Stocks Plunge Ahead of Fed Jackson Hole Meeting

23 August 2022, 02:37

Market Focus

US stocks plunged on Monday, as the earnings season wrapped up and the threat of an economic recession still looms large amid warnings from Fed officials that the fight against inflation is far from over. That stance will likely be reinforced by Jerome Powell on Friday at the Fed’s annual Jackson Hole meeting, which has been used by Fed chairs as a venue for making key policy announcements. According to the latest MLIV Pulse Survey, stocks and bonds are set to tumble once more even though inflation has likely peaked, as rate hikes reawaken the great 2022 selloff. Many investors see the most destabilizing era for price pressures in decades, eroding corporate margins and sending equities lower.

The benchmark S&P 500 and Dow Jones Industrial Average dropped on Monday, as equities saw their worst rout in two month after a surge drove the S&P 500 to its best start to a third quarter since 1932. All sectors stayed in negative territory, as Consumer Discretion, Information Technology, and Communication service performed the worst among all groups, falling 2.84%, 2.78%, and 2.67% respectively for the day. The Nasdaq dropped 2.7% as big tech underperformed, Dow Jones Industrial Average fell 1.9%, and MSCI world index plunged 1.8% on Monday.

Main Pairs Movement

The US dollar surged on Monday as investors shied away from riskier assets amid growing fears that interest-rate hikes in the United States and Europe, aimed at curbing inflation, would weaken the global economy. The DXY index extended bullish momentum and edged higher, witnessing fresh transactions and surging to a level above 109.0 during the early US trading session.

GBPUSD plunged and printed a fresh two-year low of 1.1742 on Monday, as a strong greenback across the board and the vulnerable employment data has trimmed the confidence of the Bank of England in hiking interest rates. Cable has extended the selling pressure caused by the US dollar since last week, and edged lower to a level below 1.177 by the end of day. Meanwhile, EURUSD fell to a level below 0.995, the lowest level since December 2002, as fears of a Eurozone recession escalated day by day. The pair dropped 0.94%.

Gold dropped and remained weighted at one-month low, down for the seventh consecutive day, with the risk-aversion market mood supporting the US dollar ahead of the Jackson Hole meeting on Friday. Moreover, market fear on Russia’s Nord Stream 1 pipeline’s maintenance also supported the gold bears. Gold extended the bearish momentum and kept moving downward to a level below $1730 ahead of the US trading session, then rebounded to oscillate in a range from $1735 to $1740.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair tumbled on Monday, coming under heavy bearish pressure and extending its slide toward the multi-year low below 0.996 mark amid risk-off market environment. The pair is now trading at 0.9958, posting a 0.80% loss on a daily basis. EUR/USD stays in the negative territory amid renewed US dollar strength, as the flight to safety in the American session provides a boost to the greenback and lifts it to new highs further north of the 108.00 mark at the beginning of the week. The growing worries over a global economic downturn and the COVID lockdowns in China have both undermined the market sentiment and exerted bearish pressure on the EUR/USD pair. For the Euro, the Bundesbank monthly report, which weighed on the shared currency, showed that a recession in Germany is increasingly likely and inflation will continue to accelerate.

On the technical side, the RSI is at 17, suggesting that the pair might witness some upside correction as the RSI stays in the oversold zone. As for the Bollinger Bands, the price preserved its bearish traction and moved out of the lower bands, therefore a strong down trend continuation can be expected. In conclusion, we think the market will be bearish as the pair is testing the 0.9991 support. But the pair could see some short-term correction before edging lower amid the oversold RSI.

Resistance:  1.0082, 1.0111, 1.0188

Support: 0.9991, 0.9950, 0.9910

GBPUSD (4-Hour Chart)

The GBP/USD pair suffered heavy losses on Monday, continuing to turn lower for the fourth straight day and dropped to the lowest level since March 2020 below the 1.1750 level amid renewed US dollar buying. At the time of writing, Cable stays in negative territory with a 0.64% loss for the day. The expectations that the Fed would continue to tighten its monetary policy to tame surging inflation continued to underpin the US dollar and dragged the GBP/USD pair lower. The speech from Fed Chair Jerome Powell at the Jackson Hole Symposium on Friday might also provide clues about the possibility of a 75 bps rate hike move at the September meeting. For the British pound, the Bank of England’s gloomy economic outlook and growing recession fears kept acting as a headwind for the currency.

Meanwhile, the RSI is at 21, suggesting that the pair could stage a correction before extending its slide as the RSI has dropped below 30. As for the Bollinger Bands, the price remained under pressure and dropped toward the lower band, therefore a continuation of bearish traction can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.178 support. A four-hour close below that level could open the door for additional losses.

Resistance: 1.1830, 1.1922, 1.2050

Support: 1.1780

XAUUSD (4-Hour Chart)

Gold prices slumped to below the $1,730 level in the European session and tried to erase losses in the early American session but failed on Monday. Price continues losing ground for the sixth straight day and drops to a nearly four-week low, suggesting that gold is still trying hard to gather bullish momentum with US Treasury bond yields continuing to push higher.

On the technical side, gold price witnessed a heavy sell on Monday from $1,750 level to the lowest $1,728. The RSI is at 28, which suggests that there could be a correction due to oversell. On the other hand, any advance upward now might possibly be taken as a good chance for investors to sell while the trend is still downward. As for the Bollinger Bands, the price kept declining along with the lower band, a continuation of bearish traction can be expected. In conclusion, we think the market will maintain its downside traction but need to be aware of upside correction.

Market participants now eye on Fed Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday for clues about the possibility of a 75-bps rate hike move at the September meeting. This and the important US economic releases this week will play a key role in influencing the USD price and help determine the next direction for gold.

Resistance: 1757, 1783, 1803

Support: 1714, 1685