Markets Risk-On As Fed Pushes Back on 100-point Hike

18 July 2022, 02:05

Market Focus

US stock surged on Friday, rebounding back and recovering some of the ground it lost at the end of a dizzying week as investors reduced their bets on a bigger rate hike by the Fed in July. Federal Reserve Governor Christopher Waller and St. Louis Fed President Jim Bullard, who are the two most hawkish FOMC members, said that they were not in favour of the bigger rate hike at the upcoming meeting in July. Therefore, the markets are pricing in 75 basis points of Fed tightening this month, down from a full-point bet earlier this week. However, concerns about a potential recession still remain as a 75 bps rate hike is still an aggressive one. In the Eurozone, ongoing fears over disruption to the euro-zone economy including energy supply constraints and fragmentation risks might continue weighing on investors’ sentiment, which are unlikely to ease in the coming weeks.

The benchmarks, S&P 500 and Nasdaq 100 both advanced on Friday as the less hawkish stance from Fed officials and positive US retail sales data both lent support to the market mood. The S&P 500 was up 1.9% on a daily basis and the Nasdaq 100 also advanced with a 1.8% gain for the day. All eleven sectors stayed in positive territory as the financials and the health care sectors were the best performing among all groups, rising 3.51% and 2.45%, respectively. The Dow Jones Industrial Average meanwhile climbed the most with 2.1% gain on Friday and the MSCI World index rose 1.6%.

Main Pairs Movement

The US dollar declined on Friday, extending the previous day’s retracement slide from a two-decade high and edging lower on the last day of the week. The DXY index remained under bearish momentum during the first half of the day, dropping to a daily low below the 108 level in the US trading session. The Retail Sales in US increased by 1% in June, which was better than market’s expectation of a 0.8% rise but failed to lift the greenback higher.

GBP/USD advanced with a 0.38% gain on Friday amid the risk-on market mood across the board. However, political uncertainty and Brexit woes might have overshadowed the prospects of further tightening by the Bank of England and undermined Cable. GBP/USD dropped to a daily low below the 1.181 level, but regained upside traction and extended its daily gains. Meanwhile, EUR/USD witnessed heavy buying and refreshed its daily high above the 1.009 level to trim its weekly losses in the US session. The pair was up almost 0.72% for the day.

Gold declined with a 0.16% loss for the day after dropping to a daily low below the $1700 mark in early US trading sessions, as the less hawkish stance from Fed officials continued weighing on the US dollar and offered some support to the dollar-denominated gold. Meanwhile, WTI oil preserved its upside traction and moved higher to the $98 area during the US session. But fears of a potential recession have raised concerns about the fuel demand outlook.

Technical Analysis

USDJPY (4-Hour Chart)

USDJPY consolidated its biggest daily gains in a month following the US Retail Sales and Michigan Consumer report. On the technical side, USDJPY is trading  in the range between 138.18 (76.4% of the Fib. Retracement) and 139.38 (100% of the Fib. Retracement.) USDJPY witnessed some profit taking after contesting the resistance level of 139.38, the highest in 21 years. The corrective pullback erodes a part of the previous day’s strong gain. The intraday bias remains strongly bullish as the pair continues to trade above the ascending channel and above the 20 Simple Moving Average. To the downside, the breakout of the immediate support of 138.18 and the 20 Simple Moving Average would give some pressure to USDJPY’s buyers, attracting some follow-through sellers. However, as long as USDJPY can trade above 136.22, the overall momentum remains upside.

Resistance:  139.38

Support: 137.88, 136.63, 135.77

XAUUSD (4-Hour Chart)

Gold steadied above $1,700 during the American session as falling US Treasury yields helped limit further losses on gold. From the technical perspective, the intraday outlook of gold stays negative, but the psychological support of $1,700 seems to warrant some caution for bearish traders before positioning for any further drop. That being said, if the support fails to defend, then it is expected to see an accelerated decline in gold. On the contrary, gold needs to climb above $1,788 in order to declare its upside momentum on the four-hour chart. As the RSI indicator and the MACD remain hovering in negative territory, the downward trajectory could possibly further get extended.

Resistance: 1740.31, 1766.70, 1788.03

Support: 1697.66

EURUSD (4-Hour Chart)

EURUSD extended its rebound above 1.0050 during the American session on Friday. The euro dollar eased some selling pressure as the bet on a 100 bps interest rate hike from the Fed declines. From the technical perspective, EURUSD is moving on the outside of the descending regression on the four-hour chart. EURUSD looks to build some upside momentum following the trading pattern of double-bottom. At the time of writing, EURUSD is expected to contest the resistance of 1.0146. In the meantime, the RSI indicator on the four-hour chart has surpassed the midline, suggesting that buyers are gradually back in the game.

Resistance: 1.0146, 1.0266, 1.0363

Support: 1.0000, 0.9952