Optimistic Consumer Sentiment Supports Fed Hawkishness

31 August 2022, 02:53

Market Focus

US stocks ended at their lowest level in a month, as fresh data pointed to resilience in household and labor demand, affirming the Federal Reserve’s resolve to continue to be aggressive in its fight against inflation. Three regional Fed presidents, in separate remarks on Tuesday, reiterated Chair Jerome Powell’s intention to bring down inflation. A reading on job openings Tuesday added to signs that the labor market remains tight and wage pressures persist. Jobless claims will air Tuesday before Friday’s August payroll report. Moreover, the Fed this week is also set to step up the unwinding of its near-$9 trillion balance sheet. Other risks range from China’s economic slowdown to an energy crisis that threatens to tip Europe into recession, undermining the market mood.

The benchmarks, S&P 500 and Nasdaq 100 slid on Tuesday, as they finished the session at their lowest levels in a month. All eleven sectors of the S&P 500 stayed in negative territory, with Energy and Materials performing the worst among all groups, dropping 3.36% and 1.71% respectively for the day. The Dow Jones Industrial Average fell 1%, Nasdaq 100 tumbled with 1.1% loss, and MSCI world index decreased 1% on Tuesday.

Main Pairs Movement

The US dollar was little changed on Tuesday, as the market priced in huge interest rate hikes by the U.S. Federal Reserve and the European Central Bank (ECB). The DXY edged lower and touched a daily low level below 108.3 on the first half of Tuesday, then regained bullish momentum and surged to a daily high level above 109.1 following the announcement of Consumer confidence readings. However, the greenback was then weighed by heavy selling pressure, dropping and oscillating in a range from 108.6 to 108.9.

GBPUSD dropped 0.45% for the day, as data this week has kept the hawkish sentiment going. Cable dropped dramatically and touched a daily low below 1.1626 following the surprise US CB Consumer Confidence, then  corrected a little and wandered to a level around 1.1660. Meanwhile, EURUSD tumbled with a huge loss to a level around 0.9983, then corrected to a level above 1.001. The pair advanced 0.18% on Tuesday after upbeat statistics from Germany, as well as hawkish comments from European Central Bank (ECB) policymakers.

Gold dropped 0.75% for the day, drifting back closer to a one-month low. The aggressive Fed rate hikes drove bets away from the yellow metal, causing XAUUSD to tumble and oscillate around the $1724 mark after the US consumer reading.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair edged higher on Tuesday, failing to extend its intra-day rebound and retreated from daily highs that touched in the European session after the release of upbeat US data. The pair is now trading at 1.0002, posting a 0.09% gain on a daily basis. EUR/USD stayed in the positive territory amid renewed US dollar weakness, but the higher US yields and improving economic data has both provided support to the safe-haven greenback and exerted some bearish pressure to the EUR/USD pair. The US CB Consumer Confidence Index improved to 103.2 in August, which came in better-than-expected and helped the greenback gather strength against its rivals. For the Euro, the German Annual CPI inflation rose to 7.9% in August, which is higher than the market expectation of 7.8% and showed that inflation in Germany continued to rise.

On the technical side, the RSI is at 56 as of writing, suggesting a bullish tilt in the near term as the RSI on the four-hour chart climbed above 50. As for the Bollinger Bands, the price regained some upside traction and rose higher toward the upper band, therefore the upside momentum should persist. In conclusion, we think the market will be slightly bullish as the pair is heading to test the 1.0033 resistance. A break through that level should lead to additional gains towards the next resistance at 1.0089.

Resistance:  1.0033, 1.0089, 1.0171

Support: 0.9991, 0.9917

GBPUSD (4-Hour Chart)

The GBP/USD pair declined on Tuesday, coming under bearish pressure and dropped to a daily low below 1.1640 level in the early US trading session amid growing worries about a deeper global economic downturn. At the time of writing, Cable stays in negative territory with a 0.50% loss for the day. The expectations that the Fed will continue to tighten its monetary policy at a faster pace and a possible 75 bps rate hike move at the upcoming policy meeting both continued to act as a tailwind for the US dollar. Market focus now remains on the US jobs report (NFP) that will be released on Friday. For the British pound, the currency might remain under pressure as the Bank of England had predicted earlier this month that the UK economy will enter a prolonged recession from Q4 of 2022.

On the technical side, the RSI indicator is at 35, suggesting that the downside is preserving strength as the RSI dropped sharply toward 30. As for the Bollinger Bands, the price witnessed fresh selling and declined toward the lower band, therefore a persistent selling interest can be expected. In conclusion, we think the market will be bearish as the pair is testing the 1.1655 support. A sustained weakness below that critical support should lead to a steeper decline towards a two-year low set near 1.1500 area.

Resistance: 1.1738, 1.1780, 1.1853

Support: 1.1655, 1.1476

XAUUSD (4-Hour Chart)

Gold struggled to capitalize on yesterday’s gain from the $1,720 level and met with a fresh supply on Tuesday. The steady intraday decline extended through the US session and dragged XAU/USD to the one-month low at $1,720 level. Despite modest US dollar weakness and a further decline in the US Treasury bond yields, gold prices struggled to advance as firming expectations for a 75 bps Fed rate hike at the September meeting. Hawkish comments from Fed Chair Jerome Powell on Friday reaffirmed these bets, which also weighed on gold prices.

Meanwhile, the RSI is at 36 as of writing, declining from the midline, which suggests that a persistent bearish mode could be expected. As for the Bollinger Bands, gold prices sustained pressure from downward moving average and declined to the lower bound, showing the downward traction influence on gold price. In conclusion, we think the market is still under bearish pressure as price couldn’t capitalize on the previous day’s bounce and closed at a lower high at $1,740 level on the 4H chart. The price hovers around $1,720 level as of writing, which is close to the support region at the $1,714 level. If price closes below, it may head to test the pivotal support region at $1,685 level, which is at multi-year low and acts as key support for gold investors.

Resistance: 1765, 1803

Support: 1714, 1685