Forex

The pair kicked-off the current week with a strong showing, same way it finished the previous one, but losses steam today, ahead of Thursday’s US inflation update

The USDOLLAR (bottom candlestick chart) pullback that started on Friday seems disconnected from the underlying fundamentals. On Friday, the real rate (top candlestick chart) charted an indecisive doji, whilst the greenback declined markedly. Moreover, the dollar has shown weakness in today's morning session, with minimal movement from the real rate. Over the two sessions, their correlation coefficient declined from 69% to 52%.

NFP Live Trade - 04 November 2022

The ISM manufacturing number came in at 50.2, higher than the 50 that was forecast. As a result, the real rate gapped up on the print (red arrow), and FXCM's USDOLLAR basket followed upwards (green arrow).

Forex markets this week will likely take their directionby the Fed announcement on Wednesday, 2 November. However, given the PCE data on Friday, and the resilience of median inflation, a Fed pivot has long odds, in our opinion. The central bank will deliver 75bps for this meeting, but it is unclear if it will provide 50bps or 75bps in December (48% vs 47% probabilities). FXCM's USDOLLAR basket gapped up on…

The Fed's preferred indicator of inflation, the core PCE printed at 5.1% YoY, higher than the previous release of 4.9% YoY. This increase is because everyday items such as food and medical care cost more. Next week the Fed is expected to increase interest rates by another 75bps.

The BoJ kept its short-term target at -0.1% and its 10Y at 0%. This dovishness was a unanimous decision, with the bank reiterating that it would take additional easing measures if needed. In addition, it raised its expectation of core inflation to 2.9% for 2022, dropping to 1.6% in the next two years.

The EURUSD daily is positioned favourably in its upper channel, between the blue and red bands. Moreover, the red Bollinger bands are diverging (green ellipses). This expansion suggests that volatility is increasing. It will be regarded as bullish if this is true and the EURUSD maintains its current channel

The Bank of Canada surprised the market with a softer interest rate hike of 50bps vs the 75bps expected. The statement states that "the effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening.

The pair extends this week’s gains and probes parity, as markets gear up for Thursday’s rate decision by the European Central Bank and US GDP and PCE Inflation updates

The real rate (top candlestick chart) has declined since Friday, 22 Oct. This yield has a causal relationship with the greenback, and FXCM's USDOLLAR basket has followed it downwards. The H4 correlation coefficient between the two is a strong 78%. I.e. and further pressure on the real yield will likely ripple to the dollar.