Share Rout Continues on High Interest Rate Outlook

30 August 2022, 02:24

Market Focus

US stocks declined on Monday as the realisation that interest rates are likely to remain elevated for an extended period continued to force a repricing across assets. Powell’s speech during the Jackson Hole symposium underscored that expectations for any reversal of Fed tightening next year was unlikely unless inflation reverted toward the central bank’s long-term target. The latest consumer price reading in the US put inflation above 8%, which is far away from the target 2%. Fed Chair Jerome Powell also warned of the potential for economic pain for households and business as the central bank continues to be aggressive.

The benchmarks S&P 500 and Dow Jones Industrial Average slid a second day, adding to the rout that started Friday when Powell made it clear that the Fed is willing to let the economy suffer as it fights inflation. Nine out of eleven sectors in the S&P 500 stayed in negative territory, with Information Technology the worst performing among all groups, dropping 1.28% for the day. While the Energy sector surged 1.54% on a daily basis. The Nasdaq 100 fell 1%, the Dow Jones Industrial Average slipped 0.6%, and MSCI world index fell 2.3% on Monday.

Main Pairs Movement

The US dollar was little changed on Monday. The DXY extended its upbeat traction, lifted by Jerome Powell’s hawkish comments, and refreshed a 20-year high level above 109.4 at the first half of Monday. Then, amid expectations for England Central Bank rate hikes, the US greenback was kept in check and dropped to a level below 108.6 during the UK trading session.

GBPUSD declined 0.30% for the day, as investors await the ISM’s national manufacturing reading and US Nonfarm Payroll for August, which are released on Thursday and Friday respectively.  Cable extended bearish momentum caused by Powell’s hawkish comment and fell to a level below 1.166, then rebounded to a daily high level above 1.174. Meanwhile, EURUSD surged to nearly 1.003 amid ECB rate-hiking expectations. The pair advanced 0.31% on Monday.

Gold was little-changed for the day, as market participants reflected on the Jackson Hole symposium. XAUUSD plunged to a level below $1722 at the beginning of the Asian trading session, then witnessed fresh transactions during the middle of the UK trading session and touched a daily high above $1745. The precious metal is bracing for a period of high volatility, with incoming data that could reignite fears of a worldwide recession.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair rebounded on Monday, staging a goodish recovery and climbing toward the  1.002 level heading into the US session despite the risk-averse market environment today. The pair is now trading at 0.9989, posting a 0.25% gain on a daily basis. EUR/USD stays in the positive territory amid the pullback witnessed in the US dollar, as some profit-taking at the first day of the week has dragged the US dollar down from a fresh 20-year peak near 109.5 mark. However, the rising bets for a more aggressive policy tightening by the Fed should limit the losses for the greenback, as the hawkish remarks by Fed Chair Jerome Powell last Friday has reaffirmed a 75 bps Fed rate hike in the September meeting. For the Euro, the hawkish comments from the European Central Bank (ECB) policymakers at Jackson Hole have provided some support to the shared currency.

On the technical side, the RSI is at 52 as of writing, suggesting that the pair is losing its bullish strength as the RSI has started to decline toward 50. As for the Bollinger Bands, the price failed to preserve its upside traction and witnessed some selling, therefore a continuation of a downside trend can be expected. In conclusion, we think the market will be slightly bearish as long as the 1.0007 resistance line holds. But a break above that level could favour the bulls and confirm the bullish bias in the near-term.

Resistance:  1.0007, 1.0033, 1.0089

Support: 0.9961, 0.9917

GBPUSD (4-Hour Chart)

The GBP/USD pair edged lower on Monday, failing to extend its rebound and retreating back to the 1.171 level to surrender most of its daily gains amid the negative shift witnessed in risk sentiment in the second half of the day. At the time of writing, Cable stays in negative territory with a 0.20% loss for the day. The further rise in the US Treasury bond yields and aggressive Fed rate hike bets both acted as a tailwind for the safe-haven greenback and exerted bearish pressure on the GBP/USD pair. In fact, markets are currently pricing in a greater chance of a 75 bps Fed rate hike inthe  September meeting. For the British pound, the UK markets will remain closed due to the Summer Bank Holiday on Monday, causing the absence of any fundamental catalyst for Cable.

Meanwhile, the RSI is at 40, suggesting that the downside is more favoured as the RSI stays below the midline. As for the Bollinger Bands, the price regained upside traction and climbed toward the moving average. Therefore, the bullish momentum should persist. In conclusion, we think the market will be slightly bullish as long as the 1.1655 support line holds. On the upside, the pair could shake off the bearish pressure and make an upward correction if it breaks above the 1.1775 resistance.

Resistance: 1.1775, 1.1830, 1.1854

Support: 1.1655

XAUUSD (4-Hour Chart)

Gold remained under pressure for the second day on Monday and dropped to over a one-month low, around the $1,720 level during the early part of the European session. After that, gold caught some upside traction and recovered from a one- month low. The price reversed an intraday dip and surged to $1,740 level in the US session.

Besides the hawkish comments from Fed Chair Jerome Powell last Friday, it should be noted that The European Central Bank is prepared to at least repeat the half-point increase in interest rates it delivered last month, with an even bigger move not to be excluded, which is the message from ECB officials who joined the Federal Reserve’s annual Jackson Hole symposium. Gold investors should notice that gold price may brace for a period of high volatility as worldwide central bank hawkish policy.

On the technical side, the RSI is at 44 as of writing, below midline, suggesting that the price remains in bearish mode. As for the Bollinger Bands, gold prices are hovering between moving average and lower bound. Besides, the moving average is slightly downward as of writing. Therefore, a downward traction could be expected. In conclusion, we think the market is still under bearish pressure as price closed a lower low at $1,720 level on the 4H chart and technical analysis favours bearish momentum as well.

Resistance: 1765, 1783, 1803

Support: 1714, 168