- Gold gained on the back of risk appetite, a weaker dollar and lower US yields. Profit-taking set in after Powell’s speech.
- Powell reaffirmed the Fed’s intention to taper asset purchases, pushing gold lower.
- Markit Services and Composite PMIs exceeded expectations in October.
- The US manufacturing PMI for October was disappointing.
- The 10-year UST yield returned to 1.636% by the close of trading.
- Developer Evergrande has announced plans to prioritize the growth of its EV business. The company has resumed work on 10 projects.
- In China, the number of Covid-19 infections increased over the weekend.
Most major currencies showed growth heading into the weekend. The largest gains against the US dollar were posted by the New Zealand dollar ( 1.07%). Smaller gains were recorded by the Swiss franc ( 0.76%), the Australian dollar ( 0.67%), the Japanese yen ( 0.64%), the euro ( 0.43%), the British pound ( 0.05%). Trading to the downside was the Canadian dollar (-0.07%).
The EURUSD pair increased 0.17% to 1.1643 on Friday, October 22. During the Asian session, price action slipped to 1.1620 and heightened volatility was seen during the European and North American sessions. The euro drew support from an increase in the EURGBP cross after UK macro data came out. UK retail sales fell short of expectations. As a result, the British pound was unable to tap into increased risk appetite for other assets.
US manufacturing activity continued to climb in October, albeit at a slower pace than in September, with the Markit Manufacturing PMI falling to 59.2 (preliminary) from 60.7 (vs. 60.3 forecast).
Major currencies and precious metals came under pressure following comments from Fed Chair Jerome Powell, who reiterated the central bank's plan to cut bond purchases and downplayed the likelihood of a rate hike over the coming months. He also added that high inflation is likely to continue next year. The regulator still expects inflation to return to the 2% target when supply chain bottlenecks disappear.
The market reacted with dollar buying, putting pressure on equity markets and commodities. The UST10Y yield widened to 1.676% and retraced to 1.636% by the close of trading. In the upshot, the DXY index moved lower.
Today’s macro agenda (GMT 3)
- 11:00 Germany: 3 IFO indices
- 13:00 Germany: Bundesbank monthly report
- 16:00 BoE MPC member Silvana Tenreyro speech
Current outlook
During Asian trading, major currencies have been trading in positive territory, except for the yen. New Zealand and Australian dollars topped the leaderboard. Market participants brushed aside news that the number of Covid-19 infections in China increased over the weekend and authorities expect the virus to spread further.
Demand for risk assets rose on the back of news from Evergrande. The developer announced plans to prioritize the expansion of its EV business over its core real estate business. Over the weekend, the company’s CEO said that work has resumed on more than 10 projects in Shenzhen and five other cities in South China’s Guandgdong Province.
The news is positive for risk-sensitive assets, but there is a factor that will continue to exert a negative impact on the market. Evergrande paid interest on dollar bonds last week. The default was delayed. The next grace period ends on October 29. So, market participants will need to face another round of worries as that date approaches.
Technical analysis
Buyers started off the new week on the front foot, holding support at 1.1620 due to a rally in the EURGBP pair and sluggish UK macro data.
Powell said the Fed is ready to do all it takes. The next FOMC meeting is approaching. Experts expect QE to be cut by $15 bln. The market has already priced in this move. Assuming that demand for risk assets persists on Monday and Tuesday, buyers will try to raise the price action to 1.1725 if the USD10Y yield declines.
Conversely, pressure on buyers will increase if price action retraces to 1.1620. ECB President Christine Lagarde insists that the spike in inflation is temporary and the central bank will continue to buy bonds. Buyers have a target of 1.1725, while sellers have set their sights on 1.1575.