Energy Shares the Only Winner in Cautious Market

18 August 2022, 02:36

Market Focus

US stocks declined for the first time in four days as investors assessed the outlook for the path of interest-rate hikes after the minutes from the Federal Reserve’s latest meeting noted that officials saw risks from tightening more than necessary. Moreover, the stock market rallied on signs of peaking inflation and an earnings season that saw four out of five companies meeting or beating estimates. However, prospects of the Fed continuing to raise rates to cool inflation and possibly tip the economy into recession has weighed on sentiment.

The S&P500 and Dow Jones Industrial Average slid on Wednesday, as Fed minutes noted that it may be appropriate to slow increases. Ten out of eleven sectors of the S&P 500 stayed in the negative territory, with the Communication Services and Materials sectors performing worst among all groups, falling 1.40% and 1.85% on a daily basis respectively. Energy is the only sector in positive territory, rising 0.81%. The Dow Jones Industrial Average decreased 0.5%, the Nasdaq 100 dropped 1.2% , and MSCI World index fell 0.6% on Wednesday.

Main Pairs Movement

The US dollar edged up on Wednesday, as the minutes from the Federal Reserve’s July meeting showed that Fed officials are concerned that the US central bank might raise interest rates too far as part of its commitment to get inflation under control. The DXY witnessed fresh transactions during the UK trading session and touched a daily high level neaR the 106.9 level. However, it pared most of its gains and reached a daily low level below 106.4 after the FOMC minutes.

GBPUSD dropped with a 0.40% loss on a daily basis after a volatile day, as the UK’s 40-year high inflation propelled recession woes. Cable was under heavy selling pressure during the UK trading session amid pessimistic market mood towards economic growth. However, GBPUSD rebounded after the Fed minutes and oscillated around the 1.2045 level. Meanwhile, EURUSD touched a daily-high level above 1.020. The pair rose 0.09% for the day.

Gold dropped on Wednesday, remaining pressured around two-week lows, and is down for the fourth consecutive day. XAUUSD edged lower during the UK trading session as a strong greenback across the board, and touched a daily low below $1760 in the middle of US trading session. WTI and Brent oil advanced for the day, rising 1.83% and 0.77% respectively.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair edged lower on Wednesday, remaining under pressure and surrendering most of its daily gains after touching a daily high above the 1.019 mark amid souring market sentiment. The pair is now trading at 1.0164, posting a 0.08% loss on a daily basis. EUR/USD stays in the negative territory amid renewed US dollar strength, as global stocks turned sharply lower ahead of the release of the latest FOMC Meeting Minutes and lent support to the safe-haven greenback. The US Retail Sales stayed unchanged in July and came in slightly weaker than the market expectation of +0.1%, which failed to provide impetus to the markets as focus now shifts to FOMC minutes. For the Euro, the Eurozone GDP expanded by 0.6% QoQ in the second quarter of this year, but the markets react little to the economic data.

On the technical side, the RSI is at 39 as of writing, suggesting that the downside is more favored as the RSI stays below the midline. As for the Bollinger Bands, the price retreated back and failed to cross above the moving average, therefore some downside traction can be expected. In conclusion, we think the market will be bearish as the pair might head to test the 1.0139 support. The risk is also skewed to the downside as the pair is developing below all of its moving averages.

Resistance:  1.0237, 1.0287, 1.0347

Support: 1.0139, 1.0111, 1.0016

GBPUSD (4-Hour Chart)

The GBP/USD pair declined on Wednesday, failing to preserve its upside traction that witnessed earlier in Asia session and refreshed its daily low below 1.205 level ahead of FOMC meeting minutes. At the time of writing, Cable stays in negative territory with a 0.53% loss for the day. The speculations that the Fed would stick to its policy tightening path have been fueled by the recent hawkish remarks by several Fed officials. On top of that, the rising US Treasury bond yields also helped the US dollar to find demand and undermined the GBP/USD pair. For the British pound, the UK Consumer Prices Index (CPI) rose to 10.1% YoY in July, which came in hotter-than-expected but failed to provide strong support to the cable as the US economic data have lifted bets for a larger Fed rate hike move at the September meeting.

On the technical side, the RSI is at 37 as of writing, suggesting the pair’s bearish outlook in the near-term as the RSI keeps heading south. As for the Bollinger Bands, the price witnessed fresh selling and dropped toward the lower band, therefore a continuation of the downside trend can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.2027 support. A break below that level could open the door for additional losses and the falling RSI also reflects bear signals.

Resistance: 1.2119, 1.2186, 1.2248

Support: 1.2027, 1.1940, 1.1897

XAUUSD (4-Hour Chart)

Gold slumped below $1,770 on Wednesday, dropping to its two week low. Rising yields and stronger US dollar are weighing on gold prices. The benchmark 10-year US Treasury bond yield is up nearly 3% on the trade of the day, forcing XAU/USD to come under more bearish pressure.

Meanwhile, XAU/USD had been drifting in the negative for the third successive day, forming a clear downward trend, and slumping below $1,770 level in European session. The price continued to drop in the early US session. At the time of writing, the price is at $1,760 level testing support level at  $1,757. The RSI is at 33 as of writing, suggesting that the price is still under downside pressure. For the Bollinger Bands, the price tumbled but still maintained slightly above the lower bound, indicating that the price has not yet dropped below the oversold zone. In conclusion, we think the market is still in bearish mode as the RSI indicator keeps in downtrend and the price keeps edging low.

Markets are now pricing in at least a 50-basis point rate hike at the September FOMC meeting.  As such, clues about the possibility of a larger 75 basis point move will play a key role in influencing the recent USD price and determining the next move for gold. For further price action, eyes are on the tier 1 US economic data.

Resistance: 1783, 1803, 1857

Support: 1757, 1714, 1685