Fresh on the heels of today’s surprisingly low inflation data for the United States, all eyes will be on the big Fed decision ahead. Tomorrow afternoon at 2 pm ET, the Federal Open Market Committee (FOMC; the policy-making body within the Federal Reserve) will reveal their latest increase in the Federal Funds Rate, along with a corresponding statement and a new set of economic projections for the next two years (including interest rate forecasts). Following this, at 2:30 pm ET Fed Chair Jerome Powell will speak at the FOMC press conference, where he will answer questions regarding monetary policy strategy, economic outlook, and more. All these events are likely to cause a great deal of volatility across financial markets, especially as equities investors eagerly await a slower rate hike pace.
With a 50 basis point rate hike forecast for tomorrow, instead of another brutal 75 basis point hike like those that have been implemented consecutively the past several times, traders and analysts will be on the lookout for more signals regarding a further pivot away from hawkishness. They may feel further emboldened in this search in light of the latest CPI data released this morning, showcasing another month of slowing inflation, bolstering stock market optimism and reducing US Dollar bullishness. However, whether evidence for this narrative continues to build has yet to be seen: there is still the chance that the FOMC could further upwardly revise interest rate forecasts while slowing the pace, which would not be quite as bullish for stocks and bearish for USD as it may seem.
Three Indices to Watch
In yesterday’s article we discussed three pairs to monitor for those who are bullish on USD; they remain worth checking on for potential trade setups this week. Today, however, let’s examine three stock market indices worth watching for those who may be anticipating a fundamental catalyst related to potential Fed dovishness tomorrow. Though two receive neutral signals, the EdgeFinder currently offers positive ratings for all three listed below, as can be seen among their respective ratings, signals/biases, and corresponding charts.
1) US30 (Dow Jones) - Earns a ‘3’ Rating, or a ‘Buy’ Signal
2) SPX500 (S&P 500) - Earns a ‘2’ Rating, or a ‘Neutral’ Signal
3) NAS100 (Nasdaq-100) - Earns a ‘2’ Rating, or a ‘Neutral’ Signal
Tomorrow morning at 8:30 am ET, the United States Bureau of Labor Statistics is scheduled to release the latest Consumer Price Index (CPI) data for the month of November. Widely considered a proxy for inflation, the rate at which CPI increases will help the American public and the Federal Reserve discern how much of a threat high inflation continues to pose. Month-over-month CPI is forecast to slow to a 0.3% increase, while month-over-month Core CPI (which excludes volatile food and energy prices) is anticipated to clock in at 0.3% as well. If the real numbers exceed these expectations, this would be bullish news for USD and bearish news for stock market indices, whereas the inverse would be true if the numbers come in smaller. This is because hotter inflation data gives the Fed further incentive to raise interest rates to cool the economy, which strengthens the Greenback while diminishing demand for stocks. With the Fed’s next rate hike and press conference coming just two days from now, we must issue a warning: US CPI tomorrow is just the beginning for major pairs and equities.
Three Pairs to Watch
Considering that the latest Producer Price Index data released last week was quite bullish for USD, it seems plausible that tomorrow's CPI updates could yield similar results. With this in mind, for those interested in going long on USD, here are three potential pairs to watch for trade setups. While the EdgeFinder, A1 Trading’s handy market scanner, is reasonably cautious about some of them, new momentum from a fundamental catalyst could correlate with new biases being generated which are more optimistic for US Dollar bulls. They are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CAD - Earns a ‘6’ Rating, or a ‘Strong Buy’ Signal
2) USD/JPY - Earns a ‘1’ Rating, or a ‘Neutral’ Signal
3) AUD/USD - Earns a ‘-1’ Rating, or a ‘Neutral’ Signal
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
This morning at 2 am Eastern Time, the Office for National Statistics reported the latest monthly round of Consumer Price Index (CPI) and Core CPI increases within the United Kingdom’s economy. Annual CPI, which had been forecasted to hit 10.7%, instead jumped by an astonishing 11.1%, making for another multidecade high; annual Core CPI also surpassed expectations, reaching 6.5% instead of the anticipated 6.4%. Because higher-than-expected inflation numbers tend to prompt central banks to raise interest rates to cool their respective economy in response, the Pound rose on the news accordingly, with traders welcoming the bullish indicator. However, it seems quite plausible that the UK CPI data mislead markets today, because these high figures are not due to traditional economic overheating.
A more fitting target for the blame is the slew of supply side issues stemming from the wartime energy crisis and clunky access to import commodities, driving up food and gas prices. This is why Core CPI in the UK has thus far only increased by a little over half that of CPI, and why the UK’s GDP is contracting, not expanding. These structural issues cannot be resolved merely by a central bank restricting demand vis-à-vis interest rate hikes; rather, either some combination of domestic production and trade must be reconfigured, or many of these tragic conditions must simply be endured, even in the form of stagflation. Whatever comes to pass, this particular kind of high inflation is ominous, and may perhaps be more appropriately filed as bearish for GBP upon a closer look.
Two Potential Pairs to Sell
For those who are looking for opportunities to short the Pound, the following two pairs are viewed favorably for GBP bears by the EdgeFinder, A1 Trading’s handy market scanner. They are listed below with their respective ratings, signals/biases, and corresponding charts. GBP/NZD is perhaps especially worth watching, as the Kiwi Dollar displays impressive fundamentals.
1) GBP/NZD (Earns a Score of -8, or a ‘Strong Sell’ Signal)
2) GBP/CHF (Earns a Score of -3, or a ‘Sell’ Signal)
This morning at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed the latest figures for a key measure of inflation in the United States. The Producer Price Index (PPI), which tracks changes in the prices of goods and services sold by producers, was expected to increase by 0.4% month-over-month in October; instead, it only rose by a mild 0.2%. Likewise, Core PPI (which excludes volatile food and energy prices), was forecast to increase by 0.3% month-over-month, but remained static, changing exactly 0% instead. These surprising PPI numbers today offer yet another instance of American inflation dropping following the recent low CPI report, building a bearish case for USD and a bullish one for stock market indices as the need for a hawkish Fed ostensibly lessens. However, I am personally skeptical of this development as many underlying economic fundamentals have not changed, as we will discuss below.
Markets to Watch
My bias remains bullish on USD, and bearish on the US stock market, for three primary reasons: A) None of the crises the world is contending with have evaporated: an energy crisis still looms with winter around the corner, and many markets are still hot with artificial demand following quantitative easing mid-pandemic. B) The Democratic Party in the US, which tends to be seen as a pro-stimulus party, recently outperformed expectations in last week’s midterm elections, which I predicted could create short-term rallies in the stock market (but longer-term bullishness for USD). C) One month’s worth of data on inflation is not enough to mark a trend; October’s low numbers could easily be outliers, perhaps due to tapping into oil reserves to alleviate cost-of-living increases.
For those who remain bullish on USD and anticipate the Fed further hiking interest rates at a historic pace to quell high inflation, the following markets will be key to watch. They are listed below with their respective EdgeFinder ratings, signals/biases (which diverge from mine), and corresponding charts.
1) EUR/USD (Receives a -2, or ‘Neutral’ Signal)
2) US30 (Receives a 4, or ‘Buy’ Signal)
3) USO (Receives a -5, or ‘Sell’ Signal)
This morning at 8:30 am Eastern Time, the United States Bureau of Labor Statistics revealed October’s Consumer Price Index (CPI; a proxy for inflation) numbers. Included in this report was month-over-month CPI, year-over-year CPI, and month-over-month Core CPI, which cuts out volatile food and energy prices. Rather than exceeding market expectations as USD bulls have become so accustomed to, last month’s inflation rather decelerated, and by large margins too. Month-over-month CPI was a meager 0.4%, a far cry from the 0.6% forecast, and month-over-month Core CPI only increased by 0.3% instead of 0.5%. The shocking US inflation data this morning is bearish for USD at face value, painting a picture of a US economy that is beginning to cool, implying less urgent need for Fed aggression while providing encouragement for stock markets.
Three Pairs to Trade
Despite this news, a bullish USD bias can still be meaningfully tied to fundamentals, because Fed Chair Powell made it clear that the Federal Reserve will not reduce rate hike goals based on one or two occurrences of lower-than-forecast inflation data. Thus, the bearish USD price action that arises from this news grants USD bulls potential opportunities for trade setups. With this in mind, here is a selection of pairs that the EdgeFinder, A1 Trading’s market scanner, still views favorably for USD bulls; they are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CAD (Earns a 6, or ‘Strong Buy’ Signal)
2) USD/CHF (Earns a 3, or ‘Buy’ Signal)
3) EUR/USD (Earns a -3, or ‘Sell’ Signal)
For those trading stocks or the US Dollar this week, we would like to encourage caution: US midterm elections tonight may become fundamental catalysts, creating volatility across markets. With hundreds of millions of potential voters going to the polls across the United States today to decide who they want to represent them in government, these decisions will ostensibly have significant impacts on financial market activity, especially with federal elections. With Democrats projected to lose their current majority in the House of Representatives and a slew of close races to determine a new Senate majority locked in a dead heat, the policy-making landscape in the US could be quite different in January 2023, when those newly elected take office.
What Impacts Might This Have?
If Democrats manage to beat expectations and keep both chambers of Congress, even adding to their current majorities, this will likely pave the way for more federal spending packages over the next two years, potentially adding to both GDP growth and inflation. On the other hand, if Republicans take one or both chambers, this could effectively nullify President Biden’s future agenda by preventing new spending packages from passing over the next two years, reducing potential GDP growth and inflation.
Thus, my personal guess is that a) a sweeping Democrat victory would create shorter-term stock rallies and longer-term USD bullishness (due to increased stimulus), and b) one or more chambers being won by Republicans would cause longer-term stock support and slight bearishness/neutrality for USD (due to increased austerity). However, this is only speculation; we will have to wait and see how the markets respond. This reaction may take some time to culminate, as some states take longer than others to tally votes and report election victories, meaning some results may not be known for days.
Two Potential Pairs to Watch
If you are bullish on USD and looking for potential trade setups as midterm results emerge, the following two pairs are currently rated favorably by the A1 EdgeFinder for those interested in going long on the Greenback. They are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/JPY (Earns a 5, or ‘Buy’ Signal)
2) USD/CHF (Earns a 3, or ‘Buy’ Signal)
Yesterday afternoon, the Federal Open Market Committee (FOMC; the Federal Reserve’s policy making body) met market expectations by implementing another 75 basis point interest rate hike. With this now being the fourth time in a row such a large hike has occurred, this was not the central story of the day; rather, it was Fed Chair Powell’s shocking press conference afterwards. While answering reporters’ questions, he repeatedly explained that, while the size of the rate hikes could grow slimmer soon, the Federal Funds Rate must now increase to a level previously thought unnecessary. He also mentioned preferring to err on the side of over-tightening monetary policy, since it would be easier for the Fed to lift the US economy out of contraction than to stamp out overheating. With the Federal Funds Rate now at 4% and the Fed doubling down on hawkishness, USD seems primed to continue its historic climb once again as US equities suffer.
Three Potential Pairs to Buy
According to the EdgeFinder, A1 Trading’s market scanner which offers traders an array of supplemental analysis, the following three pairs are viewed quite favorably for USD bulls. They are listed below with their respective ratings, signals biases, and corresponding charts. Tomorrow morning’s big US labor news, which will be discussed in a subsequent article today, will likely provide yet another fundamental catalyst that will influence price action for these pairs.
1) USD/CAD (Earns a 7, or ‘Strong Buy’ Rating)
2) USD/CHF (Earns a 6, or ‘Strong Buy’ Rating)
3) USD/JPY (Earns a 5, or ‘Buy’ Rating)
This week has been fascinating for financial markets: stock markets have performed quite well despite global interest rate hikes and some disappointing tech earnings in the US, while the US Dollar Index continued to decline from late September’s highs. These movements are perhaps only more surprising considering that key data on the US economy was released both yesterday and today, and the chances of it further emboldening the Fed are plausible. With the Federal Reserve scheduled to adjust the Federal Funds Rate (a key interest rate in the US) on Wednesday next week, and full-blown recession still looming in the minds of investors, it is worth unpacking this fresh data in order to ask: what will the Fed do?
Consideration #1: Surprising GDP Growth
Yesterday morning at 8:30 am Eastern Time, the US Bureau of Economic Analysis released some shocking information. Quarter-over-quarter Gross Domestic Product (GDP) in the US, a measure of economic output, was estimated to have grown by a whopping 2.6% from July through September, even more impressive than the 2.3% which had been forecasted. This is a welcome respite for a country that had just met the criteria for a technical recession (two consecutive quarters of negative GDP growth). However, this remarkably positive growth may leave the Federal Reserve only feeling more at peace with their monetary tightening regiment, since GDP contractions may have kept them somewhat cautious about the severity of their rate hikes.
Consideration #2: High Core PCE Index
This morning at 8:30 am ET, the Bureau of Economic Analysis also released new inflation data. The month-over-month Core Personal Consumption Expenditures (PCE) Index, which measures the cost of goods and services purchased by consumers (excluding volatile food and energy prices), rose by 0.5%, perfectly meeting market expectations. While not bullish in the sense of exceeding forecasts, context is crucial: not only are these figures high, but they are also identical to last month’s increase. Considering that the Core PCE Index is the Fed’s preferred measure of inflation, it seems likely that the FOMC, the Fed’s policy-making committee, could interpret these numbers as an indication that recent rate hikes have been insufficient for quelling inflation.
Consideration #3: High Personal Spending
The Bureau of Economic Analysis also reported higher than expected personal spending this morning, clocking in at 0.6% month-over-month, much higher than the 0.4% forecast. Though not holding the same significance as other indicators and measures of inflation, this increase marks a pattern, with personal spending similarly beating market expectations with a 0.6% increase the previous month. Considering that the intention behind the Fed’s interest rate hikes is to curb consumer demand by limiting borrowing and spending, hot personal spending numbers help indicate that their goals have yet to be realized.
Likelihood of Fed Decisions
In light of these latest developments in economic fundamentals, the odds of continued Fed hawkishness seem only more likely. Between a return to positive economic growth, persistently high changes in core prices, and historically hot labor markets and consumer spending, a 75 basis point rate hike seems all but certain next week. A full 100 basis point hike, while not currently forecasted, may not be off the table either, though they may refrain due to concerns about inflation data as lagging indicators (rendering current data somewhat unreliable for exhaustive Fed decision-making).
Conversely, some analysts are predicting the Fed easing up on their contractionary monetary policy aggression soon. The Employment Cost Index (ECI), administered by the US Department of Labor, revealed that wages in the private sector grew by 1.2% in Q3; though still remarkable, it is a decline from the 1.6% increase in the previous quarter. While these slower increases in pay could theoretically bring core inflation a bit lower soon, these numbers are still incredibly hot. Considering that the Fed has made it clear that they are willing to err on the side of hawkishness for the sake of returning annual inflation to 2% (down from the current rate of 8.2%), the notion that a Fed pivot towards smaller hikes will be coming soon seems rather premature.
My Biases
Personally, I am anticipating further bouts of Fed hawkishness, and a corresponding return to bullish momentum for USD across major pairs. Likewise, I am expecting that the bear market for equities is not over, and that the recent rally will only make the Fed more comfortable indulging in rate hikes. Regardless, this coming Wednesday’s FOMC Statement and press conference will keep us updated on the Fed’s vision for the near future. The Statement and rate hike will be made known at 2 pm ET on Wednesday, November 2nd, with the press conference immediately to follow. The EdgeFinder, A1 Trading's market scanner which aids traders by providing supplemental analysis, is currently bullish on both USD and the S&P 500.
There is a near endless cycle of global economic news worth focusing on. Recent noteworthy stories include the complete abandonment of UK PM Truss’ ill-timed signature tax cuts, as well as the US Dollar Index briefly falling during better-than-expected US corporate earnings. Just this morning, both UK and Canadian CPI data came in hotter than what was forecast. However, one currency continues to stand out as particularly worth watching, despite few policy updates or other fundamental catalysts this week: the Japanese Yen. With Japan’s economy in a comfortable state of low unemployment and higher consumer spending, yet little dangerous overheating, the Bank of Japan continues its ultraloose monetary policy, voluntarily sacrificing JPY’s forex value for economic prosperity. With the Yen thus continuing its fall to multidecade lows, this bearish momentum shows no signs of stopping, potentially making JPY the best currency to short.
Best Pairs to Buy
According to the EdgeFinder, A1 Trading’s market scanner that assists traders by consolidating and presenting key market analysis, the following three pairs are rated favorably for those shorting JPY. They are listed below with their respective ratings, signals/biases, and corresponding charts.
Regarding technical analysis, each pair has a clear, strong uptrend. As conveyed in the EdgeFinder charts, despite Japan's fantastic economic performance, institutional bearishness (see 'COT data' in the Sentiment category) on the Yen, trend reading, and interest rate divergence are recurring bullish themes across pairs.
1) USD/JPY (Receives a 4, or ‘Buy’ Signal)
2) CHF/JPY (Receives a 4, or ‘Buy’ Signal)
3) NZD/JPY (Receives a 3, or ‘Buy’ Signal)
