Markets Cautious on Growth Fears and Geopolitical Risks

11 October 2022, 02:27

Market Focus

U.S. equities fell for the fourth straight day as growth fears and geopolitical risks weigh on market sentiment. The Dow Jones Industrial Average lost 0.32% to close at 29202.88. The S&P 500 shed 0.75% to close at 3612.39. The tech-heavy Nasdaq Composite dropped 1.04% to close at 100542.1.

Washington’s decision to further restrict China’s access to U.S. technology added to signs of slowing chip demand worldwide. Market participants remain cautious ahead of the FOMC meeting minutes and CPI data, scheduled, respectively, to be released during the second half of the U.S. trading session on Wednesday and the U.S. trading session on Thursday.

The benchmark U.S. 10 year treasury yield has soared past 3.9% and was last seen trading at 3.955%.

The upcoming earnings season has been tainted by the relentless rate hikes by the Fed. JPMorgan Chase and Citigroup are among the big banks that will unveil earnings later this week. While economic data releases have brought great volatility to markets so far this year, the upcoming earnings season could drag equities even lower.

Daily Return vs US Dollar(%)

Main Pairs Movement

The Dollar Index rose 0.38% over the course of yesterday’s trading. Dollar demand resumed as bonds sold off and short term interest rates soared. Trading at 113.17, the Dollar Index still has room above ahead of the key inflation data release on Thursday.

EURUSD retreated 0.43% over the course of yesterday’s trading. The higher demand of the Dollar continues to weigh on the shared currency as market participants brace for another round of tightening by the Fed.

Cable lost 0.34% over the course of yesterday’s trading. The British Pound fared worse against the Dollar as market sentiment turned risk off. Market participants will now turn their attention to the British average earnings index, scheduled to be released during today’s European trading session.

Gold slumped 1.5% against the Dollar as market participants’ for the Dollar outpaced Gold demand. As market participants prepare for another round of Fed tightening, Gold continues to stay on the backfoot as yield expectations rise.

Technical Analysis:

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

The EUR/USD pair declined further on Monday, remaining under pressure and extending its decline for a fourth consecutive day near 0.9680 level amid risk-off market mood. The pair is now trading at 0.9701, posting a 0.41% loss. EUR/USD stayed in the negative territory amid stronger US dollar across the board, as another solid print from Nonfarm Payrolls last Friday continued to provide further strength for the greenback. The US Federal Reserve (Fed) is likely to maintain the aggressive quantitative tightening as the Nonfarm Payrolls report hinted at healthy job creation, therefore triggered the dismal market mood. For the Euro, the escalation of the geopolitical conflict continued to exert bearish pressure on the EUR/USD pair as Russia launched a massive attack which targeted energy and communications infrastructure on Ukraine.

On the technical side, the RSI is at 35 as of writing, suggesting that the downside is more favored as the RSI stays below the midline. As for the Bollinger Bands, the price remained under pressure and moved alongside the lower band. Therefore, the downside traction should persist. In conclusion, we think the market will be bearish as long as the 0.9735 resistance line holds. Additionally, technical indicators are hovering near oversold readings and the risk is also skewed to the downside.

Resistance:  0.9735, 0.9836, 0.9921

Support: 0.9664, 0.9551

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

The GBP/USD pair edged lower on Monday, preserving its downside momentum and failing to stage a steady rebound despite the Bank of England announcing new support measures. Cable stayed in negative territory with a 0.44% loss for the day. The reports of Russia launching missile attacks on Kyiv and other cities in response to the Crimea bridge attack over the weekend has weighed on investors’ sentiment, which provided a boost to the US dollar and dragged the GBP/USD pair lower. For the British pound, the Bank of England announced a raft of new measures to smooth market functioning, including raising the limit of its government bond-buying scheme from £5B to £10B per day. But, it seems like the additional support measures from BoE failed to lift Cable higher as concerns about the UK government’s fiscal policy and recession fears still remained.

On the technical side, the RSI is at 35, suggesting that buyers stay on the sidelines for the time being as RSI indicators on the four-hour chart stayed below 40. As for the Bollinger Bands, the price witnessed consistent selling and continued to drop towards the lower band, therefore a continuation of the bearish trend can be expected. In conclusion, we think the market will be bearish as long as the 1.12200 resistance line holds. On top of that, a steeper decline could be expected if the ongoing slide extends below the 1.0797 support.

Resistance: 1.1220, 1.1366, 1.1476

Support: 1.0797, 1.0649, 1.0392

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

XAUUSD extended last week’s retracement slide from $1730 marks region and continues losing ground for the fourth successive day on Monday, which tumbled to $1667 mark as of writing. In the past week, Fed officials reiterated their commitment to bringing inflation to the Fed’s 2% target. On Monday, the Chicago Fed President Charles Evans said that he expected the Federal funds rate (FFR) to end at around 4.5% early in 2023 –  FFR sits at 3.25% – and then to remain around that level for “some time.” He sounded optimistic that the Fed could achieve a soft landing due to Fed projections of the unemployment rate hitting 4.4% by the end of the next year, while the Fed’s inflation measure to fall to 2.8% from August’s 6.2%. Additionally, last week’s US Nonfarm Payrolls report figured more than forecast, further justifying Evan’s case for the Fed to continue tightening at an aggressive pace. In fact, the markets are now pricing in a greater chance of the fourth consecutive supersized 75 bps rate increase at the next FOMC policy meeting in November.

On the technical side, the RSI is below 30, indicating the yellow metal was going into an oversold area. As for the Bollinger Band, the prices were breaking through the lower band and the gap between upper and lower band were being larger, showing that the gold would continue its bearish momentum, and test the lowest since October’s $1660 mark. Once the price fell below $1660 mark, next support would be a two-year low of $1615.

Resistance: 1700, 1725

Support: 1659, 1641, 1615