Between fresh numbers for US PPI and more tomorrow, there is a good chance that forex and equities traders could encounter increased volatility across financial markets. First, at 8:30 am ET on Friday, tomorrow morning, the United States Bureau of Labor Statistics is scheduled to release the latest increases for the Producer Price Index (PPI; measures changes in the prices of goods and services sold by producers) and Core PPI (which excludes volatile food and energy prices), both month-over-month. These measurements of inflation are both currently forecast to have risen by 0.2% in the month of November; if the real figures fall short of these expectations, this would be bearish news for USD and bullish news for the US stock market, whereas the inverse would be true if the real PPI numbers exceed these expectations.
Second, at 10 am ET tomorrow, the University of Michigan in the US is going to publish the Preliminary release of their Index of Consumer Sentiment report. Released monthly, the index is based on data regarding the economic confidence of consumers gathered via survey; it acts as an indicator for economic optimism or pessimism, which can have big implications for financial markets. With the index anticipated to hit 56.9 this month, a larger number would signal more consumer optimism, which would be bullish news for USD and bearish for stocks. However, if the report fails to hit these forecasts, this could likely be bearish news for USD and bullish for the stock market. This is because, as with the PPI reports, hotter-than-expected growth and demand could cause the Federal Reserve to lean further into monetary tightening and hawkishness, which would fly in the face of investor hopes as reflected in the recent months’ stock market rally. Regardless of bullish or bearish biases, traders would be wise to keep an eye on these releases, as they may have a significant impact on price action tomorrow.
What Assets to Watch
While the EdgeFinder does not currently view the US Dollar in a particularly favorable light, it has generated one such bullish signal for a major pair. That pair is listed below, along with two assets worth watching for potential trade setups if tomorrow’s news is bearish for USD. They are all listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CAD - Earns a ‘5’ Rating, or a ‘Buy’ Signal
2) US30 (Dow Jones) - Earns a ‘4’ Rating, or a ‘Buy’ Signal
3) XAU/USD (Gold) - Earns a ‘2’ Rating, or a ‘Neutral’ Signal
Besides providing and consolidating robust fundamental analysis for retail traders to have on-hand, the A1 EdgeFinder can be especially helpful in the realm of sentiment analysis. By utilizing the software’s sentiment analysis features, traders can routinely keep up with how other traders, both institutional and retail, are allocating their capital. This matters a great deal because price action within financial markets is generated by supply and demand, which means that monitoring the aggregated demand of institutional or ‘smart money’ traders (who often have the most capital to work with) offers valuable insight into price action within these markets. With this context in mind, let's explore 3 top smart money securities as presented to us by the EdgeFinder’s Smart Money Tracker, which gathers and parses the latest Commitments of Traders (COT) data.
1) USOil – 82.47% Long, 17.53% Short
2) USD – 72.9% Long, 27.1% Short
3) Gold – 68.58% Long, 31.42% Short
As many of you already know, the EdgeFinder, A1 Trading’s market scanner software, can be incredibly helpful for discerning which securities are especially worth watching for potential trade setups. Whether you are planning on buying or selling a currency pair, commodity, bond, or more, EdgeFinder analysis is so robust that its ratings and biases can be a go-to supplement for traders. However, one feature of the EdgeFinder’s that is little mentioned, yet quite meaningful, is its generation of ‘0’ ratings and ‘Neutral’ biases. Most days, there are a small handful of pairs or securities that earn these reviews; rather than being irrelevant, these ratings can be quite convenient to keep in mind, as they can alert traders to risks in terms of lack of signals. With that in mind, here are 4 pairs to be wary of next week, as they currently earn such ‘0’ ratings, indicating that an extra measure of caution could be helpful.
1) GBP/CAD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
2) USD/CHF - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
3) XAU/USD (Gold) - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
4) GBP/USD - Earns a ‘0’ Rating, or a ‘Neutral’ Signal
Tomorrow morning at 8:30 am Eastern Time, the Bureau of Labor Statistics (BLS) will be reporting the latest data for three major measures of US labor market activity. Average Hourly Earnings is forecast to increase by 0.3% month-over-month, Non-Farm Employment Change (NFP) is expected to see net 197,000 jobs added last month, and the new unemployment rate is anticipated to clock in at 3.6%, increasing by 0.1%. However, these market expectations are thrown into question by the Automatic Data Processing NFP estimates released yesterday: 178,000 jobs were forecast, whereas the final estimation was a whopping 239,000 Non-Farm Payrolls added last month. If this same hot labor upset plays out in the BLS’ data on NFP and more tomorrow, we could experience yet another bullish fundamental catalyst for USD, lending even more credibility to the Fed’s concerns that high inflation is far from dealt with.
Three Potential Pairs to Sell
For those interested in going long on USD, here are three pairs to watch for selling opportunities. They are reviewed favorably for USD bulls by the EdgeFinder, A1 Trading’s handy market scanner. They are listed below in order of favorability, along with their respective ratings, signals/biases, and corresponding charts.
1) XAU/USD (Gold) - Earns a -8, or ‘Strong Sell’ Rating
2) AUD/USD - Earns a -6, or ‘Strong Sell’ Rating
3) EUR/USD - Earns a -6, or ‘Strong Sell’ Rating
At 8:30 am ET this morning, the United States Bureau of Labor Statistics released a new set of shocking Consumer Price Index (CPI; a proxy for inflation) data. Month-over-month CPI and Core CPI (which excludes volatile food and energy prices) both rose far more sharply than expected in September. Month-over-month inflation had been forecast to rise at 0.2%; instead, it jumped by twice that at 0.4%, equating to 8.2% year-over-year. Likewise, core inflation was anticipated to hit 0.4% month-over-month, instead rising by a staggering 0.6%. Though today’s market activity did not reflect as such, this is incredibly bullish news for USD, as it further validates the Federal Reserve’s hawkish agenda, paving the way for more rate hikes. Let’s discuss what today's CPI news means, and several potential options for trading it.
Second Wind for Stocks?
The Dow Jones Industrial Average soared over 800 points today, or nearly 3%, on the inflation news. There is a chance this could be a bit of a reflexive fluke on the part of institutional traders (due to annual inflation technically decreasing from 8.3%), because current market conditions in the US remain holistically bearish for equities as the Fed slows economic output. However, there is also a possibility that the CPI news made stock traders more optimistic in the short term; after all, the Fed’s continued rate hikes were already all but certain, but consumer spending has evidently remained resilient despite monetary tightening. Thus, it could be the case that we see a stock market rally on a stronger-than-expected economy, however brief it may be.
Even More USD Strength
Similar to a jump scare in a horror movie revealing that the monster isn’t truly dead at the end, high inflation has once again reared its ugly head. The Federal Reserve will almost certainly feel ever more emboldened in their efforts to slow the economy, perhaps now further into the future as well, since Fed Chair Powell has made it clear he wants to err on the side of caution due to lagging indicators. Because USD has primarily surged in value in conjunction with the Fed’s interest rate aggression, it seems likely that demand for the US Dollar will yet again continue en masse.
Four Pairs to Trade
Here are four of the best forex pairs to keep an eye on for USD bulls, according to the EdgeFinder, A1 Trading’s handy market scanner. They are listed below with their respective ratings, signals/biases, and corresponding charts. The US Dollar's strange drop in value today may make for some optimal points of entry for those planning to go long on USD.
1) EUR/USD (Earns a -6, or ‘Strong Sell’ Signal)
2) XAU/USD (Earns a -6, or ‘Strong Sell’ Signal)
3) GBP/USD (Earns a -5, or ‘Sell’ Signal)
4) USD/JPY (Earns a 4, or ‘Buy’ Signal)
The past two years have been historic for gold against the US Dollar (XAU/USD), as XAU/USD crossed above the 2000 level for the first time in history in 2020, and then again in early 2022. However, shortly after touching resistance in March this year, the pair began trending downward, recently hitting key support at 1700. With year-over-year inflation still roaring at 8.5% as the US experiences a technical recession (two consecutive quarters of negative GDP growth), it may seem strange that gold, renowned as a perennial safe haven asset, has not been performing well. Now is the perfect time for us to discuss, and ask: is gold's value a myth?
Gold’s Reputation
Gold has a revered status among many traders and investors, with some economists and financial gurus even believing gold’s fundamentals guarantee its value as a sort of ultimate security. Some of this is rooted in nostalgia for the gold standard, and the belief that USD only had real value when it was backed by gold. This belief is an instance of a monetary theory called metallism.
However, even those who don’t subscribe to metallism still have reason to be concerned about the risk inherent to today’s fiat currencies, which are backed by governments rather than commodities. Worries about fiat money are often central for gold bulls, as they consider gold to be a perfect alternative to the waning purchasing power of cash. For the sake of evaluating these biases, let’s consider compelling arguments for both gold bullishness and bearishness.
The Bullish Case for Gold
Although there are many reasons to be bullish on gold, there appear to be three primary ones. First, gold is a scarce resource; there is a finite amount of gold in the earth, and unlike certain commodities like lumber and grain, the total amount of gold in existence cannot (practically) be manually increased. This inherently limited supply reinforces gold’s millennia-long precious metal status.
Second, demand for gold has persisted since the earliest recordings of human civilization, only increasing exponentially as the earth’s population grows. While much of consumer spending on gold is still grounded in demand for jewelry and other luxury items, gold is also used across many industries to create computer chips, dental crowns, and more. Much of this demand also comes from gold investors, of which there are many, including the Federal Reserve.
Third, gold is a store of value, retaining purchasing power while a fiat currency’s purchasing power gradually (or rapidly) declines over time. This is because, as governments and central banks coordinate economic growth and expansion, increasing a given country’s money supply accordingly, inflation occurs as consumer demand outpaces the supply of goods and services. Gold is exempt from this process since it cannot be printed ad infinitum, and its purchasing power is bolstered with time as investors seek a hedge against inflation.
The Bearish Case for Gold
There are also many reasons to be skeptical of gold as an investment, including these three. First, while gold is indeed scarce, this does not mean the supply of gold is static, as mining production increases over time. According to Statista, global gold production has even surpassed 3000 metric tons per year several times this past decade, which means increasing availability for consumers.
Second, though there is indeed consistent demand for gold, over 33% of this demand comes from investors, including central banks. While gold is certainly a store of value to some degree, the fact that approximately one-third of spending on gold comes from investors seems troubling, as some of this could be reducible to speculation. This is especially worth considering since central banks are effectively subsidizing the gold markets with additional demand, which may not last.
Third, although fiat currencies and the foreign exchange market lend permanent precariousness to the value of money, XAU/USD’s performance has also been volatile and erratic. While XAU/USD is up 5000% since 1971, it has been a rocky road getting there, with many consecutive years of stagnation and decline as well as jumps. Considering the effect of monetary policy on XAU/USD, as well as dips following historic highs, there is reason to believe gold’s value will continue dropping amid the Fed’s aggressive rate hikes.
Conclusion: Truth, or Fiction?
The bad news is the world has seldom encountered a financial situation like the one we are currently in. Conventional Keynesian wisdom prescribes that governments and central banks spend their way out of recessions, and tax and tighten amid high inflation; however, this doesn’t take supply-side issues into account, or consider these two phenomena occurring simultaneously. Thus, we are in uncharted waters, and it is unclear what effect this will have on XAU/USD.
The good news is we still have recent historical data to work with, and new circumstances don’t render it altogether worthless. On top of this, these bullish and bearish arguments for gold are not mutually exclusive, as both can be helpful regardless of bias. While short-term bearish momentum seems to be more likely amid contractionary monetary policy over the next few years, this doesn’t negate existing demand for gold, and presents myriad buying opportunities for long-term bulls who may look forward to the eventual return of expansionary monetary policy. A1 Trading's EdgeFinder tool is also a helpful way to keeps tabs on XAU/USD sentiment and fundamentals going forward.
Key Takeaways
• After soaring in value over the course of the pandemic, XAU/USD experienced a sharp bearish reversal in 2022. With such mixed results in a time of high inflation and technical recession, it is worth wondering whether gold’s mythical safe haven status is outdated.
• Gold has a prominent reputation among traders and investors as being perhaps the most promising of all financial assets, destined to appreciate amid the inevitable uncertainty brought by fiat currencies. There are compelling arguments both for, and against, this.
• Three reasons to subscribe to XAU/USD bullishness are 1) gold’s scarcity, 2) persisting demand for gold, and 3) the depreciating value of fiat currencies, including USD.
• Three reasons to subscribe to XAU/USD bearishness are 1) gold’s increased availability, 2) subsidized demand for gold, and 3) XAU/USD’s erratic historical performance.
• Unfortunately, given the experimental nature of today’s monetary systems, it is impossible to know what gold’s value will eventually be. However, when money supplies continue expanding, there is reason to believe gold’s value will grow in correlation.
• As the Federal Reserve pursues monetary policy hawkishness in the face of 8.5% year-over-year US inflation, the XAU/USD downtrend seems likely to continue due to USD strength. Once the end of Fed tightening is near, buying opportunities may abound.
Gold is up another half percent on the day as investors weigh in a potentially weaker dollar based on a slowdown in US output. As we continue what is expected to be a volatile week, here are some reasons why gold may have finally snapped its downtrend and is gearing for a long term upside move.
Our market scanner is giving gold a +2 buy rating. The Edgefinder gave gold a positive score one week ago, and the scanner accurately predicted a price swing to the upside. The metal got its first positive rating on July 27. Since then, price ran up another 3%.
Gold's performance is largely tied with the economic state of the US as well as the geopolitical state around the world. In times of conflict, like the situation in Ukraine, gold will usually find upside. If GDP growth slows down or turns negative, investors find more value in gold over the market and the dollar.
In this case, we are experiencing both. However, according to last week's COT reports, the metal is not really seeing any considerable interest from major players. So, this week might be the first time in a while that institutions are putting more money into the metal.
Investors may be trying to price in a higher gold price on future contractions in GDP and job growth (NFP).
Gold broke above the falling trend line on the 1D chart, marking a big bullish indicator for the precious metal. Price is now testing a big resistance level at $1787 but shows strong potential to the upside. If we can see a close above the falling trend line/resistance level, gold might get above the $1800s again. The Edgefinder is now giving gold a positive outlook as the US market continues to show reactionary periods in GDP. Price is exceptionally volatile too, so big price swings are likely to continue as we approach Friday's NFP news.
The fib drawing suggest major resistance around $1860 should price complete a break above the current resistance level.
Yen pairs are much more volatile at the end of the week. JPY is showing strength after the recent Fed move to raise rates to 2.50%. The yen index is up 1.45% at the time of writing this, but heavier moves are expected to come.
Demand for the currency stems from the performance of gold. As gold's price rises, so does the yen. According to Orbex, USD/JPY and gold are -94% correlated, meaning that JPY rises while USD falls during a rise in gold's price.
Gold's recent gains could also be a result of the latest GDP numbers this month. Recessions and geopolitical conflicts tend to favor the price of gold more and both of those events are happening now. Thus, a continual contraction in US output will likely give the yen a boost due to the positive correlation it has with gold and the negative correlation with USD.
The yen is historically a risk-off pair, so the uptrend is likely to continue. However, it's harder to tell which risk-off currency is better to choose from. So, it will probably look stronger to investors when stacked against minor currencies or risk-on ones.
Up against the USD, however, JPY does not look promising. We're looking at GBPJPY, EURJPY and CADJPY on the short side while CHFJPY and USDJPY are more questionable.
This pair looks bearish as a potential momentum shift may have occurred on the 1D timeframe. Price is making lower highs and had a fake breakout from a wedge pattern. The pair may test the bottom of the rising trend line in the wedge. If that happens, we should watch for a break underneath and a fall to the 160.500s.
EURJPY has already broke underneath a rising trend line on the 1D timeframe. It also established a lower low which suggests that price wants to continue lower. If the pair closes below that trend line and 136.900s we might see another leg down to the 132.800s.
Similarly to the USD, CAD is looking mostly stronger than the yen. However, price did cross under a falling trend line and is continuing to fall lower. Price maty fall to the 101.900s level before finding support. A double top lies around 107.
Tomorrow, the FOMC outlook will give investors a gauge on what could come next for the US economy and USD. This news will be followed up with the new interest rate which is expected to go up by another 75 basis points. Here are the best pairs to trade before we get the news.
EURUSD caught support as price fell to the downside and touched a lower low on the 1H timeframe. There is a chance for upside, but the rally has not been very promising or strong in a sustainable way. If price does see more of a rally, it could touch 1.02700s before retracing. However, it looks like price wants to continue to the downside after breaking under support in the 1.01300s.
Gold struggles to get out of the support zone as long setups have only been working for quick and volatile moves upward before retracing back to new lows. Price still has support around the $1670s but could also come up to test the falling trend line on the 1D timeframe or resistance in the $1780s. An interest hike could take the metal lower, so price may come down to the second price target.
USDJPY hit a key support level on a rising trend line on the 4H timeframe. Price bounced from that level and has formed higher lows from there. Should price continue to steadily climb, there is resistance above at 137.500 and close to 139.
Stocks retrace on big tech earnings anticipation and even the recession-proof stocks like Walmart on a cut in profit outlook. Some support lies about 10 points below current price and cleaner support sits below that around $3744. Signs of the bear market rally being over might have started, and we may return to the lows of $3640 or lower.
AUDUSD could be trying to go higher towards resistance around 0.70455 on the 1D timeframe. Price could also retrace from the current resistance level on the falling trend line with support below at 0.68301 and a previous bottom at 0.66821.
Gold dropped nearly 1% this morning before finding a bottom and showed signs of rejuvenation. Settling in the $1600s, the metal saw little to no momentum to the upside for some time. But now there could be a good reason for the metal to start moving back higher again.
If the Fed continues to raise rates, output will fall. Because the central bank wants to hike more and more aggressively (from .25% to .75%) this will only increase the slowdown. Businesses will have to start spending less as the amount of layoffs climb.
Goldman Sachs predicts that the job market will come in much lower going into the third quarter. The US saw nearly 400K new jobs added last month, but now they think it will shrink by over half that to a mere 150K.
Non-Farm Payroll is still adding jobs but at a decreasing rate. One key thing that drives the gold market higher is a struggling economy, and this is what investors could be trying to price in.
There is the question, however, that the Fed may consider loosening their breakneck policy on raising rates, but chairman Powell has yet to say otherwise. He stated in his last meeting that him and the central bank have an unconditional obligation on this inflation curb.
COT data still shows that big money is decreasing long contracts from last week, but this week might be showing something different based on price action. We can look at some trade setups to see when big money starts buying the metal again.
The images above are the price chart of gold paired with COT activity. We can see that price and COT data are closely correlated. There is also a pattern with every time the metal hits our second price target. Institutions start pouring money back into the commodity and send price to the $1900s and $2000s. So with that in mind, we may start to see gold move higher from this area.
The metal fell down to the $1680s which has served as a multi-bottom level of support. Each time the price has dropped to these lows, there was an eventual shift that sent price much higher. As gold hits our second price target, it's starting to look more attractive. Should the Fed continue their rate hike pace, gold could very likely find some more upside.
Price targets we are looking at for the short run are $1719, $1750 and $1780. Heavy support sits at $1679.
