Risk Appetites Increase as Inflation Read Cools

11 August 2022, 02:40

Market Focus

US stocks surged on Wednesday, as a release of softer-than-expected inflation data fueled bets that the Federal Reserve would pivot to a smaller pace of hikes, although some market watchers took the view with a grain of salt, expecting that officials may still be a long way from their goal of 2% inflation. The July consumer price index brought a sigh of relief to those with concerns over unstoppable inflation, and swaps are now suggesting a move of 50 basis points as more likely in September than a repeat of the 75 bps increases that officials opted to implement at their past two meetings. However, the CPI number is just one piece of the intricate puzzle officials are playing with at the moment, as food prices in the US soared the most since 1979 in July, keeping the cost of living painfully high even as lower gasoline costs offered some relief to consumers.

The benchmarks, the S&P 500, Nasdaq 100, and Dow Jones Industrial Average surged on Wednesday as the critical US consumer price index indicated softer than expected results. All eleven sectors in the S&P 500 stayed in positive territory and six out of eleven sectors rose more than 2% for the day, with Materials and Consumer Discretionary performing the best among all groups, advancing 2.88% and 2.87% respectively on Wednesday. The Dow Jones Industrial Average climbed 1.6%, the Nasdaq 100 increased 2.8%, and the MSCI world index went up 1.8% for the day.

Main Pairs Movement

The US dollar dropped on Wednesday, following a cooler-than-expected U.S. inflation report for July that raised expectations of a less hawkish interest rate hike cycle than previously anticipated from the Federal Reserve. The DXY index dropped to a level below 105.2 when the critical data was released and fell deeper to a daily-low level below 104.7 during the middle of the US trading session. After a corrective pullback, the greenback oscillated in a range between 105.0 to 105.4.

GBP/USD advanced 1.15% for the day. Cable attracted fresh transactions and reached a level above 1.225 as investors’ risk sentiment have improved dramatically following a significant decline in the US inflation rate. However, on the UK front, bulls are waiting for the GDP due on Friday. The economic data is likely to drop to 2.8% from the previous figure of 8.7%. Meanwhile, EURUSD also surged to a monthly-high level above 1.036 amid a weak safe-haven greenback across the board. The pair rose 0.84% on a daily basis.

Gold slid on Wednesday as risk appetites improved. XAUUSD touched a refreshed monthly-high level to nearly $1808 during the announcement of US consumer data, then pulled back and wavered in a range of $1788 to $1792 marks as broader risk appetite hit the global market.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair surged on Wednesday, regaining upside momentum and touching a daily top above the 1.036 mark during the US session after the release of upbeat US CPI data. The pair is now trading at 1.03522, posting a 1.35% gain on a daily basis. EUR/USD stays in the positive territory amid renewed weakness in the US dollar, as the greenback collapsed to multi-week lows in the sub-105.00 region and provided strong support to the EUR/USD pair. The US Consumer Price Index declined to 8.5% on a yearly basis in July, which came in lower than market’s expectations and acted as a tailwind for riskier assets. For the Euro, the energy crisis and elevated inflation remains as a key focus for the growth outlook in the Eurozone, which might limit the upside for the EUR/USD pair.

On the technical side, the RSI is at 55, suggesting that the pair is facing heavy bullish pressure as the RSI stays in the overbought zone. As for the Bollinger Bands, the price moved out of the upper band so a strong trend continuation can be expected. In conclusion, we think the market will be slightly bearish as the RSI is entering overbought levels. The pair might witness some short term technical corrections before climbing higher toward the next resistance at 1.0438.

Resistance:  1.0438, 1.0484

Support: 1.0158, 1.0082, 0.9991

GBPUSD (4-Hour Chart)

The GBP/USD pair rallied on Wednesday, adding to its intraday gains and touching a daily high above the 1.226 mark in the US session amid weaker US dollar across the board. At the time of writing, Cable stays in positive territory with a 1.37% gain for the day. The softer US CPI data today seems to have pushed back market expectations for a larger Fed rate hike move at the September policy meeting and exerted heavy bearish pressure on the safe-haven greenback. However, investors still expect more tightening from the Federal Reserve, but the doors are open to less aggressive action, which means a rate hike of at least 50 basis points is still on the table. For the British pound, the fear of possible recession and the BoE’s gloomy outlook could act as a headwind and cap the upside for the cable.

Meanwhile, the RSI indicator is at 68  as of writing, suggesting that the pair remains bullish in the short run as the RSI heads north almost vertically. For the Bollinger Bands, the price regained strong upside momentum and moved out of the upper band. Therefore a continuation of the upside trend can be expected. In conclusion, we think the market will be bullish as the pair is heading to test the 1.2277 resistance line. The risk will remain skewed to the upside if the pair break above the aforementioned level.

Resistance: 1.2277, 1.2309, 1.2381

Support: 1.2186, 1.2068, 1.1940

XAUUSD (4-Hour Chart)

As the US dollar came under heavy selling pressure amid the softer-than-expected US CPI report on Wednesday, XAU/USD witnessed some buying but then retreated back near the $1793 area to surrender most of its daily gains during the US trading session. XAU/USD is trading at 1797.42 at the time of writing, rising 0.16% on a daily basis. The post-US CPI broad-based US dollar sell-off and diminishing odds for a larger Fed rate hike have both acted as a tailwind for the dollar-denominated gold, as the odds for a 75 bps Fed Rate hike move in September tumble to just 35% now. However, the risk-on market mood and the strong rally in the US equity markets should limit the gains for the safe-haven metal.

Meanwhile, the RSI is at 64 figures as of writing, suggesting that the upside is more favored as the RSI indicator remains above the midline. For the Bollinger Bands, the price continued to rise toward the upper band, therefore the upside traction should persist. In conclusion, we think the market will be bullish as the technical indicators head firmly higher within positive levels. On the upside, a break above the 1812 resistance could open the door for additional gains.

Resistance: 1812, 1822, 1831

Support: 1785, 1769, 1756