Equity Slide Resumes on Rate Hike Expectations

16 September 2022, 03:37

Market Focus

US stocks declined on Thursday, coming under bearish pressure and falling in a choppy session after the latest batch of economic data did little to dial back expectations for the Federal Reserve’s aggressive hikes move. US Retail Sales rose by 0.3% in August, coming in better than the market’s expectation of a no-change and fueling the view that the Federal Reserve will keep tightening policy aggressively. Therefore, the upbeat economic data underpinned the US dollar and acted as a headwind for the equity markets. On top of that, market sentiment is also facing downside pressure as Bloomberg ran a piece suggesting that China is likely to witness harder days than it witnessed in 2020. In the Eurozone, the fears about the energy crisis for the upcoming winter and hawkish comments from the European Central Bank (ECB) policymakers both kept the pessimism higher, meanwhile investors are blaming the ECB for underestimating the pace of inflation.

The benchmarks S&P 500 and Dow Jones Industrial Average both retreated lower on Thursday as the S&P 500 extended its slide in the US session to close at the lowest level since July 18. The S&P 500 was down 1.1% and the Dow Jones Industrial Average also declined 0.6% for the day. Nine out of eleven sectors in the S&P 500 stayed in negative territory, with the Energy and the Utilities sectors the worst-performing among all groups, losing 2.54% and 2.53%, respectively. The Nasdaq 100 meanwhile dropped the most with a 1.7% loss on Thursday and the MSCI World index was down 1.0% for the day.

Main Pairs Movement

The US dollar advanced higher on Thursday, regaining upside strength and touched a daily high near the 109.90 level in the early European session amid the case for ongoing aggressive hikes by the Federal Reserve. In fact, the market’s pricing of the Fed’s 0.75% and 1.0% rate hikes in next week’s Federal Open Market Committee (FOMC) has also risen to 80% and 20%. Market focus has now shifted to the Michigan Consumer Sentiment Index (CSI) for September, which might provide some fresh impulse.

GBP/USD suffered daily losses on Thursday with a 0.62% loss as the upbeat US Retail Sales data released on Thursday has exerted bearish pressure on Cable. On the UK front, the pound might remain under pressure amid the downbeat consensus for the UK Retail Sales data. Meanwhile, EUR/USD is seesawing around parity after mixed ECB official signals and refreshed its daily high above the 1.001 level. The pair was up almost 0.18% for the day.

Gold remained on the back foot with a 1.95% loss for the day after dropping to a daily low below the $1662 mark during the US trading session, as a firmer US dollar and yields undermined the safe-haven metal. Meanwhile, WTI Oil dropped the most in a week with a 4.31% loss for the day and retreated to $84 area amid demand fears as the US Department of Energy walked back expectations of its plan to restock petroleum reserves.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD has continued to gain for the second straight trading session. The U.S. initial jobless claims figure came in at 213K, compared to 218K previously. Retail sales figures for the U.S. came in at 0.3%, compared to -0.4% previously. Both key economic data releases attracted fresh bidding for the Greenback. However, the Dollar seems to have stalled out at its current level. Market participants will now look towards next week’s key FOMC interest rate decision, which is scheduled for Wednesday’s American trading session. According to CME’s FedWatch tool, the possibility of a full percentage interest rate hike by the Fed has risen to around 25%. A super sized interest rate hike by the Fed could bring unprecedented volatility for EURUSD.

On the technical side, EURUSD has retraced from our previously estimated short term resistance level of 1.0011 and is heading towards our previously estimated support level of 0.9969. Range bound trading for the pair is expected to continue until the FOMC interest rate decision. RSI for the pair sits at 45.8, as of writing. On the four hour chart, EURUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance:  0.9902, 1.0011, 1.0055

Support: 0.9902, 0.985

GBPUSD (4-Hour Chart)

GBPUSD could not hold on to gains from Wednesday’s trading and reversed course over the 15th. The stronger Dollar was aided by a better than expected jobless claims report and a healthy retail sales figure. Next week sees the BoE and the Fed announcing interest rate decisions for their respective countries. While the FOMC is set on a larger interest rate hike, the BoE is hampered by the weak economy of Britain and a nation that is under extreme price pressure from energy and utilities. In a survey conducted by the BoE, the central bank showed a 4.9% climb in inflation for the year ahead. Trading volume for Cable could be relatively thin ahead of the two key interest rate decisions, and Cable trading should stay rather range bound before the key decisions arrive.

On the technical side, GBPUSD has continued to trend closer to our previously estimated support level of 1.1463; however, if the Fed decides to implement a full percentage point interest rate hike next week, Cable could break below this key support level. RSI for the pair sits at 38.4, as of writing. On the four hour chart, GBPUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1.1561, 1.1854

Support: 1.1463

XAUUSD (4-Hour Chart)

Gold plummeted over the course of Thursday’s trading. The drop for Gold accelerated as the American trading session began. The non-yielding metal dropped as low as $1660 per ounce at the lowest point. The sharp drop affirms our bearish view on the non-yielding asset. Ahead of key interest rate decisions from the Fed and the BoE, market participants have rotated out of the yellow metal. The better than expected initial jobless claims report and retail sales figures from the U.S. only added further selling pressure for the yellow metal. Downbeat equity market performance, however, allowed Gold to limit some of the downsides. The rise in U.S. short term treasury yields continue to point to a bearish trajectory for the non-yielding metal.

On the technical side, XAUUSD has completely broken below our previously estimated support level of $1695 per ounce and is heading towards the lower level of support at $1650 per ounce. RSI for the yellow metal sits at 22.935, as of writing. On the four hour chart, XAUUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1740, 1800

Support: 1712, 1695