Market Insight for the Week Ending 12 May

Weekly Recap

Three central bank meetings; three 25 basis-point rate hikes.

Against consensus, the Reserve Bank of Australia (RBA) surprised markets early last week, increasing its Official Cash Rate (OCR) by 25 basis points to 3.85%, with many desks now pricing in a 4.1% terminal rate. This followed the previous meeting where the central bank kept rates on hold and marks the eleventh-rate hike overall since May 2022. Unsurprisingly, market volatility increased following the announcement, adjusting to the recent surprise, with AUD/USD aggressively rallying and the ASX 200 seeking lower levels.

Wednesday was also a big day for the markets. As widely expected, the Fed hiked the Federal Funds target rate by another 25 basis points to 5.0%-5.25%. This represents the tenth-rate hike since March 2022. I noted the following in previous writing (italics):

The FOMC statement communicated a less hawkish tone in its language used, noting that it is ‘determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time’, marking a change in language from the prior FOMC statement where it communicated that it ‘anticipates that some policy firming may be appropriate’. This echoes a vibe of a possible pause at the next meeting scheduled for 14 June; markets are also now pricing in a strong possibility of a rate pause.

Thirty minutes after the announcement, Fed Chairman Jerome Powell took to the stage and struck more of a hawkish tone. Key points were that Powell reaffirmed the change in language in the FOMC statement as ‘meaningful’, changing from ‘anticipates’ to ‘determining’. Powell added that inflation is far above the central bank’s target of 2% and that the Fed is ‘prepared to do more’; decisions from June will also be driven by incoming data—meeting by meeting. He also noted that the labour market remains tight, the economy is likely to face headwinds and communicated that the ‘banking system is sound and resilient’.

Thursday welcomed the European Central Bank (ECB), which increased all three main policy rates by 25 basis points. This marks the seventh consecutive rate increase since mid-2022 and represents 375 basis points of tightening. I also noted the following in recent writing (italics):

As of writing, markets are pricing in the possibility of about another two rate hikes before the ECB looks to hit the pause button. In her post-announcement presser, Christine Lagarde—the President of the ECB—also communicated the possibility of additional rate hikes to combat inflation. Euro area headline inflation slightly increased to 7.0% in April (from March’s 6.9%), essentially snapping a five-month period of slowing price increases. The current inflation rate remains more than three times higher than the central bank’s target. So, overall, the job is not done at the ECB, and the central bank is likely to continue its policy-firming schedule in 25 basis-point increments.

US non-farm payroll data was also released on Friday. Headline non-farm payrolls revealed that 253,000 new payrolls were added in April, comfortably north of the median consensus of 180,000 and nearer the upper end of the forecast range (265,000). While this is indeed a hot labour print, markets are pricing in the possibility of a pause for the next FOMC meeting on 14 June, with a small chance of another 25 basis-point hike. However, things may—and likely will—change before the event; we have two inflation releases, one of which is this week on Wednesday and one a day ahead of the FOMC meeting on 13 June, and, of course, we have another jobs release on 2 June.

Looking Ahead

Stepping into the second full week of May—time is flying this year—attention shifts to US inflation data and the Bank of England’s (BoE) rate decision.

Annual US inflation topped at 9.1% in June of 2022 and has since cooled for nine consecutive months. Headline inflation came in at 5.0% in the twelve months to March in the latest release, and economists anticipate the inflation rate may slow to 4.9% in April. In his Press Conference last week, Fed’s Powell stated it would take some time to bring inflation down towards the Fed’s 2% target. Therefore, any surprise shift in the inflation rate this week could increase market volatility and the chances of another rate hike.

The BoE rate decision will be of interest on Thursday—we do have UK growth GDP data a few hours prior though this is unlikely to be the focus of the day—with futures markets pricing in a 25 basis-point increase and approximately one more rate hike before the central bank pauses policy firming. A rate hike on Thursday would mark the central bank’s twelfth consecutive rate increase and 440 basis points of tightening since December 2021.

Four scenarios for the BoE’s meeting, courtesy of ING:

Technical Markets to Watch for the Week Ahead

Currencies

Dollar Continues to Display Bearish Vibe

Although most of the following analysis has been noted in previous research, I feel it deserves a spot on the week-ahead report as the buck is inching closer to those April lows.

The US dollar wrapped up marginally lower last week; according to the US Dollar Index, the USD ended 0.4% lower against a basket of six major international currencies. As I communicated above, the USD is closing in on April lows around 100.79 after buyers failed to find acceptance north of 102.25.

Given the lack of bullish intent, price action may engulf the aforementioned April lows this week and attempt to overthrow daily demand from 100.27-100.77. The noted movement would align with the current downtrend on the daily scale: trending lower since topping in Q4 2022. I also see that the Relative Strength Index (RSI) on the daily chart retested the lower side of its 50.00 centreline and formed resistance.

Medium-term price analysis based on the monthly timeframe also suggests that USD bears will likely remain in the driving seat until support at 99.67. Although the monthly chart has displayed an uptrend (since 2008) and the RSI is on the doorstep of its 50.00 centreline (possible indicator support), there is scope to extend the 7-month correction from 114.78, targeting the aforesaid monthly support, hence the medium-term bearish setting for the buck. As a result, although the overall longer-term trend faces north, I feel USD bears still have some gas in the tank.

On account of the above, I will closely watch daily demand this week at 100.27-100.77 for signs of weakness if tested. Note that a break of this area may open the door for breakout selling opportunities in the direction of monthly support from 99.67.

GBP/USD: Active Higher Timeframe Resistance

Versus the USD, sterling outperformed last week, gaining for a third consecutive week and refreshing year-to-date tops at $1.2653. Adding +0.5%, this has hauled weekly price action to within a stone’s throw of major trendline resistance taken from the high of $1.4250. Therefore, it is likely that we will be seeing the currency pair test the aforementioned structure sometime this week. Also important is the neighbouring weekly resistance nestled around $1.2767. You will also acknowledge that on the daily chart, we have a resistance zone comprising the noted weekly resistance level and a daily resistance coming in at $1.2638.

Consequently, buyers have a notable technical headwind this week, which could help bolster H1 resistance at $1.2657, left unchallenged on Friday after price topped just ahead of the level. Demand is at $1.2598-$1.2614 in the event of a further correction in short-term price action, yet a break of current resistance unmasks the $1.27 psychological level.

Ultimately, between the $1.27 handle and H1 resistance at $1.2657, which happens to align with the weekly trendline resistance, is an area sellers may be drawn to this week. However, conservative sellers will unlikely commit until H1 trendline support is cleared, drawn from the low $1.2436. Should price test H1 demand at $1.2598-$1.2614 before reaching $1.27-$1.2657, a short-term bullish scenario could emerge, targeting the aforementioned resistance area.

Commodities

XAU/USD Tests $2,000

The price of gold refreshed year-to-date tops against the US dollar last week, reaching as far north as $2,067 per troy ounce and coming within striking distance of the all-time high at $2,075. You will also note that weekly support is still intact at $1,988, and the overall trend still favours buyers, despite the weekly chart’s Relative Strength Index (RSI) threatening potential negative divergence.

Meanwhile, on the daily timeframe, price remains within the limits of a local ascending channel taken from $1,934 to $2,009. If we engulf current channel support, support warrants consideration at $1,949, closely shadowed by the 50-day simple moving average at $1,952 and longer-term channel support extended from the low $1,1616. To the upside, weekly resistance—the all-time high at $2,075—is also an obvious resistance objective on the daily scale.

Shorter term, Friday witnessed strong downside on the H1 timeframe, fuelled on the back of stronger-than-expected US jobs data. This saw price test and rebound from the widely watched $2,000 barrier, complemented by a nearby descending resistance-turned-support taken from the high $2,015. Further buying from current price throws light on H1 resistances at $2,022 and $2,034, while a move under $2,000 could see price target ascending support drawn from the low $1,969.

Direction for the week ahead is difficult. On the one hand, price may hold above the $2,000 level on the H1 timeframe and dethrone H1 resistances at $2,022 and $2,034. This is aided by the unit finding support on the weekly timeframe and the clear uptrend being seen on the bigger picture (both daily and weekly timeframes). On the other hand, the daily price could drop in on local channel support, which happens to align with the H1 ascending support mentioned above. This means the yellow metal might slice through $2,000 to run more stops before attempting to push north from the noted H1 structure.

Equities

Dow Jones Industrial Average Poised to Approach Resistance

The Dow Jones Industrial Average concluded the week on the ropes, down -1.2%. Despite this, price action has been interesting and deserves its spot on the week-ahead release.

As you can see from the weekly timeframe, buyers are favoured for now. Following the break of trendline resistance (taken from the high of 36,952) in November 2022 and the subsequent high formed at 34,712, price action retested the breached trendline to establish support in March and looks poised to engulf the 34,712 region in the coming weeks. This clearly would help validate the return of a technical uptrend.

For the daily chart, I see the unit rebounded from a noted area of technical support between 32,901 and 33,071, nestled just south of the recent higher low at 33,235. This comprises horizontal support, a 38.2% Fibonacci retracement ratio, and the 50-day simple moving average. Ultimately, this area of support was well positioned to help facilitate a potential run on stops beneath 33,235. Overhead, resistance warrants attention around 34,094; beneath current support, nonetheless, has the 200-day simple moving average to target at 32,717, followed by nearby support at 32,588.

Given weekly price indicating higher levels could be in the offing, follow-through upside materialising this week should not surprise, targeting at least daily resistance from 34,094.

Cryptocurrencies

BTC/USD

As evident from the daily timeframe of BTC/USD, the major cryptocurrency remains higher, trending north since bottoming in November 2022. Support from $27,132 was welcomed in late April, a move aided by the 50-day simple moving average of $28,563. Further buying also saw the Relative Strength Index (RSI) reclaim 50.00+ territory. As such, chart studies suggest additional outperformance, targeting fresh year-to-date highs and resistance from $31,404.

ETH/USD

ETH/USD is echoing a similar vibe to BTC/USD. The trend on the daily timeframe is north, and price movement recently recoiled from support at $1,845. This was bolstered by additional confluence: dynamic support from the 50-day simple moving average at $1,875 and the RSI regaining position north of the 50.00 centreline. Overall, the unit finished the week well, unbolting the door for fresh year-to-date peaks and a run to resistance at $2,164.

XRP/USD

As seen from the daily timeframe of XRP/USD, price shook hands with AB=CD support in late April and has been rudderless since, consequently ranging between $0.4475 and $0.4806. AB=CD support is denoted by a 100% projection at $0.4443. The chart illustrates that the structure is complemented by a Fibonacci cluster around $0.4429 and RSI support at 39.82 (note, however, that the RSI remains below 50.00 [negative momentum]). Technical expectations call for at least a test of the 38.2% Fibonacci retracement overhead at $0.4919 and maybe even the 61.8% Fibonacci retracement at $0.5276 (derived from legs A-D). The aforementioned Fibonacci ratios are commonly targeted following the completion of an AB=CD pattern.

Failure to maintain support at current prices could lead to a test of familiar support at $0.4228, a level boasting historical significance since June 2022.

LTC/USD

You may recall that I highlighted the completion of a daily harmonic Gartley pattern on LTC/USD in recent analysis. The pattern’s Potential Reversal Zone (PRZ) was between $98.37 and $96.90. While price did exceed this area, it failed to trade beyond the pattern’s X-point: the high of $105.69 (16 February); traditional rules of engagement would have traders/investors position stops beyond the X-point.

Like the AB=CD structure in XRP/USD, traders often target 38.2% and 61.8% Fibonacci retracements (taken from legs A-D); you will note that price tested the 38.2% Fibonacci level in April at $85.83, with many Gartley traders possibly reducing risk to breakeven at this point and taking partial profits. Many will also likely look for further downside, targeting the 61.8% Fibonacci level at $78.10 as a final take-profit objective.

The RSI remains under its 50.00 centreline: negative momentum.

Charts: TradingView

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