The markets kicked off the shortened Thanksgiving holiday week by building upon prior gains, fueled by a widespread risk-on sentiment that propelled stock markets and exerted selling pressure on the dollar.
Following another softer-than-expected U.S. inflation report, Investors have fully integrated their expectations of the Federal Reserve maintaining unchanged interest rates in December, and they have factored in the anticipation of four rate cuts in 2024, commencing in May.
Past Week’s Performance Of Major Currencies
Forex Market: Week In Review & Week Ahead
The U.S. dollar index (DXY) slipped to 103.30, reaching levels last seen at the end of August. This decline occurred as investors incorporated additional rate cuts into their expectations for the Federal Reserve's policy moves in 2024. This adjustment followed the U.S. inflation rate slowing to 3.2% in October 2023 from 3.7% in both September and August, which was also below market forecasts of 3.3%. Additionally, producer price indices came in lower than expected, dampening hopes of an inflation resurgence that had been supporting the dollar bulls. In general, the movements of all currencies were primarily influenced by factors related to the dollar rather than domestic economic factors.
The euro (EUR/USD) rallied above 1.09, reaching its highest levels since mid-August. The movement witnessed on Tuesday, November 14th (+1.7%), was the strongest since November 2022, illustrating how the decline in U.S. inflation positively impacts the single currency.
The British pound also benefited from reduced expectations regarding Fed rates, with the GBP/USD exchange rate rising above 1.25, reaching its highest level since mid-September. This occurred despite the inflation rate in the United Kingdom dropping to 4.6% in October 2023, down from 6.7% in both September and August, falling short of market expectations of 4.8% and marking the lowest rate since October 2021.
The yen (JPY) strengthened due to the drop in Treasury yields, and it now awaits the inflation data set to be released this week. Meanwhile, the Swiss franc (CHF) has returned to levels seen at the beginning of September against the dollar.
Risk-on major currencies, namely the Australian (AUD) and New Zealand (NZD) dollars, surged by over 3% in the last week, supported by the market's general risk appetite. The latest Minutes from the Reserve Bank of Australia revealed that a rate hike was deemed necessary to prevent an increase in inflation expectations.
Key Economic Events for the Upcoming Week
- FOMC Meeting Minutes (Tue.)
- Durable goods orders (Wed.): -3.1% month-on-month expected, 4.7% previous
- S&P Global Services PMI flash for Nov. (Fri.): 4 exp., 50.2 pre.
- S&P Global Manufacturing PMI flash for Nov. (Fri.): 8 exp., 50 pre.
- HCOB Services PMI flash for Nov. (Thu.): 48.1 exp., 47.8 pre.
- HCOB Manufacturing PMI flash for Nov. (Thu.): 43.4 exp., 43.1 pre.
- Japan’s inflation rate (Wed.): 3% year on year (y/y) pre.
- Canada’s inflation rate (Tue.): 3.2% y/y exp., 3.8% pre.
- UK’s GfK Consumer Confidence (Thu.): -28 exp., -30 pre.
New Trading Ideas For The Week
- Entry: 185.15
- Take profit: 179.63
- Stop loss: 187.15
- Reward/risk: 2.7:1
The GBP/JPY exchange rate may have initiated a new phase of downward trend after reaching a peak of 188.31 last week. The pair quickly retraced its steps, particularly as British inflation also fell short of expectations. While a substantial interest rate differential of 3.42 percentage points persists between the 10-year UK gilt and Japanese bond yields, this gap is gradually narrowing, encouraging profit-taking on long positions and awakening some aggressive bears.
GBP/JPY reached its peak at 188.31, driven by an overbought relative strength index (RSI), and has subsequently witnessed four consecutive sessions of losses. Bears are now targeting the liquidity zone in the range of 180-182, which had been breached by the bullish price action on October 31st. When plotting the Fibonacci retracement from the 2023 highs to lows, the next significant support level appears to be at 180.52 (23.6%). If the pair continues to move lower in the coming weeks, bears may set their sights on levels just below that threshold.
- Entry: 0.9673
- Take profit: 0.9375
- Stop loss: 0.9790
- Reward/risk: 2.5:1
The Euro-Swiss Franc exchange rate has experienced a roughly 3% rally in the past month, which, however, has not been accompanied by an improvement in short-term interest rate differentials between the two regions. The spread between the yield of a 2-year Eurozone bond and the respective Swiss bond has decreased from almost 2 percentage points in mid-October to the current 1.66 percentage points. The Euro's rally is primarily attributed to short-term technical factors and could soon reverse to realign with fundamentals.
The rally that began on October 20th was initiated by a bullish divergence in the RSI, but it may have already entered a consolidation phase. An interesting test could be the resistance of the descending trendline connecting the April 2021 highs and the June 2022 highs. A breakthrough beyond that level could significantly alter the outlook for the pair, but a retracement towards levels around 0.9375, more in line with the fundamentals, may offer a more attractive risk-reward ratio.
- Entry: 0.8836
- Take profit: 0.8550
- Stop loss: 0.8977
- Reward/risk: 2:1
The USD/CHF pair could encounter further downward pressure due to the potentially dovish FOMC minutes and disappointing US flash PMI releases this week. Market sentiment is beginning to anticipate potential negative economic surprises in the U.S., which is exerting downward pressure on Treasury yields. The yield differential is narrowing, eroding some support to the dollar. Last week, the Swiss National Bank’s Chair Thomas Jordan said they “will not hesitate to tighten monetary policy further if necessary."
Additionally, the rising price of gold may be contributing to the appeal of the Swiss franc.
The pair has been in a downward trend since early October, retracing more than half of the rally that began in July. Although the RSI is approaching oversold territory, previous instances of trend reversal have been triggered by extreme RSI levels, which is not the case yet. In July, the pair reversed course when the RSI reached 20, and in October, it peaked as the RSI hit 85. Bears may be targeting a complete retracement of the move from July to October.
Open trading ideas:
- Short CAD/JPY
- Opened on November 14 at 109.75
- Current Rate: 107.60
- Updated Profit & Loss: +1.9%
- Long EUR/GBP
- Opened on November 14 at 0.8718
- Current Rate: 0.8732
- Updated Profit & Loss: +0.2%
- Long AUD/NZD
- Opened on November 14 at 1.0856
- Current Rate: 1.0817
- Updated Profit & Loss: -0.4%
- Short NZD/CHF
- Opened on November 7 at 0.5327
- Current Rate: 0.5358
- Updated Profit & Loss: -0.60%
- Long XAU/USD
- Opened on October 16 at $1,912/oz
- Current Rate: $1,985/oz
- Updated Profit & Loss: +3.9%
- Short GBP/AUD
- Opened on September 18th at 1.9250
- Current Rate: 1.9295
- Updated Profit & Loss: +0.72%
- Short EUR/AUD
- Opened on September 4th at 1.6708
- Current Rate: 1.6686
- Updated Profit & Loss: +0.11%
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