Pound Drops to 37-Year Low

26 September 2022, 02:22

Market Focus

US stocks tumbled sharply on Friday, coming under heavy bearish pressure and suffering daily losses amid the risk-off market sentiment and surging US dollar. The UK’s plan to lift its economy fueled concerns about heightened inflation and added to fears of a global recession. Liz Truss’s new UK government delivered the most sweeping tax cuts since 1972 as the Bank of England is struggling to rein in inflation. Earlier in the day, data from the UK revealed that business activity in the private sector continued to contract in early September with the preliminary Composite PMI dropping to 48.4 from 49.6 in August, which came in below the market expectation of 49. Furthermore, the Fed’s decision on Wednesday to lift rates by 0.75% and open the door for another 120 bps increase has also reignited US recession fears. In the Eurozone, the Eurozone Manufacturing PMI arrived at 48.5 in September, which fell further into contraction in September and came in below the market’s estimations.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined on Friday as a selloff in the riskier corners of the market deepened amid the escalating fears of global recession. The S&P 500 was down 1.7%, and the Dow Jones Industrial Average also dropped with a 1.6% loss for the day. All eleven sectors in the S&P 500 stayed in negative territory with the Energy sector and the Consumer Discretionary sector the worst-performing among all groups, losing 6.75% and 2.29%, respectively. The Nasdaq 100 meanwhile retreated 1.7% and the MSCI World index was down 2.1%.

Daily Return vs US Dollar(%)

Main Pairs Movement

The US dollar surged higher on Friday, extending its intra-day rally and refreshed its 20-year highs above 113.0 mark during the US trading session amid the risk-off market mood. The Fed’s aggressive tightening cycle and UK’s plan to bolster the economy both provided strong support to the safe-haven greenback as traders’ worries that Fed’s aggression would tip the US economy into a recession.

GBP/USD plummeted sharply on Friday with a 3.60% loss as the cable slumped to fresh multi-decade lows below 1.1050 level amid the risk-averse environment. On the UK front, UK Prime Minister Liz Truss announced the energy relief package for households and businesses to help slow inflation. Meanwhile, EUR/USD remained under pressure and plummeted to two-decade lows near the 0.970 mark amid the stronger US dollar across the board. The pair was down almost 1.50% for the day.

Gold declined 1.65% for the day after refreshing its two-year lows below the $1687 mark during the US trading session, as the US dollar strength and higher US Treasury bond yields both exerted bearish pressure on the safe-haven metal. Meanwhile, WTI Oil retreated further with a 5.02% loss for the day after dropping to daily lows near $78.0 area amid as traders expect that the oil demand would diminish following the US Federal Reserve’s decision to increase rates.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

EURUSD dropped lower as the greenback regained demand. The German PMI, which was released during the European trading session of the 23rd, revealed a lower figure compared to last month’s print. The lower PMI could be a warning sign for the E.U. economy ahead—slowing structural growth amid rising energy costs and rising inflation. The ECB raised interest rates in their September 14th meeting, but markets are not reacting well to the hawkish actions of the ECB as purchasing activity in the private sector has entered a decline, while inflation has not seen a material decline. In contrast, while the Fed has hiked interest rates for the fourth time this year, U.S. PMI has risen to 49.3, compared to 44.6 in August, showing a robust private sector and still an expanding economy despite contractual monetary policies.

On the technical side, EURUSD has slumped below our previously estimated support level of 0.98. The fresh support level for EURUSD now forms at around the 0.96 price region. RSI for the pair sits at 43.33, as of writing. On the four hour chart, EURUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance:  1.0011, 1.0055

Support: 0.98, 0.96

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

GBPUSD has dropped to below 1.09 and a new multi-decade low as the U.S. Greenback surged on the 23rd. The U.S. PMI data, indicating 49.2, has shown signs of continual growth in the U.S. private sector despite contractual monetary policies. On the other hand, the BoE announced a 50 basis point interest rate hike on the 22nd, while no economic data released from the U.K., so far, has shown an economy that could survive further interest rate hikes. Furthermore, while new Prime Minister Liz Truss has promised a subsidy package that would put a cap on energy bills, the fiscal budget of the U.K. has already been in deficit since early 2020. In addition, U.K. finance minister Kwasi Kwarteng has announced the cancellation of the planned  increase of corporate taxes to 25%, in order to stimulate the private sector—again, this is running a wider fiscal deficit. Rising credit risk could bring parity into play as Q4 approaches. September 30th will be key four Pound Bulls as the U.K. will release its quarterly GDP figure.

On the technical side, GBPUSD has broken well below our previously estimated support level of 1.12. The next level of support for the pair sits near parity at 1.08. RSI for Cable sits at 29.53, as of writing. On the four hour chart, GBPUSD is currently trading below its 50, 100, and 200 day SMAs.

Resistance: 1.1561, 1.1854

Support: 1.12, 1.08

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

The Dollar denominated gold has plunged over the course of the last trading day. The surging Dollar exerted tremendous selling pressure throughout trading sessions on the 23rd. Despite rising tensions in Eastern Europe and the South China Sea, Gold could not find demand as market participants try to find yields in other assets that will provide any type of yield. The better than expected U.S. PMI figure, announced during the American trading session on the 23rd, sparked a further sell off of Gold. The benchmark U.S. 10 year treasury yield has cooled off to 3.685% on the 23rd, after running beyond 3.7% on the 22nd. On the economic docket, the U.S. is set to release GDP figures on the 29th, and the U.K. is set to release GDP figures on the 30th.

On the technical side, XAUUSD has dropped below our previously estimated support level of $1660 per ounce and is heading towards the secondary support level of $1600 per ounce. RSI for Gold sits at 44.6, as of writing. On the four hour chart, XAUUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1695, 1724

Support: 1640, 1600