Dollar is in the spotlight this week as key inflation data could see the FED begin the early stages of a pivot.
The Dollar begins the week on the back foot after its first weekly loss in a month against a basket of 6 other major currencies. Downside momentum can be attributed to investors seeing the recently easing signs of inflation, leading to an increased risk tolerance that has benefited other currencies as well as equities and commodities.
However, key data is in sight as August CPI numbers are due to be released this week, and if there is a significantly softer inflation print, the Dollar could continue to sell off as the market awaits the FED’s next move regarding interest rate decisions and any signs of how soon a dovish pivot could begin.
Technical Analysis (H4)
In terms of market structure, price moved correctively towards the 110.65 level in the form of an ascending channel which formed a reversal pattern of the minor trend. Since then, price has moved impulsively away from the high towards the 107.79 area where significant buy-side liquidity resides. Regarding the major trend, it will remain bullish until the key 104.00 level is breached by the bears.
The Euro kicks off the week on the front foot as dollar demand decreases significantly. Contributing factors are an increased risk sentiment in the market as well as the continued rhetoric coming from the ECB. Remarks over the weekend from Executive Board member Frank Elderson allude to the bank increasingly looking like it will follow the FED on their hawkish stance of hiking interest rates again in October, amid the risk of a recession as well as historically high energy prices, to bring inflation back to acceptable levels.
In terms of market structure, price moved correctively towards the 0.986 level in the form of a descending channel which formed a reversal pattern of the minor trend. Since then, price has moved impulsively away from the low towards the 1.019 area where significant sell-side liquidity resides. The trend will remain bearish until the key 1.037 level is breached by the bulls.
Sterling begins the week on solid ground on the back of increased dollar selling bias in the market and hit a two-week high after moving from a low last seen in 1985. Most of this momentum seen in the Pound is a direct result of the market already having priced in the possibility of a 75-basis point rate hike at the next FED meeting this month, and the effect that this has on the risk-on sentiment can be seen in relation to how other currencies as well as equities across the board have rallied.
However, the gains made by Sterling could be capped by an increasingly dampened outlook on the UK economy, with disappointing economic data being released earlier today coming in at 0.2% growth versus the 0.5% that was expected. Further upside potential will increasingly be linked to dollar dynamics as we get into a week where US inflation data is due.
Technical Analysis (H4)
In terms of market structure, price moved towards the 1.140 area in a corrective wave, forming a reversal pattern (falling wedge) of the minor trend. Since hitting the low, price has moved impulsively towards the 1.167 area and is now trading at a level where significant sell-side liquidity could enter the market. Regarding the major trend, price is still in a technical downtrend and this move could potentially represent a correction to form a new Lower-High in the trend until the bulls breach the 1.186 area impulsively.
Gold heads into the new week with investors keenly eyeing the August inflation data due to be released on Tuesday. Any significant move from the yellow metal will be intrinsically linked to how soft the inflation data is because that will affect the probability of a 75 versus a 50-basis point rate hike from the FED at their next meeting this month. A 75-basis point rate hike is likely to keep gold southbound, but a 50-basis point rate hike could be the catalyst for the beginning of a recovery and a sustained run back towards levels on the north side of current price.
Technical Analysis (H4)
In terms of market structure, current price action has printed out a rising wedge corrective pattern with the peak formation located at the $1 729 level. A significant break above this area could put bulls in charge of price to challenge the $1 741 area. Conversely, a failure to break above this corrective pattern would result in bears taking control of price and yielding a subsequent impulsive wave that could challenge the $ 1 681 area.
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