Bank of England Ends Gilt-Buying, Markets Risk-Off

12 October 2022, 02:32

Market Focus

U.S. equities edged lower over the course of yesterday’s trading. The Dow Jones Industrial Average, however, was able to edge slightly higher by 0.12% to close at 29239.19. The S&P 500 lost 0.65% to close at 3588.84. The tech-heavy Nasdaq Composite retreated 1.1% too close at 10426.19. The risk-off sentiment was driven by comments from BoE governor Andrew Bailey, who said the central bank would end its special support of the gilt market. Governor Bailey urged market participants to unwind positions they may not have the ability to maintain.

The benchmark U.S. 10 year Treasury yield continued to edge higher and was last seen trading at 3.947%.

Russian President Vladimir Putin threatened further missile attacks on Ukraine after hitting Kyiv and other cities in the most intense barrage of strikes since the first days of its invasion. The bombing from Russia was sparked by the attack on the Crimea bridge last week. Escalating tensions between Russia and Ukraine continue to weigh on investing sentiment and global energy supplies.

On the economic docket, Britain is set to release its GDP figures during today’s European trading session, and the U.S. will release PPI figures during the American trading session today. The FOMC meeting minutes will be released during the latter part of the American trading session today as well.

Daily Return vs US Dollar(%)

Main Pairs Movement

The Dollar index gained 0.1% over the course of yesterday’s trading. The Dollar has continued to gain traction ahead of the key PPI data release and FOMC meeting minutes release. Markets are now pricing in further tightening of 75 basis points by the Fed as inflation continues to run rampant.

EURUSD gained 0.08% over the course of yesterday’s trading. The Euro-Dollar pair was able to maintain its intraday gains despite a broadly stronger Dollar. Economic data releases by the U.S., however, can once again send the pair lower.

Cable lost 0.82% over the course of yesterday’s trading. The British Pound dropped as BoE governor Bailey’s comment on pulling back emergency purchasing of Gilts. Today’s British GDP release will be closely observed.

XAUUSD lost 0.12% over the course of yesterday’s trading. The precious metal fared worse against a strong Dollar.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

The EUR/USD pair edged higher on Tuesday, witnessing some recovery momentum and flirting with the 0.968~ 0.974 area despite the dismal mood that dominated financial markets. The pair is now trading at 0.9762, posting a 0.66% gain on a daily basis. EUR/USD stayed in the positive territory amid a weaker US dollar across the board as the retreating US bond yields exerted bearish pressure on the greenback and lifted the EUR/USD pair higher. The Sentiment remains deteriorated amidst fears that global central bank tightening would slash corporate earnings while dampening the economic outlook, but a scarce macroeconomic calendar and US first-tier events scheduled for later in the week limit further volatility. For the Euro, the currency is likely to remain under pressure amid the fierce Russia-Ukraine tussles which raise doubts about the economic health of the old continent.

On the technical side, the RSI is at 48, suggesting that the pair is regaining upside strength as the RSI rose sharply towards 50. As for the Bollinger Bands, the price witnessed fresh buying and crossed above the moving average, therefore the upside traction should persist. In conclusion, we think the market will be bullish as long as the 0.9677 support line holds. Additionally, technical indicators recovered from oversold readings and the case for recovery will be firmer if the pair extends gains above 0.9836.

Resistance:  0.9836, 0.9921, 0.9986

Support: 0.9677, 0.9551

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

The GBP/USD pair surged on Tuesday, regaining upside momentum and refreshed its daily high above 1.1160 mark in US session following the outcome of the Bank of England’s gilt purchase operations. At the time of writing, the cable stays in positive territory with a 0.94% gain for the day. The US dollar trims a part of its intraday gains and turns out to be a key factor lending some support to the GBP/USD pair. For the British pound, the Bank of England announced earlier in the day that it intends to purchase index-linked gilts and reiterated that it stands ready to purchase up to 10 billion sterling of gilts each day until the end of the week. The announcement is acting as a tailwind for the GBP/USD pair today. Moreover, the latest news reported that the BoE accepted 1.957 billion sterling of offers in the first purchase operation of index-linked gilts.

On the technical side, the RSI is at 52, suggesting the bullish tilt in the near-term technical outlook as the RSI has risen above 50. As for the Bollinger Bands, the price preserved its upside traction and climbed above the moving average, therefore a continuation of the bullish trend can be expected. In conclusion, we think the market will be bullish as the pair is heading to test the 1.1220 resistance. A four-hour close above that level could open the door for additional gains and favor the bulls.

Resistance: 1.1220, 1.1366, 1.1476

Support: 1.1023, 1.0797, 1.0392

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

XAUUSD trimmed earlier losses and reclaimed above $1680 as of writing, due to high US T-bond yields, alongside a strong US dollar, ahead of crucial US inflation figures to be released on Thursday, which could provide some clues regarding the need for Fed aggressive hikes. Even though the yellow metal rebounded drastically, the market sentiment still deteriorated amid fears that global central bank tightening would slash corporate earnings while dampening the economic outlook. The US 10-year Treasury bond yield is down by four bps but around year to date highs 3.92%. The International Monetary Fund (IMF) cut its forecast for the next year to 2.7% from 2.9%in July, almost 1% less than in January. Furthermore, the IMF said that the US would extend at 1% next year, unchanged from its previous forecast, but cut its outlook from 2.3% in July to 1.6%, which adds to fears about global growth.

From the technical perspective, the RSI has gone from 30 to 45, indicating a rebound in the near-term could be expected till RSI fell back to below 30. As for Bollinger Bands, yellow metal rebounded back to the lower area of bands, and kept bullish momentum to test the 20-period moving average around $1688. If the four-hour chart closed above that level, the bulls could expect to challenge the month-high around $1723.

Resistance: 1688, 1723, 1761

Support: 1661, 1644, 1620