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The pound closes in on the 1.3500 level as DXY forms a shooting star

Some big moves in the markets today on relatively small amounts but obviously significant data. The trends can end abruptly when traders get their target levels and unwind their trades. This could be what is happening with the US dollar index at the time of writing.

Market Wrap

Cable closed the London session on a high as traders position themselves for a Bank of England rate hike in December. The price action is nearing 1.3500 which will be the first key test for the start of a new uptrend. Only when we get back above the 1.3620 and previous swing high can we get more bullish, but the technology will at least match the fundamentals when that happens. Patience is key unless you really believe the BoE this time.

Inflation is escalating as countries across the developed world report rising prices.

This morning, the UK inflation rate surpassed expectations. The UK CPI inflation rate was always expected to increase sharply in October due to the latest increase in Ofgem's energy price cap. The temporary VAT cut for the hospitality sector was partially reversed and motor fuel prices, as well as everything else related to energy, are continuing to increase.

However, the increase from 3.1% to 4.2% y/y in September was well above expectations; forecasts ranged from 3.9% to 4.1%.

Despite energy prices being the primary contributor to October's inflation rise, that rise was as expected, so the biggest surprise was the higher-than-expected rise in "core" inflation. Core excludes the more volatile energy and food prices, so we're seeing rising prices across the board. Wages will have to follow if the Bank of England cannot curb the inflation rise with a rate hike. Though if they do, the mechanics of adding 0.25% to all goods and services could lead to even higher prices being accepted if wage increases jump.

Similarly, the Canadian CPI increased 4.7% year-over-year in October, up from 4.4% in September. It is the largest increase since February 2003. A year-over-year increase of 3.3% was seen in the CPI excluding energy, matching September's increase.

The CPI increased by 0.7% in October, the most since June 2020 (+0.8%), when energy prices began to rise after steep drops during the early months of the pandemic. On a seasonally adjusted monthly basis, the CPI rose 0.5%.

Unlike the GBPUSD, the Canadian dollar is currently suffering from higher inflation worries and falling oil markets. This goes to show it is not a given that inflation equals rate hikes and a sovereign currency. You have to weigh up all the macroeconomics and then find a technical level to trade-off. 1.2668 could be the last chance for the USDCAD bears to get a good entry for a long term short if the 1.2600 level drops its resistance potential.

EIA's weekly energy inventory data this afternoon showed crude oil down -2.101 million barrels against an estimate of +1.398 million barrels. Given expectations and private data, the crude oil drawdown is unexpected.

A draw on Oil inventories is usually good news for bullish oil traders. The worries around rising COVID-19 infections and lockdowns across parts of Europe will be a drag on the demand. The US dollar just recently reversed off a key level, so we may get a turnaround in energy tomorrow. If not the support level around $79 has to hold, or we will be looking for a break lower, a retest of old support, and then continuation trade lower.

In October of 2021, the number of housing starts in the US declined unexpectedly by 0.7% MoM to 1.52 million from 1.53 million in September and well below expectations of 1.576 million. The number of housing starts fell for a second consecutive month to the lowest level in six months due to rising building material prices, especially lumber and copper, as well as supply constraints and labor shortages caused by the pandemic disruptions.

The rest of the economic calendar is dominated by the Fed speakers, so it will be hard to know how the market reacts to their statements until the algos have finished doing their work. There is a real possibility that we get a melt-up in the US indices.

High inflation is not good for a currency, just ask the Venezuelans and Turkish people. The DXY hit the $96 big level today and promptly reversed, which is currently looking like a shooting star candle. Stops will be above the highs, so a quick reversal tomorrow will be extremely bullish as the liquidity would allow the price to accelerate higher. In a couple of days’ time, if the chart pattern is a bearish swing high, this could be the end of the dollar bull run. Especially if the Fed does not raise rates and/or the US Government were to default in mid-December due to the debt ceiling not being raised.

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