Market News Report - 20 October 2024While it was a mild week, the US dollar was again among the strongest currencies. Other ones include CAD and GBP, while NZD was among the weakest.
Let's dive into what we should expect for each major forex market in our latest fundamental report.
Market Overview
Below is a brief technical and fundamental analysis breakdown for all major currencies.
US dollar (USD)
Short-term outlook: bearish.
Despite a recent 50 basis points (bps) rate cut, the Fed may not need to cut rates as aggressively going forward. This is partly due to positive job numbers and earnings data that exceeded expectations.
Still, the central bank has signalled the potential for two 25 bps drops by the end of this year. Meanwhile, a 50 bps cut has pretty much been priced out, with STIR (short-term interest rate) markets seeing a 14% chance of a hold next month.
The Dixie continues to head north after weeks of ranging around the key support area at 100.157. We have spoken about a potential technically-driven retracement (despite the bearish fundamentals).
Meanwhile, the key resistance is far away at 107.348, which will remain untouched for some time.
Long-term outlook: weak bearish.
The latest strong NFP report has raised expectations for a 25 bps rate cut (instead of 50 bps), which is giving USD a boost in the near term. So, there is no extreme dovish pricing anymore.
While the bearish bias remains, the dollar may gain amid a broad pullback. This idea could prove even more relevant if Donald Trump wins the upcoming election.
Euro (EUR)
Short-term outlook: bearish.
The STIR markets were predictably accurate as the European Central Bank (ECB) cut the interest rate last week.
However, they remain data-dependent on what to do in the future (although they are quite concerned about slow growth).
Also, the past week saw weaker economic data across various European nations. Finally, short-term interest rate markets have indicated an 83% chance of a rate cut in December.
The euro has finally made its bearish intention known on the charts after spending weeks near the resistance at 1.12757. It is close to the key support at 1.07774.
Long-term outlook: bearish.
The latest rate cut and the avoidance of indicating a clear future move for the December meeting are among the key down-trending factors. Furthermore, a threat of a trade tariff with Trump could be negative. Couple this with potential USD strength, and we have a clear bearish bias for the euro.
British pound (GBP)
Short-term outlook: bearish.
The Bank of England (BoE) kept the interest rate steady in its recent meeting. Still, the language indicates they need to be “restrictive for sufficiently long.” Also, the central bank's higher-ups stressed "a gradual need" to cut rates.
As with the ECB, the central bank's current key theme is fighting persistent inflation in the United Kingdom. So, it makes more sense to be dovish than hawkish. Not long ago, Governor Bailey hinted that "aggressive rate cuts" were possible if inflation went lower.
We mentioned that the current retracement may be the start of a more serious bear move. So far, that's what the pound is experiencing. The nearest key support is at 1.26156, while the resistance target is 1.34343.
Long-term outlook: weak bearish.
Sequential rate cuts by the BoE may soon be a reality. Also, weak CPI, labour, or GDP data should be expected to back up the bearish bias. However, the central bank hopes for lower service inflation, which may provide relief.
Another interesting point is the latest CFTC (Commodity Futures Trading Commission) report, showing that GBP longs have been stretched to the upside. So, bullishness should be limited at some point.
Japanese yen (JPY)
Short-term outlook: bullish.
The primary bullish catalyst is the Bank of Japan’s (BoJ) recent decision to hike the interest rate. STIR markets expect a hold at the next meeting but a hike at the start of next year.
Governor Ueda of the BoJ noted that despite domestic economic recovery, recent exchange rate movements have reduced the upside risk of inflation (which has been on an upward trajectory). All of this backs up the potential for a rate hold or hike.
The 139.579 support area is proving quite strong, boosting the yen since mid-September. Still, the major resistance (at 161.950) is too far for traders to worry about.
Long-term outlook: weak bullish.
Lower US Treasury yields are one potential bullish catalyst for the yen (the opposite is true). Inflation pressures and wage growth would also provide upward momentum. We should also consider that the dovish tendencies of other major central banks and worsening US macro conditions are JPY-positive
Still, as a slight downer, near-term inflation risks subsiding (according to the BoJ) reduce the urgency for a rate hiking cycle.
Australian dollar (AUD)
Short-term outlook: weak bullish.
The Reserve Bank of Australia (RBA) kept the interest rate unchanged during the Sept. 25 meeting. They further stated that they "did not explicitly consider rate hikes" for the future, which is a marginally dovish statement.
The Aussie remains sensitive to China’s recent economic woes. However, high iron prices have supported the former.
Finally, recent positive unemployment data gives a base case for a hold in the next RBA interest rate meeting.
After failing to break the 0.69426 resistance level several times, the Aussie has retraced noticeably from this area. Still, this market is bullish and far from the major support level at 0.63484.
Long-term outlook: weak bullish.
While the RBA hasn’t ruled anything out, the central bank isn’t explicitly suggesting rate hikes in the future.
It’s crucial to be data-dependent with the Aussie, especially with core inflation as the RBA's key focus area.
However, the Australian dollar is pro-cyclical, meaning it is exposed to the economies and geopolitics of other countries, especially China.
New Zealand dollar (NZD)
Short-term outlook: bearish.
Unsurprisingly, the Reserve Bank of New Zealand (RBNZD) cut its interest rate by 50 bps recently and sees further easing ahead. This affirms another cut next month of potentially the same magnitude.
Furthermore, the central bank is confident that inflation will remain in the target zone, adding more impetus to the bearish bias.
Due to the rate cut, the Kiwi has been on a downward spiral, proving the strength of the major resistance level at 0.63696. Conversely, the major support is at 0.58498.
Long-term outlook: bearish.
The central bank's latest dovish stance (where it cut the interest rate) firmly puts the Kiwi in a 'bearish bracket.' They also revised the OCR rates lower and signaled steady winnings in the inflation battle.
Canadian dollar (CAD)
Short-term outlook: bearish.
The Bank of Canada (BoC) recently dropped the interest rate to 4.25%, as anticipated by the markets for some time. Further cuts in the next few meetings are on the cards, with the long-term target being 3%.
Unemployment, weak economic growth, and mortgage stress are the key drivers for this dovishness.
Watch out for the new interest rate for CAD on Wednesday, where a 50 bps cut is predicted (77% chance).
While the short-term fundamental biases of USD and CAD are bearish, CAD is weaker on the charts. USD/CAD is making a steady uptick towards the key resistance at 1.39468, while the key support lies down at 1.33586.
Long-term outlook: weak bearish.
Expectations of a rate cut remain the focal point. Governor Macklem himself stated a while ago that it's reasonable to expect more cuts in the future. Any big misses in upcoming GBP, inflation, and labour data will send CAD lower.
Also, mortgage stress remains a major factor in this interest rate policy, and the BoC will have to cut rates to alleviate it.
Still, encouraging oil prices and general economic data improvement would save the Canadian dollar's blushes.
Swiss franc (CHF)
Short-term outlook: bearish.
STIR markets were, as usual, correct in their 43% chance of a 25 bps rate cut (from 1.25% to 1%) recently. In the Sept. 26 meeting, the Swiss National (SNB) indicated its preparedness to intervene in the FX market and further rate cuts in the coming quarters.
The central bank's new Chair (Schlegel) said they "cannot rule out negative rates." Finally, the September CPI came in weak at 0.8%, against the expected year-on-year 1.1%.
Still, the Swiss franc can strengthen during geopolitical tensions, such as a worsening Middle East crisis.
USD/CHF has just broken out of the range (but only just) discussed in our last few reports. While remaining largely bearish, this market could return closer to the major support level at 0.83326 or climb its way to the higher major resistance level at 0.92244.
Long-term outlook: weak bearish.
The bearish sentiment remains after the last SNB meeting, while inflation is being tamed with lower revisions. We should also remember that the SNB's intervention prevents the appreciation of the Swiss franc.
The new chairman is more keen to cut rates than his predecessor, Jordan. STIR markets are currently pricing a 23% chance of a 50 bps cut at the December meeting.
On the other hand, 'safe haven flows' and geopolitical risks can be positively supportive of the currency. As with other central banks, inflation is a crucial metric in the SNB's policy rates.
Conclusion
In summary:
This week's main high-impact news event is Wednesday's CAD interest rate decision.
Our short and long-term fundamental outlooks remain unchanged from the last few weeks.
As always, hope for the best and prepare for the worst. This report should help you determine your bias toward each currency in the short and long term.
