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BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

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Central Bank Watch Overview:

  • As Eurozone economic data has continued to struggle, European Central Bank interest rate expectations have steadied in April 2021.
  • It’s still the case that neither the Bank of England nor the Federal Reserve are expected to shift policy in 2020; the BOE is likelier than the Fed to move first on rates.
  • Retail trader positioningsuggests that the US Dollar has a mixed trading bias.

Bank of England Rate Cut Odds Hone in on August 2021

The self-imposed Brexit deadline of October 15 on behalf of UK Prime Minister Boris Johnson is quickly approaching, but rates markets don’t seem too concerned that the pace of news headlines has become more frenetic and discouraging. Asymmetric risk exists on the near-term horizon: volatility likely arrives in the unlikely situation that no deal is achieved; in turn, BOE rate cut odds are likely to either stay where they are or pull forward in the coming weeks, particularly as BOE policymakers discuss the prospect of negative interest rates more frequently and publicly.

Bank of England Interest Rate Expectations (OCTOBER 12, 2020) (Table 1)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

It still holds that speculation surrounding negative interest rates remains premature at best, insofar as rates markets don’t foresee that kind of possibility from becoming reality until at least August 2021. An EU-UK trade agreement would further reduce the likelihood of a shift into negative interest rate territory by the BOE; the current course would likely stick for a few years, akin to the Federal Reserve.

IG Client Sentiment Index: GBP/USD Rate Forecast (OCTOBER 12, 2020) (Chart 1)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

GBP/USD: Retail trader data shows 42.37% of traders are net-long with the ratio of traders short to long at 1.36 to 1. The number of traders net-long is 25.92% higher than yesterday and 2.13% higher from last week, while the number of traders net-short is 10.42% higher than yesterday and 4.21% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

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European Central Bank Rate Cut Holds for April 2021

Eurozone economic data continues to deteriorate, and the upcoming release of the Eurozone inflation report suggests that disinflation remains significant. To this end, the late-summer jump in European Central Bank interest rate expectations has held, insofar as an interest rate cut deeper into negative territory will arrive sooner in the first half of 2021, as was expected one month ago. Weak CPI readings coupled with a strong Euro relative to the ECB’s internal forecasts are increasing the odds of dovish jawboning in 2020, leading to a rate cut in the first half of 2021.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 12, 2020) (TABLE 2)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

According to Eurozone overnight index swaps, there is a 24% chance of a 10-bps interest rate cut by the end of 2020. Interest rate cut odds have been pulled forward in recent weeks; one month ago, there was just under a 15% chance of a 10-bps cut before the end of the year. April 2021 remains favored with an implied probability of 57%.

IG Client Sentiment Index: EUR/USD Rate Forecast (OCTOBER 12, 2020) (Chart 2)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

EUR/USD: Retail trader data shows 36.08% of traders are net-long with the ratio of traders short to long at 1.77 to 1. The number of traders net-long is 24.36% higher than yesterday and 9.41% higher from last week, while the number of traders net-short is 1.73% higher than yesterday and 5.14% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

Federal Reserve Content with Standing Pat for Now

It still holds that little has changed with respect to the Federal Reserve, having enacted emergency interest rate cut measures and a slew of balance sheet-expanding operations. To this end, interest rate markets are still stuck in a state of suspended animation. Should the Fed change course, it will likely shift to via more QE, a repo facility, Municipal Liquidity Facility, etc.

FEDERAL RESERVE INTEREST RATE EXPECTATIONS (OCTOBER 12, 2020) (Table 3)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

Seeing as how there’s been no indication thus far that the Fed will cut interest rates into negative territory,we’ve reached the lower bound for the time being. In the future, if yield curve control is implemented, we would expect a similar outcome to what is being experienced by the Reserve Bank of Australia main rate expectations curve, especially now that the Fed has extended its promise to keep rates low through 2023.

IG Client Sentiment Index: USD/JPY Rate Forecast (October 12, 2020) (Chart 3)

Central Bank Watch: BOE, ECB, & Fed Rate Expectations; EUR, GBP, USD Positioning Update

USD/JPY: Retail trader data shows 55.41% of traders are net-long with the ratio of traders long to short at 1.24 to 1. The number of traders net-long is 8.09% higher than yesterday and 12.35% higher from last week, while the number of traders net-short is 0.29% higher than yesterday and 18.77% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bearish contrarian trading bias.

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist





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Nasdaq 100, DAX 30, Nikkei 225 Forecasts Ahead of Big Tech Earnings

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Nasdaq 100 chart

Chart created with TradingView

Nasdaq 100, DAX 30, Nikkei 225 Forecasts: Neutral

  • The Nasdaq 100 eagerly awaits earnings from Apple, Amazon, Facebook and more
  • German and Euro area GDP data is also due in the week ahead, a key event for the DAX 30
  • The Nikkei 225 will set its sights on the fast-approaching interest rate decision from the Bank of Japan

Nasdaq 100 Forecast

Outlook: Neutral

Earnings season is in full swing and the week ahead will see the release of quarterly reports from some of the world’s largest publicly traded companies. Apple, Amazon and Facebook are scheduled to report after Thursday’s close, a set of stocks that collectively account for more than 27% of the entire Nasdaq 100. Blue chip names like Boeing, General Electric, Pfizer and Ford will also report next week, but the speculative appetite in the big-tech names should afford them the most influence and market-moving potential.

NDX weights

Source: Slickcharts

To that end, market participants have high expectations for the FANGMAN group given their lofty share prices and after their blowout reports last quarter. Therefore, stocks like Apple, Amazon and Facebook will be highly scrutinized and could see a less-than-perfect report result in a seemingly drastic price decline.

Nasdaq Trading Basics: How to Trade Nasdaq 100

Either way, forecasting directional moves following an earnings report is incredibly difficult, so strategies that can benefit from heightened implied volatility may be ideal at this stage.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (September 2020 – October 2020)

NDX price chart

Regardless, the Nasdaq 100, Dow Jones and S&P 500 may wait to stage serious moves until the Presidential election has passed. Given the massive uncertainty surrounding the vote, many traders are likely hesitant to hold significant exposure ahead of such an important event. It could be argued post-earnings price moves might be hampered to some degree, at least until the political landscape has returned to more stable footing.

DAX 30Forecast

Outlook: Bearish

The DAX 30 is set to receive more traditional economic data in the form of Euro area and German GDP readings followed by an ECB rate decision. Struck with another coronavirus wave, Europe may be on pace to disappoint growth forecasts as a slowdown was already hinted at by economic figures toward the end of the prior quarter.

DAX 30 Price Chart: 4 – Hour Time Frame (June 2020 – October 2020)

DAX 30 Chart

The DAX might take notice of a poor result, but I would suspect a GDP-miss might already be priced in to some degree. Nevertheless, the DAX seems tilted to the downside in the week ahead. In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

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Nikkei 225 Forecast

Outlook: Neutral

Shifting our focus to the Japanese Nikkei 225, traders will have their hands full with an upcoming interest rate decision from the Bank of Japan. After staging an admirable recovery from the coronavirus, Nikkei 225 gains have slowed to a crawl and the index has made little progress since early September. While the upcoming BOJ meeting will likely see a continuation of the norm for Japan’s monetary policy path, the lack of progress might suggest the Nikkei 225 is awaiting a broader uptick in risk appetite.

Nikkei 225 Price Chart: Daily Time Frame (November 2019 – October 2020)

Nikkei chart

With that said, the Nikkei might track moves in US indices as they await earnings and the looming Presidential election. Since little change is expected domestically in Japan, these outside factors could very well deliver the spark required to push the Nikkei above its recent highs. Still, the outlook remains encouraging. Until these outside issues are resolved, however, the forecast remains neutral or cautiously bullish.

–Written by Peter Hanks, Strategist for DailyFX.com





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ECB Meeting to Determine Next Major Move in EUR/USD

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EURUSD Chart

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Fundamental Euro Forecast: Neutral

  • The European Central Bank’s Governing Council meets this coming week and its statement Thursday, followed by its President’s news conference, will likely be important in determining the Euro’s direction over the next month or so.
  • The ECB will leave all its monetary settings unchanged but President Christine Lagarde could well start preparing the markets for a further easing of monetary policy in December.
  • Meanwhile, there are few signs of a breakout from the broad 1.16 to 1.20 range for EUR/USD that has confined the pair since mid-July.

ECB Meeting Critical for EUR/USD

The statement Thursday at the end of the next meeting of the European Central Bank’s Governing Council, and the subsequent comments by ECB President Christine Lagarde at her news conference, will be critical in determining the future direction of the Euro.

There will be no changes in interest rates or Eurozone monetary policy this coming week but Lagarde could hint at a further policy easing as early as December – a move that could weaken EUR/USD and the Euro crosses. The problem is that the Governing Council seems split on the issue.

Some members seem willing to act, fearing a “double dip” in the Eurozone economy as GDP falls again after a brief respite, hit by a second wave of Covid-19 infections that forces more countries and regions into lockdown. Easier monetary policy might help alleviate the resulting economic impact, help lessen deflationary pressures in the Eurozone and offset any damage to the region’s trade caused by the Euro’s advance since EUR/USD hit a low under 1.07 in March.

Others, though, seem more circumspect, worried that after hitting its highest level for more than a month last week EUR/USD may be vulnerable to a setback. There may also be concern about hinting at easier monetary policy so close to the US Presidential election and that more wary view seems to be that of the markets, where pricing suggests the rate on the ECB’s deposit facility will be minus 0.6% by the end of next year, only marginally below the current minus 0.5%.

You can find an FX traders’ guide to the ECB by clicking here

Putting all these factors together suggests that EUR/USD will continue to trade for a while yet in a broad range between the September 1 high at 1.2011 and the September 25 low at 1.1611.

EUR/USD Price Chart, Daily Timeframe (July 22 – October 22, 2020)

EURUSD Price Chart

Source: Refinitiv (You can click on it for a larger image)

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Week Ahead: Data Also Important for EUR/USD

Turning to the economic data on the calendar, the week ahead is a busy one, with German inflation and unemployment figures due Thursday, followed by Eurozone inflation and GDP numbers Friday. Both the German and the Eurozone price data could show steeper falls – emphasizing the ECB’s concerns about deflation – while the GDP data for the third quarter will likely show a strong rebound.

That would do little though to ease double dip concerns so more important might be Monday’s Ifo index of the German business climate in October, the first month of the fourth quarter, and it would be no surprise if that were weaker than in September.

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— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex





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Crude Oil Prices May Rise on US Stimulus Hopes, PMI Data

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CRUDE OIL & GOLD TALKING POINTS:

  • Crude oil prices edge up on US fiscal stimulus hopes, upbeat data flow
  • Soundbites from Washington DC, US PMI surveys now in the spotlight
  • Gold prices down as US Dollar gains alongside Treasury bond yields

Crude oil prices managed to retrace some lost ground Thursday after the prior day’s selloff, the largest one-day loss in over a week, as an improvement in market-wide risk appetite helped buoy sentiment-geared assets. Tellingly, the WTI benchmark tracked higher alongside bellwether S&P 500 futures.

Markets seemed to be cheered by the appearance of a positive turn in US fiscal stimulus negotiations after House Speaker Nancy Pelosi said a deal is “just about there”. Data flow was also supportive: existing home sales surged to a 14-year high while jobless claims registered lower than expected.

Gold prices fell as the chipper mood buoyed Treasury bond yields, tarnishing the appeal of non-interest-bearing alternatives. Interestingly, the US Dollar managed to shed the anti-risk trading profile defining recent price action and rose in tandem, hinting the day’s new-flow may have curbed Fed easing bets.

CRUDE OIL, GOLD PRICES EYE US FISCAL STIMULUS AND PMI DATA

Soundbites shaping fiscal stimulus expectations are likely to remain in focus through the end of the trading week. Flash US PMI surveys headline the data docket, with forecasts pointing to a slight pickup in the overall pace of economic activity growth in October compared with the prior month.

A brighter view of the near-term business cycle might keep crude oil prices supported in the near term. A lasting rally seems unlikely however as weak demand continues to weigh. In fact, an EIA implied demand gauge published this week slumped toward Covid outbreak lows registered in April.

Gold may continue to suffer if yesterday’s trade dynamics remain in play, with hopes for a strengthening recovery boosting yields alongside the Greenback. However, disappointing data flow or souring stimulus prospects in the face of opposition in the Republican-controlled Senate might buoy the yellow metal.

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CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices are hovering just below range resistance in the 42.40-43.88 area. A downswing from here sees initial support in the 34.64-36.15 zone, with a break below that likely exposing the 27.40-30.73 region next. Alternatively, a daily close above resistance may open the door for a test of the $50/bbl figure.

Crude Oil Prices May Rise on US Stimulus Hopes, PMI Data

Crude oil price chart created using TradingView

GOLD TECHNICAL ANALYSIS

Gold prices recoiled from resistance in the 1911.44-28.82 area, marked by a former range bottom and a falling trend line set from mid-August. Support is eyed in the 1848.66-63.27 zone, with a daily close below that seemingly setting the stage for a move below the $1800/oz figure. Alternatively, claiming a foothold above resistance may be followed by another test above $2000/oz.

Crude Oil Prices May Rise on US Stimulus Hopes, PMI Data

Gold price chart created using TradingView

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COMMODITY TRADING RESOURCES

— Written by Ilya Spivak, Head APAC Strategist for DailyFX

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter





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