Hello, welcome to the Key To Markets preview of the Week Ahead.
The Fed finally hiked rates last week and presented a surprisingly hawkish plan for the equivalent of 6 new hikes. FX markets will continue to react to the Fed’s decision this week, while commodities are rolling over thanks to hopes for a ceasefire in Ukraine.
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5-day performance as of March 17, 2022. 19:00 GMT
Source: finviz.com
In case you missed it….
The Fed hikes. The Federal Reserve hiked rates by 0.25% and signalled another 6 hikes (1.5%) in further hikes this year.
Stocks dip then rip. The S&P 500 had its biggest 2-day gain since April 2020 after starting the week on the backfoot
DAX rallies 2000 points. The short-covering / bear market rally in the DAX 40 has taken the German index from under 12,500 to over 14,500.
Dollar fades after FOMC. News of the Fed hiking rates sent the USD higher but markets seem sceptical the Fed can deliver and the buck rolled over.
EUR/CHF up 400pips. After crashing to parity with the Swiss franc, the euro has rallied 400 pips in the past two weeks.
Oil back to $100. Brent crude oil extended its decline from multi-year highs right the way back to the psychological 100 support
Gold holds 1900. Less need for a haven brought gold lower this week, though the precious metal bounced after the Fed meeting.
Peace optimism. Delegations from both Russia and Ukraine offered a little more hope that a ceasefire deal can be reached, possibly involving neutrality and security guarantees.
China locks down (again). Authorities put all of the tech-hub region of Shenzhen under lockdown, likely disrupting supplies further. Tesla shut down its gigafactory for 2 days.
Yield curve inverts. The US 5-year Treasury yield is now higher than the 10-year treasury yield (The 5s10s curve fell under zero), one indicator of a coming recession.
Source: Macro Bond / Lance Roberts
We are in an oil price shock because of the after-effects of covid lockdowns and now the war in Ukraine. Former Fed Chairman Ben Bernanke highlighted in a famous economic paper that oil price shocks are always followed by a recession – not because the higher oil price is too much to afford, but because central banks respond to the higher inflation by raising rates.
Source: FX Street
Stocks rallied off the lows in the past week, while havens like gold, the yen and Swiss franc dropped thanks in part to reports from both Russia and Ukraine that some progress was been made towards a ceasefire. Agreement on Ukraine’s neutrality and security seem possible but if talks fall apart, it will likely be over the disputed regions of Ukraine in the East and South – possibly reversing recent price trends.
In one of the more astonishing price moves seen in market years, the Chinese stocks market went from an all-out-crash to a huge rebound in the space of two days. The Hang Seng jumped 9% on Thursday off a 6-year low. It came as investors flipped from worrying about 1000s of new covid cases and possible sanctions to joy at the prospect of ‘support’ from authorities. The price action this week could hinge on whether some action follows the rhetoric from Beijing.
The Swiss National Bank is expected to stay pat again this month but any hawkish shift in tone could see traders swing back into the franc after a 2-week plunge. Since dropping its peg against the euro, the SNB has tended to mirror the moves of the ECB. The ECB was surprisingly hawkish at its March meeting, signalling a Q4 rate hike.
The opinion from purchasing managers about the effect of the huge rise in input costs from energy all the way to basic foodstuffs will be telling this week. If PMIs deteriorate significantly, it will add credence to the inverted US yield curve predicting a recession.
The Bank of England raised UK rates to 0.75% but was less certain about further hikes across the rest of the year, citing economic uncertainty caused by the war in Ukraine. That puts the spotlight back onto real economic data this week- soft data would confirm the dovish tone and could pile pressure onto sterling, which had been one of the better performers this year in a strong dollar environment.
Here you can find an analysis of the major asset classes including the major forex pairs, gold, oil, and the S&P 500.
EUR/USD has put in a higher low on March 14 and is now challenging resistance at 1.112, which it breaks will form a higher high, confirming the end of the prior downtrend and could open up a test of the 200 SMA above 1.12. A dropws under a rising trendline connecting the recent lows would suggest the downtrend is continuing.
GBP/USD is testing 1.32 resistance in what could be the neckline of an inverse head and shoulders pattern. If the neckline breaks, the projected target would be near 1.34 – which matches the peaks in late February and the 200 SMA.
USD/JPY surged out of its recent trading range, taking out 116.3 and flew up 300 points to 119. The 120 level is major psychological resistance. A deeper pullback could test the March 15 low at 117.7 then 117.
AUD/USD is in a highly volatile upwards trend, swinging 200-300 pips at a time between highs and lows. There is a trendline supporting the lows but the highs are rising at a steeper rate. Resistance comes from the 0.745 and then if the trendline through the highs is extended, then 0.755.
USD/CAD stalled for a third time just under 1.29 and has now stumbled almost 300 pips towards 1.26 with support possibly lying just below at 1.257 with the next level under that, the year-to-date lows at 1.245.
XAU/USD has dropped over $170 from the highs and found support at 1900 and the 200 SMA. A fakeout under 1900 helped a move up to 1950. The near term momentum is negative but if 1900 holds in the next dip, the correction from 2070 could be over.
BRENT has put in a base at 95 with a small double bottom, prompting a move up to 105. Whether the 100 level holds could determine whether 95 has formed the bottom of the correction. The greater probability favours a shift towards a sideways range following such a strong uptrend and sudden big pullback.
US500 has been trading sideways and looks set from a break higher as it tests resistance at 4400, following a surge over the 50 and 200 SMAs. The price never came back to the 4100 February low and since double bottomed at 4150, putting an end to the downtrend for now.
Thank you very much for reading – and have a great week trading!
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