Monthly Review: October 2022
US Fed & BoE Continue with Jumbo Rate Rises to Curb Inflation. Where Next? Recession!
Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout November and beyond.
Despite the efforts of Central Banks with Interest Rate rises, global economies cannot seem to curb inflation. What has history shown us to be the best way to control rampant inflation? The answer, sadly, is a Recession.
We have published this blog slightly late this month as we wanted to see some key November events including the US Federal Reserve and Bank of England Interest Rate Decisions, and the US Non-Farm Payrolls.
Last month we announced the fiscal plans of Liz Truss, Prime Minister of the UK. These plans alienated politicians and investors alike and the Pound plummeted. Welcome, Rishi Sunak, the third Prime Minister in 3 months. Can he do better?
We are seeing a metamorphosis of the Forex Markets in that no one seems to know where to go for a Safe-Haven. Not the Yen. CHF? Gold?
The USD Index is displaying a slight downtrend from September through October Obviously, a strong USD is good for US importers but very bad for US exporters as foreign customers are finding American products to be too expensive. The continuing issues with inflation, globally, are not helped by a strong currency in the world’s largest economy.
The fall in price action on the right of the chart was caused by a good NFP report. Ironic? Read on.
The Fed is in the same boat as every other central bank in that the big rises in Interest Rates are not doing enough to curb inflation. Investors and politicians alike are now resigning themselves to the fact that 2023 will be a year of recessions.
If history repeats itself, a big sell-off of equities in the event of investor panic, will cause the USD to rise even further,
The biggest problem, however, is the potential crisis bubbling under the surface. It is a problem that the “man-on-the-street” doesn’t think about but it will soon be the “elephant in the room” among large economies and certainly the IMF. Emerging Market (EM) USD-denominated debt is and will become a huge issue if the USD maintains its strength. This is a complicated topic and deserves its own blog but suffice it to say that there is no good option to solve this problem if EMs start to default.
The US Federal Reserve raised Interest Rates by the predicted 0.75% to 4% just the other day. The attitude of Jerome Powell was to continue raising rates in the future but perhaps not as severely as the last two meetings.
However, the 4 November NFP report came out much higher than expected. Normally, this would be good news for the economy but not this time. Wages continue to rise which means more inflation. Part-time jobs vs full-time are ahead which is not what we want to see either. Without going into the minutia of the reports, this all means that the Fed may still have to raise rates in December by another 0.75%, again.
Sadly, Jerome Powell and most economists know, the best way to dampen runaway inflation, is to have a recession.
Last month we announced that Liz Truss took over as Prime Minister and immediately set about to kick-start the economy. She announced tax cuts to get British consumers spending again and to aid those suffering from extremely high energy bills. Tax cuts always affect a currency negatively and this was the case with GBP.
GBP is now trying to recover and investors and politicians alike did not like the policies of Ms Truss and she was forced out. Now, with Rishi Sunak as Prime Minister and Jeremy Hunt as finance minister, they face a monumental task of bringing inflation and the economy under control.
Even the dramatic rise in Interest Rates by Andrew Bailey and the Bank of England could not stop the slide. One of the few saving graces for Pound Sterling is that the UK has very little in the way of Emerging Market debt on its books, contrary to other major currencies.
This chart on GBPUSD is typical of all GBP pairs with recovery during October but with a dramatic fall after US and UK Interest Rate decisions.
Since our pessimism last month, the FTSE 100 has been gaining contrary to the state of the economy in the UK. Why? Most of the revenue, generated by the constituent companies of this index, is from outside the UK so internal issues have less effect than external ones.
From the technical standpoint, the FTSE 100 index is in a steady uptrend and MACD is on the verge of crossing into bullish territory.
For those of you afraid of heights, try to avoid viewing the price action chart on USDJPY.
The Bank of Japan injected Billions of dollars into the economy in October, which temporarily stopped the slide of JPY. However, this was short-lived as USDJPY continues to see price action in the high 140s.
On 2 November, the Bank of Japan’s Kuroda hinted at a possible Interest Rate rise but he would have to see yearly GDP at around 2%. Keep an eye on your calendars.
Overall we see a downtrend in both Brent Crude and WTI starting at the end of May of this year. Over the month OPEC+ played havoc with price action but by the end of the month, and into the first week of November, a weaker USD, and an impending European price cap on Russian crude had prices rising past $98 again.
From the technical side, price action broke the upper trend line and formed a cup and handle pattern before rising up to a key level of resistance where the Stochastic Oscillator is maintaining an overbought position.
As I mentioned above, we wanted to wait until all the economic news had run its course this week. Between Interest Rate decisions, speeches, and the US Non-Farm Payrolls, many big players were sitting on the sidelines and by Friday afternoon, it all kicked back into gear with big moves on almost everything.
The NFPs caused a rapid drop in the USD and it was just what XAUUSD needed as we see price action approaching the upper trend line in this enormous Descending Triangle. Along with declining confluence from the Stochastic Oscillator, all signs are bearish so we will keep an eye out for a reversal going into the next days into November.
That’s all for now. Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of November.
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