Thread: Daily Market Analysis from ForexMart

GBP/USD: Pound slightly weakens, but selling still risky as dollar remains weak

The pound-dollar pair surged by more than 200 points yesterday, reacting to the publication of inflation growth data in the United States. The resonant release put an end to discussions about the Federal Reserve's future steps—at least in the context of the December meeting. The probability of the Fed raising interest rates in December decreased to 5%, meaning the market is almost certain that the U.S. regulator will maintain the status quo next month.

The inflation report played the role of a cold shower for dollar bulls. Last week, Federal Reserve representatives, including Chairman Jerome Powell, thoroughly heated the public with their hawkish statements, so the sharp shift in sentiment significantly impacted the greenback. The U.S. Dollar Index dropped from 105.60 to 103.80 in just a few hours, reflecting the anti-rally of the American currency. The GBP/USD pair did not stay on the sidelines and updated a two-month price high, testing the 1.2500 level for the first time since September.

But, as they say, "not everything is rosy." The pound rested on its laurels only briefly, as inflation data in the United Kingdom were also published following the U.S. report. It can be said that today, GBP/USD buyers also experienced a cold shower, as almost all components of the UK data were in the red. Certain conclusions can be drawn here as well, primarily regarding the prospects of tightening monetary policy by the Bank of England. These conclusions do not favor the pound as they suggest the central bank will maintain the status quo after the upcoming meetings.

For instance, the overall Consumer Price Index in the UK sharply dropped to zero month-on-month (forecasted to decline to 0.1%) after two consecutive months of growth (0.5% in September). In the year-on-year calculation, the overall index also ended up in the red, reaching 4.6% (forecast at 4.8%)—the weakest growth rate since October 2021. For comparison, the overall CPI was at 6.7% YoY in September.

A separate line needs to be drawn for the core Consumer Price Index, excluding energy and food prices. In June and July, it was at 6.9%, but it dropped to 6.2% in August. In September, the indicator again demonstrated a downward trend (6.1%), as well as in October—5.7% (while most experts predicted a decline to 6.0%). This is the lowest value of the indicator since March 2022.

The Retail Price Index, used by British employers in salary negotiations, similarly ended up in the red zone: -0.2% MoM (forecasted to grow by 0.1% MoM) and 6.1% YoY (forecasted to grow to 6.3%)—a two-year low, the weakest growth rate of the indicator since October 2021.

However, some components of the data entered the green zone but remained in the negative territory. For example, the Producer Purchase Price Index in the year-on-year calculation rose to -2.6% (forecast at -3.3%), and the Producer Selling Price Index reached -0.6% YoY (forecasted to decline to -1.0% YoY).

Commenting on the published report, the chief economist of the Office for National Statistics stated that the decline in inflation occurred against the backdrop of falling energy prices. According to him, the downward trend in key indicators is associated with the decrease this month in the maximum level of energy prices, which limits the amount that suppliers can charge consumers per unit of energy.

The sharp decline in inflation in the United Kingdom is a significant blow to the positions of the British currency. However, an interesting situation has developed for the GBP/USD pair: the dollar is knocked out after yesterday's release, and the pound is knocked down after today's news. Sellers of the pair managed to muffle the upward impulse but failed to turn the situation in their favor.

At the moment, it is challenging to say whether sellers of GBP/USD will be able to reverse the trend. Despite the weak positions of the pound, the pair may resume its upward movement due to further weakening of the American currency. The disappointment of the dollar bulls is too great: just last week, Powell stated that the current level of the Fed's rate might be "insufficient" to curb inflation. However, after the publication of CPI growth data in October, his words lost their relevance. Therefore, rushing to sell GBP/USD now may not be advisable—after a short pause, buyers may regain the initiative in the pair.

From a technical perspective, the pair is currently testing the support level of 1.2450 (the upper line of the Bollinger Bands indicator on the daily chart). In this price range, the downward pullback has stalled. This is another signal indicating the unreliability of short positions. It is advisable to consider selling only after sellers firmly establish themselves below the 1.2450 target—in this case, the next price target will be the level of 1.2340 (the Tenkan-sen line on D1).

Dollar versus Gold: New Employment Data in the U.S. and Its Impact on the Market

This significant rise in gold prices was recorded on Monday, but by Tuesday, the situation had dramatically changed: the price decreased by 0.5%, reaching $2,020.29 per ounce. This decline followed the record achievement and a reduction of more than $100 in a single day, closing the market session with a loss of over 2%.

It is noteworthy that American gold futures also showed a decrease, falling by 0.3% to $2,036.30.

Experts predict that the growth that led to Monday's record may temporarily subside. This is due to uncertainties around the prospects of the U.S. monetary and credit policy. However, geopolitical risks may contribute to gold reaching new heights in the future.

Jim Wyckoff, a senior analyst at Kitco Metals, emphasized that the gold market has taken a pause after the recent rally. He also suggested that the $2,000 level might become a new floor for gold in the market.

Significant impact on market trends is also exerted by employment data in the U.S. Recent reports showed a decrease in the number of job openings in the country to a level not seen in more than two and a half years. This indicates that the rise in interest rates is starting to affect the demand for labor.

Thus, investors are eagerly awaiting the U.S. non-farm employment report for November, which will be published on Friday. These data may provide a clearer understanding of the future movements of U.S. interest rates, which, in turn, will affect the dynamics of both the dollar and gold.

The dollar, in turn, has strengthened its position, showing a growth of 0.2% and approaching a two-week high. Such strengthening of the currency made gold more expensive for holders of foreign currencies, which also played a role in changing market dynamics.

Traders are actively assessing current economic trends, especially the likelihood of a reduction in interest rates by the U.S. Federal Reserve (Fed) in March. According to the CME FedWatch tool, the probability of such a reduction is currently estimated at 66%. Historically, a decrease in interest rates is a factor that typically provides support in the market for non-interest-bearing bullion such as gold.

In light of this, experts from Commerzbank suggest that the price of gold may reach $2,100 per troy ounce by the second half of 2024. This forecast is based on the expectation that the Fed will begin the process of lowering interest rates.

Against this backdrop, there is also a decline in prices of other precious metals. Spot silver fell by 1.4%, reaching a price of $24.16 per ounce. The price of platinum also decreased, by 1.8%, settling at $899.80 per ounce.

Palladium, continuing the trend, also showed a decline of 4.1%, reaching a more than five-year low at $936.24 per ounce. This decrease highlights the overall trend of instability in the precious metals market, influenced by both economic and geopolitical factors.

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WGC Gold Forecast for 2024​​​​​​​

The World Gold Council on Wednesday published a report on gold demand trends for the fourth quarter and the year 2023. The report states that the annual demand for the precious metal, excluding over-the-counter markets, amounted to 4,448 tonnes. This is 5% lower than the demand registered in 2022. However, considering over-the-counter markets and equity flows, the overall demand for gold last year rose to a record 4,899 tonnes.

According to the latest report from the World Gold Council, central bank purchases and purchases of metal on over-the-counter markets contributed to a huge physical demand, leading to a record-high price in the last month of the year. Juan Carlos Artigas, head of WGC's research department, said despite challenging obstacles, as the Federal Reserve continued its aggressive monetary policy, supporting higher bond yields, the precious metal managed to grow by 15%.

Judging by the final price of gold on LBMA, the yellow metal ended 2023 at $2,078.40 per ounce with an average price of $1,940.54 per ounce. This is also a record, 8% higher than the prices of 2022. According to final estimates, central banks bought 1,037 tonnes of gold last year, falling short of the 2022 record by only 45 tonnes.

Over the last ten years, central bank demand has almost doubled compared to the average figure.

As for the World Gold Council's forecast, WGC still expects substantial purchases by central banks in 2024. The report states that central bank demand will return to the pre-record average level of around 500 tonnes.

Analysts also noted that the leader among central banks in gold purchases last year was the People's Bank of China, which acquired 225 tonnes throughout the year. For comparison, the National Bank of Poland was the second-largest gold buyer, purchasing 130 tonnes, thereby increasing its gold reserves by 57%.

Demand for gold-backed ETFs was also driven by Chinese investors. However, China's economy is facing growing obstacles and economic uncertainty. Nevertheless, the precious metal may attract certain demand from Chinese investors.

The report also suggests that central banks may not continue the rapid pace of purchases observed in the last two years, but this trend clearly indicates that gold has become an important risk management tool.

Stocks and the dollar: stability vs. growth ahead of key consumer price index

At the start of the week, global market indices remained virtually unchanged, while the US currency slightly strengthened ahead of Tuesday's consumer price index report in the US, which could hint at when the Federal Reserve might begin cutting interest rates.

In the realm of cryptocurrencies, Bitcoin reached $50,000, a level not seen in over two years, with its value increasing by 5.6% to $50,207. Cryptocurrency stocks also saw gains: Coinbase Global (COIN.O) increased by 3.7%.

The S&P 500 index slightly fell after reaching a new intraday record high. Last week, the S&P 500 index surpassed 5,000 points for the first time in history. The MSCI global stock index remained unchanged after reaching its highest level since January 2022.

The January report on the consumer price index is expected on Tuesday, with the US producer price report to follow later in the week. Investors are also eagerly awaiting the January US retail sales report, set for release on Thursday.

Initial expectations of a Fed rate cut at the upcoming meeting were not met due to data indicating the economy remains stable.

Market estimates put the likelihood of rates staying unchanged in March at 84.5%. According to CME FedWatch Tool data, the chance of a rate cut of at least 25 basis points in May dropped to 61% from over 95% at the start of 2024.

"Moderate consumer price index data and soft retail sales should reinforce the Fed's confidence that inflation is returning to its target," said Mark Chandler, chief market strategist at Bannockburn Global Forex in New York.

The Dow Jones Industrial Index (.DJI) rose by 125.69 points, or 0.33%, to 38,797.38, the S&P 500 (.SPX) lost 4.77 points, or 0.09%, to 5,021.84, and the Nasdaq Composite (.IXIC) dropped 48.12 points, or 0.30%, to 15,942.55.

Among the Dow Jones index components, Nike Inc (NYSE:NKE) shares increased by 2.71 points (2.59%) and closed at 107.21. Shares of Goldman Sachs Group Inc (NYSE:GS) went up by 8.63 points (2.25%), finishing at 392.89. Shares of 3M Company (NYSE:MMM) rose by 1.76 points (1.89%), closing at 94.66.

Shares of Salesforce Inc (NYSE:CRM) fell by 3.76 points (1.29%), ending the session at 287.54. Shares of Microsoft Corporation (NASDAQ:MSFT) rose by 5.29 points (1.26%), closing at 415.26, while shares of Apple Inc (NASDAQ:AAPL) dropped in price by 1.70 points (0.90%), finishing trading at 187.15.

Among the S&P 500 index components, shares of VF Corporation (NYSE:VFC) appreciated by 13.92% to 17.43, Diamondback Energy Inc (NASDAQ:FANG) gained 9.38%, closing at 165.98, and shares of Mohawk Industries Inc (NYSE:MHK) increased by 6.61%, ending the session at 117.28.

Shares of Motorola Solutions Inc (NYSE:MSI) decreased in price by 3.20%, closing at 320.30. Shares of ServiceNow Inc (NYSE:NOW) lost 3.19%, ending trading at 786.98. Quotes of Monolithic Power Systems Inc (NASDAQ:MPWR) dropped by 2.98% to 729.87.

Among the NASDAQ Composite index components, shares of Beamr Imaging Ltd (NASDAQ:BMR) surged by 371.56% to 9.95, Renalytix Ai Plc (NASDAQ:RNLX) increased by 228.00%, closing at 1.25, and shares of Millennium Group International Holdings Ltd (NASDAQ:MGIH) rose by 201.94%, ending the session at 3.11.

Shares of AN2 Therapeutics Inc (NASDAQ:ANTX) decreased in price by 74.50%, closing at 5.10. Shares of Medavail Holdings Inc (NASDAQ:MDVL) lost 43.22%, ending trading at 1.80. Quotes of TOP Financial Group Ltd (NASDAQ:TOP) dropped by 40.63% to 3.20.

Shares of Goldman Sachs Group Inc (NYSE:GS) reached a 52-week high, increasing by 2.25%, 8.63 points, and finished trading at 392.89. Shares of Beamr Imaging Ltd (NASDAQ:BMR) reached a historical high, rising by 371.56%, 7.84 points, and ended trading at 9.95. Shares of Medavail Holdings Inc (NASDAQ:MDVL) fell to a 3-year low, losing 43.22%, 1.37 points, and closed at 1.80.

The global stock index MSCI (.MIWD00000PUS), tracking stocks in 49 countries, dropped by 0.01%. European stocks (.STOXX) increased by 0.5%.

Markets in China, Hong Kong, Japan, South Korea, Singapore, Taiwan, Vietnam, and Malaysia were closed for holidays.

Financial markets in mainland China were closed for the Lunar New Year holiday and will resume trading on Monday, February 19. Trading in Hong Kong will resume on February 14.

Investors also tempered their expectations for a European Central Bank rate cut after two policy makers stated last week that the ECB needs more evidence of inflation falling before it can reduce rates.

On Monday, the Federal Reserve Bank of New York published its January survey of consumer expectations, which showed that inflation expectations for one year and five years remained unchanged at 3% and 2.5%, respectively. The predicted inflation growth over three years fell to 2.4%, the lowest level since March 2020, from December's 2.6%.

The dollar index, which tracks the dollar's performance against a basket of other major trading partners' currencies, increased by 0.1% to 104.13.

The dollar rose by 0.03% against the yen to 149.35, while the euro dropped by 0.1% for the day to $1.0769.

The yield on US Treasury bonds fell, with the rates on benchmark 10-year bonds decreasing after three consecutive periods of growth.

The yield on the benchmark 10-year US Treasury bonds decreased by 1.9 basis points to 4.168% from 4.187% late on Friday.

Oil futures closed mixed, almost unchanged. Concerns over interest rates and global demand caused the market to pause after prices jumped by about 6% last week.

US oil increased by 8 cents and settled at $76.92 per barrel. Brent crude oil decreased by 19 cents and settled at $82.

Spot gold prices fell by 0.3%.

Inflationary explosion in the US: how do the dollar and bonds react?

The consequences of high inflation are felt across the financial market. Specifically, the main Wall Street indices reacted to this news with a decrease after the publication of data indicating a higher than expected rise in consumer prices. This event pressured the expectations regarding the imminent lowering of interest rates, which in turn led to an increase in the yield of US Treasury bonds.

Among other things, the Dow Jones Industrial Average recorded its most significant drop in almost 11 months after the US Department of Labor's report showed an unexpected increase in consumer prices in January, especially due to the rise in housing costs.

Against this backdrop, market indices, which were on the rise in anticipation that the Federal Reserve System (FRS) would begin to lower rates as early as May, showed negative dynamics. The S&P 500 index, for example, closed above the 5000 point mark for the first time, and the Dow Jones index traded near record-high values. However, the publication of inflation data revised expectations regarding the FRS's policy, increasing the likelihood that rate cuts may not occur until June.

Mega-cap companies sensitive to rates, such as Microsoft, Alphabet, Amazon.com, and Meta Platforms, showed a decrease in stock prices amid the rise in yields of US Treasury bonds to a two-month high. A similar situation was observed among chip manufacturers, including Micron Technology, Qualcomm, and Broadcom, which led to a 2% drop in the Philadelphia SE Semiconductor index.

The real estate, consumer discretionary, and utilities sectors faced the most significant losses among the 11 major industry indices of the S&P 500, especially real estate, which reached its lowest values in more than two months.

Small-cap companies also felt the pressure, with the Russell 2000 index showing the most significant daily drop since June 2022.

"Various statements by Federal Reserve System officials in recent weeks have indicated that the market-anticipated rate cuts in the first half of the year might have been premature. The latest consumer price index data certainly confirms this trend," commented Bob Elliott from Unlimited Funds.

The consumer inflation data followed a modest revision of inflation figures for the last quarter of 2023, giving investors temporary relief regarding inflation expectations.

The Cboe Volatility Index reached its highest level since November, highlighting the growing market concern. The S&P 500 and Nasdaq Composite indices lost 1.37% and 1.79% respectively, while the Dow Jones Industrial Average fell by 1.36%, marking its most significant decline since March 2023.

Among other developments, JetBlue Airways shares surged by 21.6% after Carl Icahn disclosed his stake in the company, calling the shares "undervalued." Arista Networks' shares declined by 5.5% following a gross profit forecast below expectations, and Marriott International lost value after forecasting annual earnings below analyst expectations.

Cadence Design Systems and toy manufacturer Hasbro also faced a drop in share value after publishing gloomy forecasts. Meanwhile, Tripadvisor shares jumped by 13.8% following the announcement of the creation of a special committee to review deal proposals.

The total trading volume on US exchanges reached 12.9 billion shares, comparable to the average of the last 20 sessions at 11.71 billion shares.

The US stock market continues to demonstrate record levels, supported by leading technology companies and expectations of Federal Reserve rate cuts. The global stock index MSCI and the Stoxx 600 European index also showed a decline amid current events.

The dollar index reached a three-month high, and bitcoin set a new record since December 2021, despite subsequent declines.

Data on US retail sales and the producer price report are expected shortly, which may further influence market sentiments.

The rise in oil prices continues amid tensions in the Middle East and Eastern Europe, with Brent crude futures and West Texas Intermediate showing significant increases. Meanwhile, gold prices fell below the key level of $2000 per ounce after the CPI data was released, reaching a two-month low.

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XAU/USD: review and analysis

The positive factor for raw materials currently lies in the fact that the dollar bulls are awaiting important economic events regarding the path and timing of the Federal Reserve's interest rate reduction. This week, the FOMC minutes will be published, which is expected to contribute to some impulse in the precious metal.

Also, a decent increase in Treasury bond yields provides some support for the U.S. dollar and limits the rise of the non-yielding yellow metal. In addition, the overall positive tone in the stock markets contributes to restraining the global increase in the price of gold.

And since yesterday was a holiday in the United States, there were no significant movements in the markets. From a technical point of view, any upward movement is likely to encounter some resistance near the $2,030 level, where the 50-day SMA is located, with subsequent testing. If this level is decisively surpassed, it will create a foundation for further growth beyond the intermediate barrier at $2,044–2,045 towards the supply zone at $2,065.

On the other hand, the 100-day SMA, currently around $1,992–1,991, may act as immediate support before the $1,983 region or the two-month low reached on Wednesday. Following this is the 200-day SMA, currently tied to the $1,965 area, and in the case of a decisive breakthrough, it will be considered a new trigger for the bears.

After that, gold may accelerate its decline to the November 2023 low, with some obstacles along this path.

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2025: Gold and oil raise rates

In Asian markets on Tuesday, gold prices remained within a narrow range amid fears of long-term interest rate hikes. The absence of trading signals was also due to a holiday in the American market.

Gold demonstrated some strengthening, reaching the $2000 per ounce mark after recovering from a two-month low over the last two trading sessions. However, current fluctuations in gold prices are still occurring within the range of $2,000-$2,050, which was established for the majority of 2024.

Spot gold prices increased slightly by 0.1% to $2,019.17 per ounce, while the price of gold futures expiring in April settled at $2,030.20 per ounce as of 23:34 Eastern Time.

Analysts from Citibank highlight three main catalysts that could push gold prices to $3000 per ounce and oil to $100 per barrel in the next 12-18 months. Among them are a sharp increase in gold purchases by central banks, stagflation, and a deep global recession. Currently, gold is trading around the $2016 mark and could rise by approximately 50% in the event of any of these scenarios materializing.

Analysts point to dedollarization in central banks of developing countries as the most likely path to reaching $3000 per ounce of gold. This would lead to a doubling of gold purchases by central banks and shift the focus of demand from jewelry to gold as the main driver.

Central bank gold purchases have reached record levels in recent years, aiming to diversify their reserves and reduce credit risk. Leading this trend are the central banks of China and Russia, as well as India, Turkey, and Brazil, actively increasing their gold bullion purchases. According to the World Gold Council, global central banks have maintained a level of net gold purchases exceeding 1000 tons for two consecutive years.

In the context of a global recession, a deep economic downturn could force the United States Federal Reserve to drastically cut rates, which, in turn, could be the reason for gold prices to rise to $3000. Gold traditionally exhibits an inverse correlation with interest rates, becoming a more attractive asset compared to fixed income in a low-rate environment.

Stagflation, combining high inflation with economic slowdown and rising unemployment, could also trigger a rise in gold prices, despite the low likelihood of such a scenario. Gold is perceived as a safe haven in periods of economic instability, attracting investors looking to avoid risks.

In addition to the above factors, Citi suggests that the baseline scenario for gold involves reaching a price of $2150 per ounce in the second half of 2024, with an expected average price just over $2000 per ounce in the first half of the year. Record prices may be achieved by the end of 2024.

Although geopolitical tensions in the Middle East provide support for gold prices, a more significant price increase is restrained by the prospect of long-term interest rate hikes in the US.

Traders are lowering expectations regarding the Federal Reserve's imminent rate cuts following reports of high inflation in the US, and statements from Fed officials reinforce assumptions about maintaining high interest rates over a longer period.

The outlook for gold in the near future remains uncertain, similar to the situation in the market for other precious metals. Prices for platinum and silver show a decline, and copper experiences a slight drop in price, despite a reduction in the base interest rate in China, the largest importer of the metal.

In the context of the oil market, analysts consider a scenario where oil prices could once again reach $100 per barrel, considering risks associated with geopolitical tensions, actions by OPEC+, and possible supply disruptions from key oil-producing regions. Tensions in the Middle East, particularly the conflict between Israel and Hamas, and increasing tension on the border between Israel and Lebanon highlight potential risks for oil suppliers in the OPEC+ region.