Pound Sees Huge Rebounds as Gilt-Buying Stems Plunge

30 September 2022, 02:14

Market Focus

US stocks tumbled on Thursday, suffering from heavy daily losses and plunging to their lowest since November 2020 as another group of Federal Reserve officials struck a hawkish tone on policy tightening. Federal Reserve (Fed) Bank of Cleveland President Loretta Mester cited on Thursday that they are not yet at a point where they could start thinking about stopping interest rate hikes, while San Francisco Fed President Mary Daly also said the central bank should curb inflation in a manner that avoids a difficult downturn. On the economic data side, US Real GDP contracted by 0.6% in Q2 and remained in line with the estimates. In the Eurozone, tensions between the Union and Moscow over gas deliveries escalated after the suspected sabotage of the Nord Stream pipelines, which resulted in Germany’s relief package in response to higher gas and electricity prices. On top of that, today’s German Retail Sales data, which is expected to decline firmly by 5.1%, will be closely watched by traders as European Central Bank President Christine Lagarde is looking to hike interest rates by 125 basis points in the coming monetary policy meetings.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined on Thursday as the S&P 500 fell as much as 2.9% during Thursday’s session but trimmed losses as markets closed. The S&P 500 was down 2.1% on a daily basis and the Dow Jones Industrial Average also dropped 1.5% for the day. All eleven sectors in the S&P 500 stayed in negative territory with the Utilities sector and the Consumer Discretionary sector performing the worst among all groups, losing 4.07% and 3.38% respectively. The Nasdaq 100 meanwhile dropped the most with a 2.9% loss on Thursday, while the MSCI World index was up 1.1%.

Daily Return vs US Dollar(%)

Main Pairs Movement

The US dollar declined lower on Thursday, extending its downside momentum and remaining under pressure near 112 area despite Wall Street resuming its slump and trimming all Wednesday’s gains. The falling US Treasury bond yields acted as a headwind for the safe-haven greenback. However, the fact that US central bank officials reiterated the need for higher rates should limit losses for the US dollar.

GBP/USD surged on Thursday with a 2.09% gain after Cable refreshed its daily high above the 1.110 mark as a slight improvement in sentiment kept most G8 currencies higher against the greenback. On the UK front, Prime Minister Liz Truss said that she was willing to take controversial decisions, doubling down on the economic plan. Meanwhile, EUR/USD also advanced for the second consecutive day and refreshed its daily high above the 0.980 level amid US dollar weakness. The pair was up almost 0.80% for the day.

Gold was nearly unchanged with a 0.03% gain for the day after rebounding from a daily low that was  touched during the European session, as the precious metal cheered a softer US dollar but failed to respect the market’s grim conditions. Meanwhile, WTI Oil retreated lower with a 0.37% loss for the day after retreating from the weekly top surrounding $82.50 the previous day.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

EURUSD has continued to rise for the second straight day as the Dollar continues to retreat. However, the recent upward correction of the Euro is not due to a change in fundamental economic reasons, rather the Euro was able to advance due to fatigue buying of the Dollar. Economic data release from Europe has continued to paint a harsh outlook. The Germany consumer price index rose at an annual pace of 10.9%, and the EU economic sentiment indicator printed 93.7 in September, missing the 95 market expectation. U.S. GDP for Q2 came in inlign with market expectations at -0.6%.

On the technical side, EURUSD has continued to move towards our previously estimated support level of 0.98. Consolidation should happen around this level as EURUSD eyes to recover above parity. RSI for the pair sits at 44.09, as of writing. On the four hour chart, EURUSD is currently trading above its 50 day SMA but below its 100 and 200 day SMAs.

Resistance:  1.0011, 1.0055

Support: 0.98, 0.96

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

Cable has continued to rise on the back of the upward momentum of the previous trading day. The British Pound was saved by the BoE’s announcement that it would begin purchasing long-dated Gilts in order to maintain stable exchange rates. After falling to historical lows on the 26th, Cable has recovered more than 6.5%. The weaker Dollar over the past two days have also acted as a tailwind for the British Pound. However, the long term economic outlook for Britain grows worse by the day due to, previously mentioned, widening fiscal deficit and price impacts from its European neighbors. Long term credit risk could cause financial turmoil in the U.K. should the BoE play its cards wrong.

On the technical side, GBPUSD has found support at our previously estimated support level of 1.053 and is heading towards the next level of support for the pair at 1.12. RSI for the pair sits at 62.48, as of writing. On the four hour chart, GBPUSD is currently trading above its 50 day SMA but below its 100 and 200 day SMAs.

Resistance: 1.1561, 1.1854

Support: 1.08, 1.053

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

The Dollar-denominated gold rose more than 1.8% over the course of the previous trading day. The non-yielding metal continues to find bidding as the Dollar weakens. Global markets continue to be extremely risk averse as equity indices around the globe struggles. Geopolitical events happening around the globe have also acted as tailwinds for the precious metal. The U.S. 10 year treasury yield has fallen for the second straight day and is last seen trading at 3.72%. Much of the rise in Gold prices, however, should be attributed to the weakened Dollar. The non-yielding metal, despite being a traditionally inflation hedge asset, has been proven to under perform under a rising interest rate environment; in fact, the idea of Gold being an inflation hedge tool only becomes true over a 50 plus year horizon.

On the technical side, XAUUSD has rebounded strongly off of our previously estimated support level of $1640 per ounce and is heading towards the next level of support at $1660 per ounce. RSI for the pair sits at 41.4, as of writing. On the four hour chart, XAUUSD is currently trading above its 50 day SMA but below its 100 and 200 day SMA.

Resistance: 1695, 1724

Support: 1660, 1640