✅ Daily Market Analysis - WEDNESDAY SEPTEMBER 20, 2023Key events:
UK - CPI (YoY) (Aug)
USA - Crude Oil Inventories
USA - FOMC Economic Projections
USA - FOMC Statement
USA - Fed Interest Rate Decision
USA - FOMC Press Conference
Mixed Market Signals: US Stock Futures Stabilize, Forex Rates Range-Bound, Gold Edges Up Slightly
We observe a blend of mixed signals across various asset classes. Here's a brief overview:
US Stock Futures Stabilize: US stock futures have shown signs of stabilization after recent volatility. While they experienced fluctuations, they are currently exhibiting a more balanced and steady pattern. This suggests that investors may be finding some stability in the equity markets.
Forex Rates Range-Bound: Foreign exchange (forex) rates are trading within relatively narrow ranges. Major currency pairs are not displaying significant movements, indicating a state of consolidation and a lack of clear directional bias. Market participants may be awaiting key economic events and data releases for potential catalysts.
Gold Edges Up Slightly: Gold prices have seen a slight uptick. The precious metal has inched higher, albeit modestly, reflecting a degree of investor interest in safe-haven assets. Gold often attracts buyers during uncertain or turbulent market conditions as a hedge against risk.
Let's analyze together each point of this article
During the evening trading session on Tuesday, US stock futures displayed limited movement, mirroring a downward trend in major benchmark indices as bond yields continued to climb in anticipation of the impending interest rate decision by the Federal Reserve.
Dow Jones Futures, S&P 500 Futures, and Nasdaq 100 Futures all exhibited marginal fluctuations, remaining within a narrow 0.1% trading range.
NASDAQ Index daily chart
SPX Index daily chart
DJI Index daily chart
As we draw closer to the upcoming policy announcements from the Federal Reserve (Fed), Bank of England (BoE), and Bank of Japan (BoJ) scheduled for later this week, major foreign exchange rates are showing limited trading ranges. This subdued trading environment comes on the heels of a substantial sell-off that occurred at the end of the previous week, triggered by developments in the European Central Bank's (ECB) latest policy meeting. Notably, the euro demonstrated signs of a modest recovery yesterday, with its value surging to an intraday high of 1.07199. This rebound allowed the euro to surpass the low it had touched at the conclusion of the previous week, which had been at 1.0632.
EUR/USD daily chart
The resurgence of the euro yesterday can largely be attributed to a noteworthy report from Reuters, which cited sources within the European Central Bank (ECB). The report, titled "ECB to Address Excess Liquidity in Next Phase of Inflation Combat," played a pivotal role in boosting the euro's performance.
The minutes released from the September meeting of the Reserve Bank of Australia (RBA) revealed the possibility of further tightening measures if inflation continues to persist. Additionally, market attention was focused on China's central bank (PBOC), which was set to announce its interest rate decision later in the day, potentially impacting the Australian Dollar.
In another part of the forex market, the USD/JPY pair saw a notable surge, reaching a peak of 147.99. This marked fresh highs for the year 2023 and was supported by the ongoing rise in US bond yields.
USD/JPY daily chart
In the previous trading session, the US Dollar closed at 147.60 Japanese Yen, while Japan's 10-year JGB yield increased by 1 basis point, reaching 0.71%.
Against the Canadian Dollar (USD/CAD), the Greenback experienced a decline, slipping from 1.3485 to 1.3445. This marked the Canadian Dollar's strongest performance in six weeks, buoyed by Canada's annual inflation data hitting 4%, surpassing the anticipated 3.8%.
The Dollar Index (USD/DXY), which measures the US Dollar's strength against a basket of six major currencies, saw a slight drop from 105.35 to 105.15. Market expectations are leaning towards the Federal Reserve maintaining its current interest rates at the upcoming meeting.
US Dollar Currency Index daily chart
In additional economic developments from the previous day, US Housing Starts for August disappointed by coming in at 1.28 million units, falling short of expectations. This figure represented the lowest reading since June 2020. Conversely, Building Permits for August showed strength, reaching 1.54 million units, surpassing the previous figure of 1.44 million, and beating estimates set at 1.44 million.
Regarding the precious metals market, the most-active futures contract for gold on New York's Comex, specifically the December contract, settled at $1953.70 per ounce. However, it recorded a modest gain of just 30 cents for the day.
XAU/USD daily chart
The 10-year Treasury yield is currently hovering around the highs observed in August, suggesting the possibility of establishing new cycle highs. Gold traders are closely monitoring these developments, with their initial focus centered on the Federal Reserve (Fed) and subsequently shifting to the policy decisions of the Bank of England (BOE) and the Bank of Japan (BOJ).
Should optimism rise that most advanced economies have completed their interest rate hikes, it could provide a favorable backdrop for gold. However, achieving such optimism may prove challenging, given that the Fed and BOE might not indicate the conclusion of their rate hikes just yet. If concerns about economic slowdowns, often referred to as "hard landings," start to trouble Wall Street, gold could attract safe-haven flows despite some underlying dollar strength.
Global markets are adapting to a new perspective on rate hikes, triggered by the European Central Bank's decision to raise rates to a record high of 4% on Thursday, even as it suggested that this hike might be its final move in the near term.
While the Fed's policymakers are not expected to raise rates at their upcoming meeting on September 20, this follows a series of 11 hikes that added 5.25 percentage points to the base rate. In February 2022, the rate stood at just 0.25%. Chairman Jerome Powell's statements during his news conference on Wednesday will be closely analyzed for insights into the Fed's outlook for the remainder of the year, especially with two more policy meetings scheduled for November and December.
Nonetheless, with a Fed rate hike seemingly on hold for now, some dollar investors are adopting a wait-and-see approach, while others are capitalizing on the greenback's recent eight-week rally.
In August, US consumer prices experienced their second consecutive monthly increase, resulting in a year-on-year growth rate of 3.7%, up from 3.2% in July. This rise was primarily attributed to surging gasoline prices, accounting for over half of the overall increase. Such a phenomenon could exert renewed pressure on those at the Fed who are committed to combating inflation.
US Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a widely followed economic indicator in the United States that measures changes in the average price level of a basket of goods and services commonly purchased by households. It is a key gauge of inflation and provides valuable insights into the cost of living for the average American consumer. The CPI is released by the U.S. Bureau of Labor Statistics (BLS) on a monthly basis and is considered one of the most important economic indicators.
The CPI calculation involves tracking the prices of thousands of items across various categories, such as food, clothing, housing, transportation, and medical care. These items are grouped into different expenditure categories, and their prices are weighted based on the average spending habits of urban consumers. The index is then calculated by comparing the current prices of these items to a base period's prices, usually set at 100.
Here are some key points about the US Consumer Price Index (CPI):
Inflation Measurement: The CPI is primarily used to measure inflation, which is the rate at which the general price level of goods and services rises over time. It helps policymakers, economists, and investors assess the impact of price changes on purchasing power and economic stability.
Components: The CPI is divided into two main components: the "core" CPI and the "headline" CPI. The core CPI excludes volatile food and energy prices, as they can experience significant short-term fluctuations. The headline CPI includes all items, providing a broader view of price movements.
Base Year: The CPI is reported relative to a base year, which is assigned a value of 100. Changes in the index represent the percentage change in prices relative to the base year. For example, if the CPI is 110, it indicates a 10% increase in prices since the base year.
Monthly Release: The BLS releases the CPI data on a monthly basis, typically around the middle of each month, with a one-month lag. This allows for the timely assessment of inflation trends.
Uses: The CPI is used for various purposes, including adjusting Social Security benefits, indexing pensions, calculating cost-of-living adjustments (COLAs), and helping businesses adjust prices and wages to account for inflation.
Economic Indicator: Economists and policymakers closely monitor CPI data to make informed decisions about monetary policy, interest rates, and economic stimulus. High inflation can erode purchasing power and lead to changes in central bank policy.
Basket of Goods: The CPI's "basket of goods" is periodically updated to reflect changes in consumer preferences and spending habits. This ensures that the index remains relevant and accurate.
Core and Headline CPI: The core CPI, which excludes food and energy prices, is often used to assess underlying inflation trends. The headline CPI, including all items, provides a more comprehensive view of overall inflation.
In summary, the US Consumer Price Index (CPI) is a crucial economic indicator that tracks changes in the average price level of goods and services purchased by consumers. It helps gauge inflation, informs policy decisions, and has significant implications for individuals, businesses, and the broader economy.
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The central bank maintains its targeted inflation rate at a maximum of 2% per year and has committed to achieving this objective through additional interest rate hikes if they are deemed necessary.
The key areas of focus will be the Federal Reserve's (Fed) economic projections and the Fed Funds rate forecasts. Of particular significance will be the Fed's "dot plot," which discloses the individual perspectives of Fed members regarding the future path of interest rates. Until this information is released, we can expect foreign exchange markets to remain within their recent trading ranges, albeit amid somewhat turbulent conditions.
