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)
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
From the hours of 3:15 to 9:45 am Eastern Time on Monday morning, there may be several fundamental catalysts that cause great volatility across the forex market. This prompts us to issue a warning: PMI on Monday. France and Germany, the United Kingdom, and the United States will all be releasing the latest monthly results of their respective Flash Manufacturing Purchasing Managers Index (PMI) and Flash Services PMI, within just hours of each other. These indices, which are composed by surveying purchasing managers across the manufacturing and services industries, are key indicators of economic expansion and contraction, which offers traders a sneak peek at each country’s evolving GDP.
If a set of PMI numbers come in higher than currently forecasted, this will theoretically be bullish for the host country’s currency, whereas numbers that fail to meet forecasts would likewise be bearish. With EUR, GBP, and USD already contending with potential market turmoil from war-related energy crises, upcoming US midterm elections, and UK Prime Minister Truss’ historic resignation yesterday after a mere six weeks in office, Monday’s news may only add more fuel to the fire.
Three Pairs to Watch
While the PMI data could swing in all sorts of directions, holistic economic conditions such as energy access and Fed hawkishness seem to further weigh in USD’s favor. However, given the pullback on recent highs from USD, A1’s EdgeFinder is perhaps signaling more caution than enthusiasm here. Nonetheless, in the context of the potential PMI catalysts, the following three pairs are well worth watching for trade setups. They are listed below with their respective ratings, signals/biases, and their corresponding charts.
1) EUR/USD (Receives a -5, or ‘Sell’ Signal)
2) GBP/USD (Receives a -2, or ‘Neutral’ Signal)
3) EUR/GBP (Receives a -1, or ‘Neutral’ Signal)
This morning, at 8:30 am Eastern Time, the Federal Reserve Bank of Philadelphia released an unfortunate batch of news for the US economy. The Philadelphia Fed Business Outlook Survey, otherwise known as the Philly Fed Manufacturing Index, which surveys over 200 Philadelphia manufacturers on a monthly basis, indicated worsening business conditions this month. While a score of -5 was anticipated, and would have already been a pessimistic indication, the real number was a bleaker -8.7. Considering that American manufacturing is a crucial component of US exports, these disappointing conditions ostensibly highlight the toll that a strong US Dollar is taking on trade, which carries negative implications for US GDP growth, or the lack thereof. With USD falling on the Philly Fed News today, monetary tightening-induced recession fears continue to haunt financial markets.
End of the Road for USD?
While the USD bullish run cannot last forever, a reversal currently seems unlikely anytime soon. High core inflation and hot labor markets are still incentivizing the Federal Reserve to continue their aggressive rate hike strategy, which they show little sign of stopping, regardless of UN criticism. Those bullish on USD may want to watch bearish movements like these for potential trade setups, which could yield potential discounted opportunities for going long on the Greenback.
Three Potential Pairs to Trade
According to the A1 EdgeFinder’s market analysis, the following pairs rank favorably for those interested in going long on USD. They are listed below with their respective ratings, signals/biases, and corresponding charts.
1) USD/CHF (Earns a Score of 4, or a ‘Buy’ Signal)
2) EUR/USD (Earns a Score of -5, or a ‘Sell’ Signal)
3) AUD/USD (Earns a Score of -4, or ‘Sell’ Signal)
Today (Friday, October 14th) has been full of historic and turbulent decisions within the United Kingdom. Chief among them include the official end of the Bank of England’s (BoE) emergency bond-buying intervention scheme, as well as Prime Minister (PM) Liz Truss’ decision to fire Kwasi Kwarteng from his role as Chancellor of the Exchequer. He had only served in the position less than six weeks; his time in office is the second shortest ever for a Chancellor. With the UK’s economy now taken off of monetary policy life support, and a former foreign minister named Jeremy Hunt now appointed the new Chancellor, both the BoE and the PM are hoping for a fresh start. However, GBP bearishness only looks ever more compelling; let’s explore five crucial points of consideration as we evaluate the case against the Pound.
1) No More BoE Intervention
Towards the end of September, following the now-former Chancellor’s ‘mini-budget’ announcement that included debt-financed plans for energy bill subsidies and stimulus via tax cuts, GBP plummeted in value. The selloff saw the Pound reach never-before-seen lows against the US Dollar, nearing parity; to contain the selloff and prevent an implosion of the UK’s financial system, the BoE jumped into action. Buying bonds in order to inject new liquidity and project some semblance of economic optimism for wary financial institutions, the monetary rescue mission has worked, at least to an extent. However, this program ends today; now that the BoE is withdrawing its palliative aid, there is ostensibly nothing preventing another GBP selloff.
2) PM Truss’ Untimely Vision
While PM Truss may be nominally taking steps in a better direction, e.g., walking back certain tax cut provisions and appointing a new Chancellor, these gestures may be more tokenistic than substantive. This is because her whole underlying vision for the UK’s economy is incongruent with current circumstances: attempting to use fiscal stimulus to spur growth in the midst of 40-year inflation highs is almost nonsensical, contrasting both Keynesian and Austrian theories on economics. Even if she affirms a couple budgetary changes, there are few signs that she is relenting from expansionary policy in general, the key catalyst that prompted the GBP selloff.
3) UK Energy Insecurity
A central component of GBP’s bearish fundamentals is the energy crisis the UK is facing, similar to that of mainland European countries. The crux of this problem is that Britain’s shockingly high inflation rate, currently 9.9% year-over-year, is not just due to economic overheating post-stimulus, but is also caused by restricted energy supply and high global prices in the aftermath of sanctions with Russia. This supply-side problem cannot be fixed with hawkish monetary policy, forcing the UK’s government to choose between partially subsidizing energy bills with money printing, or potentially letting energy costs increase manifold, devastating consumers. Neither of these solutions can solve the underlying issue, and both contribute to Pound weakness.
4) Post-Brexit Instability
Another risky factor underpinning the fragility embedded within the UK’s financial system is uncertainty post-Brexit. With trade policy still in a state of flux upon leaving the EU, the UK’s economy was already in a delicate position in the eyes of potential investors. Now the UK is facing the same crises without the extra layer of financial security that comes with being an EU member, all while it is still finding its new footing on the world stage. Market sentiment may continue to assess that British equities, bonds, and the Pound are thus too risky to go long on, opting to further short GBP and other securities instead.
5) Empirical Forex Data
On top of these bearish fundamentals, institutional sentiment and market activity currently corroborate a bleak outlook for the Pound. According to the most recent Commitments of Traders (COT) data, 68.53% of institutional traders are selling GBP against other currencies, an increase of 4.55% over the previous week. Because financial institutions contribute significantly to price action and market volatility in forex, this institutional GBP bearishness has reflected in the markets accordingly. As depicted in the GBP/USD chart above, we have yet to see a breakout to the upside above trendline resistance on the 1-day timeframe (though a higher low has been found at the 1.10 level, before the bond-buying scheme finished).
A Grim Conclusion
From the standpoint of both fundamentals and sentiment analysis (as well as some technical analysis), a return to GBP bearish momentum seems quite plausible. While the fate of GBP minor pairs appears to be less clear, A1 Trading’s EdgeFinder tool, a market scanner that offers helpful supplemental analysis, rates GBP/USD at a -6, earning a ‘strong sell’ signal.
• Today has been historically significant for the UK’s fragile economy: the Bank of England’s emergency bond-buying program wraps up, and Chancellor of the Exchequer Kwasi Kwarteng has been fired. The case for GBP bearishness is quite a compelling one.
• First, the Bank of England’s quick monetary intervention to save GBP from collapsing ends today. With their policy efforts having briefly saved the Pound from dire sentiment and fundamentals, the primary measure of security for GBP’s value in forex is now gone.
• Second, while UK Prime Minister Truss has made some budgetary concessions, such as walking back the extent of her tax cuts, her underlying policy agenda is barely changed. Considering her vision was the catalyst for the GBP selloff, this is bad news.
• Third, the UK faces an energy crisis similar to that of mainland Europe, forcing the government to choose between debt-financed subsidies or devasting, near-unaffordable energy bills. Neither option is good for GBP, nor can be fixed by curbing demand via rate hikes.
• Fourth, the problems afflicting the UK’s precarious financial system are exacerbated by post-Brexit difficulties. Without the extra layer of economic protection brought by the EU, financial markets may judge GBP and UK stocks and bonds to be too risky to buy.
• Fifth, besides fundamentals, institutional sentiment and price action appear to confirm this bearish narrative for GBP. Over 68% of institutional traders are now shorting GBP against other currencies, and GBP/USD has yet to break out above key resistance.
• In conclusion, at best the Pound does not appear to be worth buying; at worst, market conditions look incredibly bearish for the currency, and for the UK’s economy in general. Currently, GBP/USD receives a ‘strong sell’ signal from the A1 EdgeFinder as well.
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)
As many traders and analysts grapple with today’s big economic news (namely, the UK’s disappointing 0.3% month-over-month contraction in GDP, the US’ surprise 0.4% jump in month-over-month PPI, and the FOMC meeting minutes set to release at 2 pm), many are similarly preparing for tomorrow's new round of CPI data in the US. Scheduled for reporting by the Bureau of Labor Statistics at 8:30 am on Thursday, October 13th, the public will learn how prices for US consumers changed in September. Because CPI is a proxy for inflation, this news will likely cause a great deal of volatility across financial markets, potentially offering another fundamental catalyst for USD bulls if September’s hot jump in PPI is any indication. While major pairs like EUR/USD, GBP/USD, and USD/JPY are thus still ripe for trading, it can also be worthwhile to explore some less frequently traded pairs as well. Here are the A1 EdgeFinder’s top 4 minor pairs to trade, along with some additional analysis for each.
1) CHF/JPY (Earns a 3, or ‘Buy’ Rating)
2) EUR/CHF (Earns a 3, or ‘Buy’ Rating)
3) AUD/JPY (Earns a -3, or ‘Sell’ Rating)
4) AUD/NZD (Earns a -3, or ‘Sell’ Rating)
On Wednesday, October 5th, the multinational group known as OPEC+, which consists of the OPEC member countries plus a selection of non-member allies (including Russia), made a shocking and controversial move. They decided to collectively scale back their oil production, which currently amounts to approximately 40% of the world’s supply, by 2 million barrels per day, or 2% of global output. This policy agenda comes on the heels of several months of declining oil prices, with brent crude oil falling below $95 a barrel from this recent summer’s highs around $125 a barrel. As the Economist describes, this organization operates in a manner comparable to an international central bank, with the goal of keeping oil and gas prices high and stable. These production cuts will surely be felt by consumers and investors around the world, which is why we ought to discuss how to trade the OPEC news.
What Exactly is OPEC?
The Organization of the Petroleum Exporting Countries, or OPEC, is an intergovernmental organization that plays a weighty role in influencing oil and gas prices on an international scale. Consisting of thirteen member countries which meet regularly, not only do they contribute well over a third of the world's oil supply, but they also own over 75% of the world's oil reserves. OPEC+ also includes ten additional countries which participate in OPEC’s plans, and whose sizeable global authority grows exponentially larger amid an energy crisis, particularly one primarily created by Russia, an OPEC+ participant.
Why Are These Output Cuts Significant?
These cuts, which could likely become more severe than expected given OPEC+’s reputation for failing to meet production goals, guarantee a smaller energy supply available within the global markets short-term, which necessarily creates higher oil and gas prices. This reduced supply and higher prices could not come at a worse time for many internationally speaking: European countries are already grappling with the consequences of underdeveloped energy sectors due to years of reliance on Russian exports, and many lower income countries are struggling under the burden of painful US Dollar-denominated debts and energy prices. This is a devastating economic blow to billions of people around the world, and it will reflect as such across financial markets.
Could Rising Oil Prices Be Mitigated?
Unfortunately, there does not appear to be much that can be done in the short-term to resolve this situation, at least on a multinational level. US President Biden announced a plan to release 10 million more barrels of oil from the US Strategic Petroleum Reserve in the month of November, in addition to the 180 million barrels already released since Spring of this year. While this may help cushion some of the initial blow for consumers, it is purely palliative, and unsustainable given the reserve’s limitations and the potential longevity of this energy crisis. Norway, now the EU’s largest supplier of gas, announced plans to use ‘joint tools’ to boost exports for Europe amid crisis, but precise details about this arrangement are currently few. It could take a grueling amount of time for the world’s countries to expand energy grids and develop diplomacy strategies to mitigate damage.
How Have Forex Fundamentals Changed?
Due to oil’s now artificially exacerbated scarcity, and its aforementioned effects on various economies, this news has certainly influenced market fundamentals, including within the forex market. For commodity traders, fundamentals appear to be quite bullish for US Oil into the near future and may continue to be so until global oil output returns to previous levels. For those trading currency pairs, this news is likely bullish for the Canadian Dollar, a ‘commodity currency’ since oil and gas production and exports are central for Canada’s economy. By contrast, this news offers further bearish potential for the Euro, since this current energy crisis has been catalytic in sending EUR to historic lows against other currencies, especially USD.
Three Trading Possibilities
The EdgeFinder, A1 Trading’s market scanner tool which offers traders holistic supplemental analysis for a variety of pairs and securities, corroborates the fundamentals mentioned above. The following three possibilities are viewed favorably for traders, and are listed with their respective ratings, biases/signals, and a chart which lists the specific factors the EdgeFinder takes into account.
A) USO - Earns a 7, or ‘Strong Buy’ Signal
B) EUR/CAD - Earns a -2, or ‘Neutral’ Signal (personal sell bias)
C) EUR/USD - Earns a -7, or ‘Strong Sell’ Signal
Tomorrow morning at 8:30 am Eastern Time, the United States Bureau of Labor Statistics will release three key monthly labor data reports: Average Hourly Earnings (month-over-month), Non-Farm Employment Change/Payrolls (NFP), and the new US unemployment rate. These three measures of nationwide labor market activity, and NFP in particular, have tremendous market-moving potential as fundamental catalysts. This likelihood of volatility across financial markets warrants a warning: NFP is nearly here.
Currently, markets are forecasting an 0.3% increase in average hourly earnings in September (which equates to higher costs for businesses and more money for employees), 248,000 new non-farm payrolls added to the US economy, and an unemployment rate of 3.7%, unchanged from August. If the real numbers exceed these expectations on Friday, this will likely be bullish news for the US Dollar, since the Fed will have further incentive to raise rates to cool the economy. However, if the real numbers fail to meet these expectations, this may be interpreted as bearish for USD, since it could prompt the Fed to consider pumping the brakes on further interest rate hikes. If Wednesday's NFP estimates are any indication, a hotter-than-expected US labor market seems plausible, which would benefit USD bulls.
Two Potential Pairs to Buy
The following pairs are rated favorably by the A1 EdgeFinder as potential buying opportunities for those aiming to go long on USD. They are listed below with their respective ratings and signals, along with their EdgeFinder analysis and current trends on a 1-day timeframe.
1) USD/JPY (Earns a 4, or ‘Buy’ Signal)
2) USD/CHF (Earns a 4, or ‘Buy’ Signal)
Two Potential Pairs to Sell
The following pairs are rated favorably by the A1 EdgeFinder as potential selling opportunities for those who are bullish on USD. They are listed below with their respective ratings and signals, along with their EdgeFinder analysis and current trends on a 1-day timeframe.
1) EUR/USD (Earns a -7, or ‘Strong Sell’ Signal)
2) GBP/USD (Earns a -5, or ‘Sell’ Signal)