rate hike cycle

Analysis of transactions and tips for trading EUR/USD The price test of 1.0719, coinciding with the significant rise of the MACD line from zero, limited the upward potential of the pair. Even so, market players continue to buy in anticipation of further interest rate hikes despite inflation in the eurozone starting to slow down. Clearly, market players do not expect any changes in the European Central Bank's monetary policy.     The empty economic calendar today will push traders to focus on upcoming US labor market data, as growth in unemployment and disappointing non-farm payrolls will convince the Fed to continue its tight approach to monetary policy. Only a pause in the rate hike cycle will weaken dollar demand and lead to a further rise in EUR/USD.     For long positions: Buy when euro hits 1.0780 (green line on the chart) and take profit at the price of 1.0816. Growth could occur. However, when buying, traders should make sure that the MACD line lies above zero or rises from it. Euro can also be bought after two consecutive price tests of 1.0754, but the MACD line should be in the oversold area as only by that will the market reverse to 1.0780 and 1.0816.   For short positions: Sell when euro reaches 1.0754 (red line on the chart) and take profit at the price of 1.0722. Pressure may return amid very good labor market statistics in the US. However, when selling, traders should make sure that the MACD line lies below zero or drops down from it. Euro can also be sold after two consecutive price tests of 1.0780, but the MACD line should be in the overbought area as only by that will the market reverse to 1.0754 and 1.0722.       What's on the chart: Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market   Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

Analysis of transactions and tips for trading GBP/USD he price test of 1.2480, coinciding with the significant rise of the MACD line from zero, limited the upward potential of the pair. Even so, market players continued to buy, ignoring weak manufacturing activity data in the UK.     The empty economic calendar today will convince traders to push GBP/USD higher, which could continue in the afternoon if the upcoming US labor market data show growth in the unemployment rate and a weaker increase in non-farm payrolls. Such a scenario will convince the Fed to continue its tight approach to monetary policy. Lately, the central bank expressed plans to pause its rate hike cycle. If this happens, dollar demand will decline, which will lead to a rise in the pair.   For long positions: Buy when pound hits 1.2544 (green line on the chart) and take profit at the price of 1.2592 (thicker green line on the chart). Growth could occur. However, when buying, traders should make sure that the MACD line lies above zero or rises from it. Pound can also be bought after two consecutive price tests of 1.2517, but the MACD line should be in the oversold area as only by that will the market reverse to 1.2544 and 1.2592.   For short positions: Sell when pound reaches 1.2517 (red line on the chart) and take profit at the price of 1.2477. Pressure could continue amid very strong labor market data from the US. However, when selling, traders should make sure that the MACD line lies below zero or drops down from it. Pound can also be sold after two consecutive price tests of 1.2544, but the MACD line should be in the overbought area as only by that will the market reverse to 1.2517 and 1.2477.       What's on the chart: Thin green line - entry price at which you can buy GBP/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell GBP/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market   Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.  

Market sentiment could change depending on the Fed's final decision at its June monetary policy meeting. This decision, however, could be affected by upcoming economic data from the US. Ahead lies key manufacturing indicators from both the US and Europe, followed by reports on China's export volume, import volume, and trade balance. Equally important will be the meetings of other central banks, where key parameters of monetary policy will remain unchanged. Markets will likely establish equilibrium, as investors expect a 0.25% increase in the Fed's interest rates. However, the recently-released strong US labor market data for May changed the sentiment, pushing market players to opt for a pause. Now, only 19.6% expect a 0.25% increase in rates. Resolving the debt problem, as well as very positive employment data, allow investors to believe that the US will no longer face recession.   As such, the Fed may opt not to raise rates, primarily because they do not want to shake the markets and stimulate another sell-off in the government bond market, given the government's high need for new loans at relatively low interest rates. Most likely, until June 14, consolidation in broad ranges will be observed in the forex market. Similar expectations can be set for stock and commodity markets.   Forecasts for today:     EUR/USD The pair trades above 1.0685. A neutral or weakly positive market sentiment will push the quote between 1.0685 and 1.0825. However, a decline below 1.0685 mark could lead to a `further fall to 1.0540.   XAU/USD Gold trades within the range of 1933.75-1983.75. A pause in the fed's rate hike cycle will push the quote towards 1983.75. Pati Gani Analytical expert of InstaForex © 2007-2023 Back to the list  

The BoE is losing confidence in these surveys But June’s decision to lift rates by 50 basis points, having been hiking more gradually over recent months, showed that the wider BoE committee is losing patience and confidence in these forward-looking measures. The hawks would point to the survey question on "price growth", which shows firms consistently predicting inflation to be lower than what is actually realised, as the chart below demonstrates. The Bank has also produced interesting research showing that firms are resetting prices more regularly than in the past, which the hawks could argue shows that inflation is more ingrained than it once was. The reality is that the Bank is likely to pay less attention than usual to these surveys, and we think the next few policy decisions will be guided by CPI inflation, and to some extent average earnings, and not a lot else. We’ll get fresh data on the latter next week, and it looks like regular pay growth (which excluded volatile bonuses) will stay either flat or a touch lower on a year-on-year basis. The key question is whether the recent re-acceleration in pay growth is largely a function of the higher National Living Wage, or whether it reflects renewed underlying momentum in wage setting.   Realised price growth has typically been higher than what firms had expected   When it comes to CPI, we expect to see the headline rate dip to 8% in June’s numbers from 8.7% currently, and down again to 6.5-7% in July. But that’s mainly a function of lower electricity/gas prices and a reflection of the sharp rise in petrol prices we saw at the same time last year. We’d expect services inflation to notch slightly lower over the summer, but probably not enough to prompt another change in strategy among committee members. We therefore expect a 25 basis point rate hike in August and another in September – and we certainly wouldn’t rule out more. But ultimately we think the surveys, including the Decision Maker Panel, do contain some useful signals. And by November, we think the committee will have more confidence that inflation is indeed easing, to enable it to pause its rate hike cycle.

Good news for the Bank of England as corporate price expectations fall further The Bank's own survey of businesses suggests price pressures continue to fade. We still expect a hike at the September meeting but recent comments from Bank of England officials suggest that could be the last increase in this tightening cycle.   Corporate price expectations are continuing to fall With two weeks to go until the next Bank of England rate decision, there’s a growing sense that the rate hike cycle is reaching its peak. That story has been offered further ammunition by the latest Decision Maker Panel from the BoE, which surveys chief financial officers (CFOs) on a range of topics and continues to point towards lower inflation. Here are some of the main numbers: Expected price growth over the next year is seen at 4.4% (or 4.9% if you average the last three readings), the lowest since November 2021. Expected annual wage growth is at 5.1% on a three-month moving average, down from 5.2% last month and 6% last December. CPI inflation is expected to be at 4.9% over the next year and 3.2% over three years, and both have tracked the fall in actual inflation lower over recent months. The proportion of firms finding it “much harder” to recruit sits at 26%, up fractionally on July but down from a peak of 66% last summer. On the face of it, this all provides further ammunition for the Bank of England doves and echoes what we’ve been seeing in other surveys too. In the past, the Bank of England has put a lot of emphasis on the Decision Maker survey, but more recently, the Bank has been visibly wary about putting too much weight on survey data while actual data on inflation and wage growth continues to come in hot. Policymakers are also acutely aware that firms have been saying one thing about expected price increases, but when it comes down to it appear to end up moving more aggressively. 'Realised’ price growth has been consistently higher than 'expected', according to this survey, as the chart below demonstrates.   Expected' price growth has consistently undershot 'realised'     Further rate hikes mainly hinge on services inflation and wage growth The English central bank has made it abundantly clear that the next decision will hinge on three variables – services inflation (due the day before the next meeting), private sector wage growth and the vacancy/unemployment ratio (both due on Tuesday). And the picture is likely to be mixed. Private sector wage growth currently stands at 8.2% and is likely to stay there when we get fresh data next week. But there’s an outside risk that we see this nudge slightly lower, on the basis that separate data from firms' payrolls indicated that median pay actually fell in level terms during August. This data is released a month ahead of the more traditional average weekly earnings numbers. We’d expect that to be coupled with a further modest rise in unemployment, as well as a renewed fall in vacancies. The ratio of unfilled job openings to the number of workers unemployed is rapidly approaching pre-Covid levels. Meanwhile services inflation, currently 7.4% and next due on 20 September, may well inch up by a tenth of a percentage point and mark another cycle high. But we expect this to be the peak and we expect a pullback through the remainder of the year as lower gas prices begin to leave their mark.   Recruitment difficulties are easing   The bottom line is that the Bank is likely to hike rates by 25 basis points again in two week’s time, but our base case is that this is the last hike in this tightening cycle. Governor Andrew Bailey's indication that we're near the top of the tightening cycle came wrapped with several caveats. But it fits into a broader communication exercise from the Bank that appears to be laying the ground for a pause. Chief Economist Huw Pill's reference to a "table mountain" profile for rates gave a further indication that the Bank is now more concerned about how long rates stay elevated rather than how high they peak. References to policy now being "restrictive" in the August policy statement pointed in this direction too. A November hike is possible, but assuming we're right about the direction of the dataflow and on the basis of recent BoE comments, we think a pause is still more likely at that meeting.  

According to the latest CFTC report, the past week was relatively calm in the futures market. One notable change was the value of the net short yen by position, which corrected by 1.2 billion, while changes in other currencies were minimal. The US dollar's net positioning, after sharply rising the previous week, saw a 0.3 billion correction, bringing it to 8.5 billion, indicating a firm speculative positioning for the dollar. Other factors that supported the greenback are the drop in the number of long positions in oil and especially gold, with a weekly change of -4.8 billion, implying further declines. This often signifies growing bullish sentiment for the US dollar.   The University of Michigan's Consumer Sentiment Index fell to 63.0 in October, the reading was below the forecast of 67.2, reaching the lowest level since May. This marks the third consecutive decline and can be largely attributed to rising gas prices and a decline in the stock market. However, consumer spending remains at a good level despite weaker sentiment in recent months. China's consumer price index remained flat from a year earlier in September, while the Producer Price Index fell by 2.5% as concerns linger about weak demand. Both figures were slightly below consensus estimates. This week's data on industrial production, retail sales, and third-quarter GDP will provide a clearer picture of the impact of the government's additional stimulus measures. The conflict between Israel and Hamas has quickly escalated into the bloodiest clash in the past 50 years from both sides. As both Israel and Iran are minor natural gas exporters, European natural gas prices rose by about 40% last week. Oil markets remain calmer due to reduced demand and excess production capacity. US consumer price inflation for September shows headline prices rose 0.4% month-on-month (consensus 0.3%), and the core index slowed down from 4.3% year-on-year to 4.1% year-on-year, which is a positive sign for the Federal Reserve. There is growing confidence that the Fed's rate hike cycle is coming to an end.   The British pound corrected slightly above the resistance level at 1.2305 and then resumed its decline. It is assumed that the local peak has been formed, and the sell-off will continue, with the nearest target being 1.2033 (the low from October 4). In case it breaks below this level, selling pressure may intensify, with the long-term target being 1.1740/90.  

EUR/USD On Tuesday, the euro continued to face pressure from Monday, even slightly more so due to the decline in commodity prices (crude oil down 2.1%) and as U.S. Treasury yields fell. German industrial production dropped in September by 1.4% compared with the previous month (-3.86% YoY), which fueled concerns about a European recession. Now we are waiting to see if other news will support the euro's upward movement. However, we don't expect to receive any news today or tomorrow, unless Federal Reserve Chair Jerome Powell or John Williams suggests an the end to the rate hike cycle. On the other hand, a certain event that could exert pressure on the dollar would be the so-called U.S. "government shutdown", as the emergency 45-day funding measure is set to end on November 16. Congressional leaders struggle to reach an agreement over the 2024 budget year limit. Take note that market participants may already be preparing for this event.   On the daily chart, the lower shadow carefully tested the support of the MACD line. Now, the euro has established a consolidation range between yesterday's low and the Fibonacci level at 1.0665-1.0750. Settling below 1.0665 could lead to a decline towards the price channel line around the psychological level of 1.0500, while a move above 1.0750 opens the target range of 1.0834/57. The uptrend remains intact. On the 4-hour chart, the bullish momentum remains intact. After retreating, the price is now staying above the indicator lines, and the Marlin oscillator may form a bullish reversal from the neutral zero line.  

2024 set to be the year that the hike cycle is felt The ECB hike cycle seems over, but the shockwaves of tightening will still shape the eurozone economy in 2024. Traditional lags in transmission are now accompanied by longer ones in average interest burden increases, potentially extending the impact of tightening. For the ECB, the risk of being behind the curve for the second time in one cycle is growing. The end of the hike cycle is most likely here. The ECB has raised interest rates aggressively - from -0.5% to 4% in just over a year. With inflation coming down quickly and the economy stagnating, it is hard to see how the ECB could continue hiking rates, either this week or in the coming months. Instead, the focus is shifting towards possible first rate cuts. This makes it an excellent moment to focus on how fast monetary transmission is happening and what to expect from the impact of this in 2024.   The initial impact of tightening was significant In March, we concluded that the early signs of a rapid impact on transmission channels were significant. Since then the pace has moderated a bit, depending on the channel. As back in March, we follow the ECB’s own categories of transmission channel. At the end of 2023, broad money supply is still contracting quickly, currently at an annual pace only seen in 2009. Bank rates for loans for households and businesses are still rising rapidly and the euro has broadly appreciated against the currencies of major trade partners since late summer - it is now slightly above levels seen at the start of ECB’s rate hikes. Asset prices have also corrected, but with very different results across asset classes.   Flow chart of how monetary policy impacts the economy, according to the ECB Moving on from the channels to the real impact of monetary tightening so far, the impact on bank lending has slowed. Most importantly, the bank lending impact was strong at the start of the tightening cycle - lending growth to non-financial corporates has slowed from around 1% month-on-month in the summer of 2022 to 0% in November and has stabilized around 0% since. This also seems related to a working capital and inventories-related lending surge in summer, the need for which faded when supply chain problems eased. Lending to households slowed from 0.4% month-on-month in May 2022 to 0% in April 2023, since when it has also stabilized around 0%. Overall, the lending correction is not dramatic, but has a significant impact on future investment. Don’t forget that there is likely more to come - the ECB Bank Lending Survey suggests continued weakness in lending ahead. In short, the impact of monetary policy tightening on lending and consequently on the real economy is unfolding like every textbook model would suggest.   At face value, monetary transmission is working quickly   Not every aspect of tightening works quickly, quite some of the burden is still to come While at face value the transmission of monetary policy tightening is working as planned, looking slightly deeper reveals more complexity and more sluggishness. Coming from a long period of negative rates is having a big impact on how fast interest payments are rising. Looking at net interest payments from corporates, we see that these have increased disproportionally slowly so far (chart 4). The same holds for households, where the average mortgage rate paid by households in the eurozone has only increased by 0.8% while new mortgage loan rates are up by 2.7%. For governments, the same is true. Interest rate payments are increasing but remain at relatively low levels. Low locked in-rates have caused a relatively small increase in debt burdens so far.   Average interest payments have started to move up only slowly   This means three things: First of all, costs have not increased materially so far, which would be an additional tightening effect. Higher costs force cuts in spending or investment elsewhere, which results in weaker activity. While the relationship between interest rates for new loans and average debt burden was more synchronized in previous hike cycles, the initial effect on debt burdens has been relatively limited. Secondly, this means that the impact of the hike cycle is likely more spread out this time. Over the course of next year, loans will have to be refinanced at higher rates, which will continue to increase average debt burdens. So, while the initial impact of ECB tightening has already been forceful, it is reasonable to expect that the effect will not fade quickly in 2024 as more businesses, households and governments adjust to a new reality of higher rates. Lastly, since there is now such a discrepancy between the current interest rate and the average interest rate paid in the economy, the ECB could cut rates but average interest payments could still be increasing. So, if the ECB were to start the process of decreasing interest rates, part of the tightening effect would still be coming through the pipeline. This would dampen the effect on monetary easing.   Important moderating effects have kept the impact on GDP mild so far Much to the chagrin of the ECB, governments have continued to provide ample fiscal support to the economy. As chart 6 shows, the fiscal stance is falling moderately, but continues to be generally supportive of economic activity. It is not the first time that fiscal and monetary stances are at odds with each other - think back of the 2010s when fiscal austerity countered ECB efforts to bring inflation up to 2%. Now this is working the other way, as fiscal support boosts economic activity and therefore counters the ECB’s efforts to reduce underlying inflation.   As in the 2010s, monetary and fiscal policy are working in different directions   The labour market is also moderating the impact of tightening; at least for now. The weaker economic environment since late 2022 has not yet translated into a weaker labour market. While a relatively simple Okun’s Law would suggest that the labour market should be cooling slightly, it remains red hot. This supports economic activity and maintains wage pressures for the moment. Tightening efforts in the labour market remain relatively invisible for now. Finally, investment has continued to be supported by the supply-side problems from 2021 and 2022. While new orders have fallen, production has been kept up by the large amount of so far unfulfilled orders brought forward. The size of eurozone order books has fallen rapidly since late 2022, which has boosted activity and masked weakness in drying up orders when it comes to total economic activity. These factors have so far suppressed the impact of tightening on the economy, but we expect them to be less supportive of growth in 2024. While the fiscal stance is set to remain expansionary, with the exception of Germany, it will likely be less so in 2024 than in 2023. The labour market has recently shown more serious signs of weakening, which leads us to expect that unemployment will finally start to slowly increase over the course of next year. Backlogs of work have largely been depleted, meaning that the full effect of monetary tightening will likely be felt more strongly next year as mitigating factors fade.   Unemployment is lower than you would expect on the basis of current economic activity   The landing has been very soft so far, but gets bumpier in 2024 Inflation has come down very quickly over the course of 2023. Peaking at 10.6% YoY in October, it has fallen to 2.4% in November. This has been achieved with economic activity stagnating but not falling and the labour market continuing to go from strength to strength. The monetary stance has moved from an interest rate of -0.5% and QE to a 4% interest rate and QT. Can we really move from a broadly accommodative stance to a very restrictive stance and not notice any economic pain? That seems unlikely: much of the impact of the higher rate environment is likely to be felt next year because of the usual lag of monetary policy, because some effects of tighter policy are now more lagged than in previous cycles, and because mitigating factors are set to fade. Milton Friedman’s famous quote that monetary policy has ‘long and variable lags’ seems to be an understatement in the current complex monetary environment. That does mean that the restrictive impact of monetary policy on the economy is set to increase while inflation already looks to be solidly under control. The month-on-month core inflation rate in November was negative and the trend has been sharply down. Disinflation in 2023 was mainly the result of base effects due to ending supply shocks and not so much to monetary policy tightening. Disinflation in 2024, however, will be mainly the result of the further unfolding of monetary policy tightening. While there are clear uncertainties about the inflation outlook - including how wage growth will develop and whether new spikes in energy prices could emerge - there is a high risk that the ECB is getting behind the curve for the second time in one cycle. It was late in responding to inflation on the way up and could well be late in responding on the way down as well. Expectations of rate cuts have moved forward and have grown a lot recently. Given the wrong assessment of inflation dynamics on their way up and concerns about possibly more persistent inflationary drivers, we think the ECB will be very hesitant to simply reverse the rate hiking cycle. Instead, we expect the ECB to wait for additional wage growth data for the first quarter and then start cutting in June - but rather gradually, with three cuts of 25bp every quarter. That would still leave monetary policy restrictive and keep average interest rate payments going up as society adjusts to higher interest rates. It would also make new investments slightly more attractive again. The hike cycle may have so far seemed like an easy adjustment to swallow, but ironically the pain of tightening will likely be felt most when the ECB already starts to ease.

Focus on CPI data ahead of crucial FED decision this week While the decision to maintain current interest rates appears highly probable, the primary focus of the market this week will be on Jerome Powell's upcoming speech as the Federal Reserve Chair has a significant opportunity to impact market sentiments by potentially signaling an end to the rate hike cycle. Nevertheless, such a development should not significantly alter investor expectations as it has been a wide topic of discussion for quite some time, however, a significant deviation from those expectations could lead to some noticeable impacts on USD and potentially even on risk assets.   Despite the gradual normalization of macroeconomic data, shifts are aligning favorably for the Fed as the labor market is also exhibiting signs of stabilization while inflation is clearly slowing down which has prompted investors to engage in speculation regarding the timing of potential rate cuts. In this scenario, there is a potential for a boost in bond prices, accompanied by a concurrent reduction in yields as anticipation of a Fed pivot could drive capital accumulation in bonds, taking advantage of the prevailing, albeit high, interest rates. In either case, focus today will be on US CPI data ahead of tomorrow's FED decision and while it is unlikely that the data will change tomorrow's outcome, it could certainly have a short term impact on global markets.