In the midst of the conflict between Hamas and Israel, investors are flocking to safe havens, particularly favoring gold and the Swiss franc. Remarkably, the Swiss franc has emerged as the best-performing currency of the past week.
Market Recap from the Previous Week:
The U.S. Dollar Index (DXY) took a breather last week, following recent comments from Federal Reserve officials that reinforced the market's expectation of no change in interest rates at the upcoming November 1st meeting. During his address to the Economic Club of New York, Federal Reserve Chair Jerome Powell delivered a somewhat mixed message. He suggested that the Fed could proceed cautiously, but also noted that further interest rate hikes might be necessary if economic data continue to show strength. Nevertheless, the market is currently assigning a 98% probability that the Fed will maintain interest rates at their current levels in November, with a 75% probability of the same in December.
Among major currency pairs, the Swiss franc experienced the most significant gains, appreciating by 1% against the U.S. dollar. This strengthening of the Swiss franc underscored its robust correlation with gold prices and the decline in yields on Treasury bonds. Additionally, the euro surprised with a 0.9% increase against the dollar, as traders remained uncertain about whether the European Central Bank (ECB) would pause its interest rate hike cycle in the upcoming week.
Conversely, the Norwegian krone (NZD), which is highly sensitive to risk sentiment, witnessed the most pronounced decline, falling by over 2.5% against the Swiss franc and 1.5% against the U.S. dollar. Furthermore, the New Zealand dollar also experienced a notable drop, losing 2.1% against the Swiss franc and 1% against the USD, primarily due to the substantial rise in global equity volatility.
Key Economic Events for the Upcoming Week
The main event of the week is the European Central Bank (ECB) meeting on October 26th, with economists currently leaning towards a higher likelihood that the ECB will choose to keep interest rates unchanged. However, surprises may not be ruled out, as indicated by the recent hawkish minutes from the previous meeting.
The U.S. dollar is keeping a close eye on two key releases. First, the publication of the initial estimate for economic growth in the third quarter on Thursday, which is anticipated to show a robust 4.2% annualized rate. Second, it eagerly awaits the data on the Personal Consumption Expenditure (PCE) index, the Federal Reserve's preferred gauge of inflation, set to be released on Friday.
United States:
- GDP growth rate (Thu.): 4.2% quarter-on-quarter annualized rate expected, 2.1% previous
- PCE price index (Fri.): 3.4% exp., 3.5% pre.
- Core PCE price index (Fri.): 3.7% exp., 3.9% pre.
- S&P Global Manufacturing PMI Flash for October (Tue.): 49.5 exp., 49.8 pre.
- S&P Global Services PMI (Tue.): 49.9 exp., 50.1 pre.
Euro Area:
- ECB’s interest rate decision (deposit rate) (Thu.): 4% exp., 4% pre.
- HCOB Eurozone Manufacturing PMI (Tue.): 7 exp., 43.4 pre.
- HCOB Eurozone Services PMI (Tue.): 48.7 exp., 48.7 pre.
- Germany’s Gfk consumer confidence (Tue.): -26.5 exp., -26.5 pre.
Other Data To Follow:
- S&P Global UK Manufacturing PMI (Tue.): 45 exp., 44.3 pre.
- S&P Global UK Services PMI (Tue.): 49.5 exp., 49.3 pre.
- Bank of Canada’s interest rate decision (Wed.): 5% exp., 5% pre.
- Australia’s inflation rate (Tue.): 5.4% exp., 5.2% pre.
Chart Of The Week: Swiss Franc Ends Longest Weekly Losing Streak with Third Consecutive Week of Gains
Short EUR/CHF
- Entry: 0.9474
- Take profit: 0.9300
- Stop loss: 0.9538
- Risk-reward ratio: 2.78
Fundamental View:
Two potential scenarios could lead to a fresh bout of weakness in the Euro against the Swiss Franc. The first scenario hinges on an escalation of tensions in the Middle East, which would likely intensify the flow of capital into safe-haven assets such as gold and the Swiss Franc. The second scenario revolves around the European Central Bank's decision not to raise interest rates on Thursday. This outcome may be influenced by data releases this week, including German consumer confidence and Eurozone PMI figures, which could provide evidence of an ongoing economic slowdown and thus curbing any unexpected hawkish moves by the ECB.
Technical View:
EUR/CHF has recently experienced a rebound after hitting oversold levels in the daily RSI. However, it remains firmly entrenched in a long-term downtrend that has even gained momentum since late September. Of particular note is the emerging "death-cross pattern" between the 21-day and 50-day moving averages, a potential signal that sellers are firmly in control. In the short term, the target of 0.93 could be within reach, with a stop-loss set at approximately 0.9538 if the Euro were to surpass last week's highs.
Order Short GBP/USD
- Entry: 1.2240
- Take profit: 1.1970
- Stop loss: 1.2354
- Risk-reward ratio: 2.7
Fundamental View:
The dollar is poised to flex its muscles as the third-quarter economic growth data is released. While economists' consensus points to 4.2%, estimates from the Federal Reserve Bank of Atlanta still push expectations up to 5.4%. There is a real possibility of a surprising and robust figure. Additionally, on Friday, PCE inflation may also mirror the higher-than-expected CPI data from September. Subdued UK PMI data could once again exert pressure on the interest rate differential between 2-year UK and US bonds.
Technical View:
GBP/USD seems to have found a floor in October after the sharp bearish wave in September and following a deeply oversold RSI condition. The trendline connecting the lower highs in July, September, and October could provide a new entry point for bears aiming for a break below the 1.2000 level. However, if GBP/USD manages to surpass the September highs at 1.2354, that would invalidate the bearish thesis.
Short CHF/JPY
- Entry 168.01
- Take profit: 164.90
- Stop loss: 169.20
- Risk-reward ratio: 2.7
Fundamental View:
The Swiss Franc has exhibited strength against the Japanese Yen, with 10 winning sessions out of the last 13. However, this move lacks fundamental basis as the interest rate differential between Switzerland and Japan, especially the 2-year rate, has remained largely unchanged, while the 10-year rate differential has even decreased. Therefore, a retracement of this recent trend could be on the horizon, especially if rumors of a new intervention by the Bank of Japan become more persistent, considering that the Yen has depreciated by nearly 20% against the Franc this year.
Technical View:
CHF/JPY has reached overbought levels on the daily RSI, although in previous instances of such signals, it did not lead to the expected contrarian effect. The trend remains firmly bullish, but a short and mild retracement might not be out of the radar. CHF/JPY could test a significant support level around 164.90-165, near the convergence of two key moving averages at 21 and 50 days, which are about to form a golden cross. If the bullish momentum persists and breaches 169.20, it could be time for the bears to pause and rethink.
Open trading ideas:
- Long CHF/SEK
- Opened on October 16 at 12.1280
- Take Profit: 12.80
- Stop Loss: 11.85
- Profit & Loss: +1.8%
- Long XAU/USD
- Opened on October 16 at $1,912/oz
- Take Profit: $2,050/oz
- Stop Loss: $1,860/oz
- Profit & Loss: +3.5%
- Short EUR/USD
- Opened on October 9 at 1.0535
- Take Profit: 1.000
- Stop Loss: 1.0750
- Profit & Loss: -0.7%
- Short GBP/CAD
- Opened on October 9 at 1.6646
- Take Profit: 1.6082
- Stop Loss: 1.6823
- Profit & Loss: -0.2%
- Short NZD/USD
- Opened on October 9 at 0.5975
- Take Profit: 0.5512
- Stop Loss: 0.6130
- Profit & Loss: +2.7%
- Long USD/JPY
- Opened on September 25th at 148.56
- Take Profit: 154
- Stop Loss: 147.20
- Profit & Loss: +0.9%
- Short GBP/AUD
- Opened on September 18th at 1.9250
- Take Profit: 1.8600
- Stop Loss: 1.9560
- Profit & Loss: -0.3%
- Short GBP/JPY
- Opened on September 11th at 182.96
- Take Profit: 175.9
- Stop Loss: 185.6
- Profit & Loss: +0.3%
- Short EUR/AUD
- Opened on September 4th at 1.6708
- Take Profit: 1.6200
- Stop Loss: 1.6900
- Profit & Loss: -0.7%
- Long USD/CHF
- Opened on August 28th at 0.8840
- Take Profit: 0.9250
- Stop Loss: 0.8680
- Profit & Loss: +1%
