This morning has little Tier-1 data and any moves will likely be traced back to the mean ahead of the FOMC as traders position themselves for what could be a very volatile US session. If the markets have actually priced in whatever the FOMC decides to announce today these ranges could remain until NFP on Friday, though we have to get through the Bank of England and OPEC+ meetings before that.
Market Brief
Today is arguably the biggest day in the markets for a couple of years, as expectations are that the Federal Reserve will begin to tighten monetary policy, paving the way to a rate hike cycle in the near future.
The forex heatmap is mixed with a shift back into the Antipodean currency pairs but out of the Canadian and US dollars. The Swiss franc has also caught a bid at the London open with the British pound mixed due to a weaker dollar but also on the back of higher housing inflation data reported this morning.
Although marginally below the 10.0% recorded in September, annual house price growth in October was 9.9%, and when taking seasonal effects into account, monthly house price growth in October was 0.7%. Since the pandemic began in March 2020, the average UK home price has risen by $30,728 to now trade above the 250K price level.
It is the Bank of England’s turn tomorrow to tell the market whether they are entering into a tighter monetary cycle and the GBPUSD is poised for a breakout in either direction.
The cable is in a large descending channel and is currently finding support from an old pivot level around the 1.3600 big figure. At the start of October, the price action in GBPUSD formed an area of balance and this is where I expect the day’s trading to remain until after the FOMC release. If the Fed comes out Hawkish we should expect a dip to the 1.3420 - 1.3450 zone to see if there are any buyers remaining at the swing low. I still favor a bigger move to the upside as descending channels usually break the upper bounds, but the ActivTrader sentiment indicator is showing that the majority of traders on the platform also favor a bullish move. The contrarian in me feels an upside break is more likely after these traders have been stopped out. Maybe that is what happens with the FOMC tonight.
There are several factors suggesting that UK economic activity including rising asset prices like houses, may slow down. The cost of living has sharply risen in recent months, which has weakened consumer confidence and the BoE is expected to raise the bank rate from its current record low of 0.1% before the end of the year - most likely to 0.25% or 0.5%. A rate hike would help the GBP against the euro which remains around NIRP and ZIRP levels.
Service sector activity in the United Kingdom increased to 59.1 points in October, marking the largest increase in the last three months and bringing some cheer to the UK through the FTSE100 has since dropped 10 points. The Composite Output Index for manufacturing increased to 57.8 points, according to the IHS Markit this morning.
As COVID-19 outbreaks eased, the Caixin China General Services PMI increased to 53.8 in October 2021 from 53.4 in the prior month, reflecting the second straight month of expansion in the service sector.
The USDCNH shows that the two biggest economies in the world are either doing as well as each other over the last 8 months or that the PBOC is able to keep the yuan within a tight range with their monetary policy actions. October was a relatively large down month for the USD versus the yuan and all though I doubt they want the yuan to appreciate much more, there is a decent demand zone formed at the 2018 monthly swing low for price action to test. If there is a big spike in the DXY following the FOMC tonight, it will be interesting to see if the PBOC allows the USDCNH to rise too.
Tomorrow is also the day that OPEC+ decides on whether they are going to increase production output, though they will consider the larger build in US API inventories from yesterday as a reason not to. Gasoline was a draw of -.55mln barrels but lower than the expected draw of -1.3mln and Crude inventories were a build of +3.59mln versus an expected +2.2mln. The Brent chart above could be forming a head and shoulders pattern on the H4 chart, so a more significant drop below the $80 per barrel level could then lead to an even larger drop. The fact remains that there is likely to be an increase in demand for oil markets during a cold winter and the OPEC+ nations are not actually supplying the full 400mln barrels due to unforeseen problems. So, a tight market and probable rising demand are most likely to raise oil prices in the longer term.
The next 48 hours are going to be important for the USDCAD and I have significant levels of interest above at the 1.2440-1.2450 zone and then the 1.2500 – 1.2520 zone of resistance. Currently, the daily price action is in a tight rising channel, so a break to the downside is what I expect, though the FOMC could spike the US dollar higher first. It is definitely recommended to wait until after the news before trading the Loonie as it could rip or dump a couple of hundred pips before you know it.
Ahead of the FOMC today we have ADP jobs data and ISM service PMI data from the USA.
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