 10.6%, due to lower energy inflation. Signs of peaking underlying inflation are less clear-cut, but core inflation holding steady at 5.0% might be just enough for the ECB to slow the hiking pace to 50bps at its December meeting. Money markets price in around 54 basis points of rate hikes which means an inline data print will cement the chances of this smaller policy move.

EUR/USD has primarily been driven by dollar dynamics recently so Powell’s speech may ultimately hold more sway later, with eyes then turning to the monthly US labour data released on Friday. The marginal new high for the euro yesterday and subsequent losses and lower close on the session formed a bearish key reversal session on the daily chart. The rejection of the 200-day simple moving average is another negative. EUR support resides in in the low 1.02 range now while major resistance is 1.0496.

EURUSD

 

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