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US Infrastructure/Debt Ceiling in Focus. Central Banks Eyeing Inflation

   

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout October and beyond.

At this moment, the world is watching the US Congress to see if it will pass a variety of spending and stimulus bills and to raise the US debt ceiling.

Supply issues and labour shortages are causing inflation to rise far more than Central Banks might find comfortable so they may need to react by increasing interest rates sooner than expected.  The question for forex traders is: Which Central Bank will be the first to blink?

These supply and inflation issues will almost certainly have an impact on upcoming retail sales figures and consumer confidence, especially with Christmas arriving in a few short months.

Crude Oil

The next scheduled OPEC+ meeting will be early next week on 4 October where we expect a more liberal outlook on production based on current inventories and potential demand.

Despite announcing production increases in the 1 September meeting, forecasts for increased demand through 2021 and 2022 were more optimistic and they reduced the forecasted surplus from 2.5 million barrels per day to 1.6 million.  These factors, including growing optimism regarding COVID, saw prices heading higher.

6 September saw Saudia Arabia announcing price cuts to Asian countries which caused a temporary fall in prices, but only temporary, giving traders a chance to “Buy the Dip”.Screenshot 2021-10-01 at 14.06.58

Brent Crude broke $80 per barrel in September which it hadn’t seen since 2018.

However, faltering economies, uncertainty about US debt and uncertainty about the current and next variants of COVID may have both WTI and Brent either ranging this month or in fact, declining throughout October.

Beyond October, we may see sharp increases to due the shortage of Natural Gas having winter countries shifting to crude based products to generate heat and the forecasted demand for increased air travel.

USD

We started the month of August with some good data on the US Non-Farm Payrolls, US Unemployment Rate, and Average Hourly Earnings.  This strengthened the USD for a few weeks but the threat of the Delta COVID variant, and the extreme American views on masks and vaccines, cast a cloud of pessimism over the US economy.

Last month, September, the NFP data was simply bad, which had caused the US Federal Reserve to rethink their plans for Bond Purchase tapering and any type of Interest Rate rise.Screenshot 2021-10-01 at 14.25.09

However, USD found itself getting stronger all month, probably based on the idea of tax increases to fund Joe Biden’s “Build Back Better” scheme and investors’ confidence that the Fed will, in fact, start tapering soon.

The market is on the edge of its seats, watching the US Congress this week and next, as the failure to raise the debt ceiling would be, in Janet Yellen’s words, “Catastrophic!”  Let’s see!

EUR

Eurozone inflation has hit a 13-year high and is leading most major economies.  This has caused EUR to fall and there seems to be no end in sight with increasing energy prices and supply problems affecting consumer goods and food.  Unless the ECB intervenes, we will see a weaker EUR into October.Screenshot 2021-10-01 at 15.58.16

GBP

As we can see from the chart, UK Pound Sterling had a “wild ride” all month.Screenshot 2021-10-01 at 16.21.27

28 September proved to be the worst day as a market sell-off hit GBP, combined with evidence of a global energy crisis.  Price has mostly recovered against EUR but has a long way to go against a strong USD.

The Bank of England governor — Andrew Bailey — is bullish on the UK economy, even in the face of labour shortages and supply problems for, well, almost everything.  He feels that the current spate of inflation is temporary but we will only see if he is correct into next year.

Asian Equities

As we discussed in July, the strategy with the China A50, CSI 300 and the HK 50, is not to “Buy the Dip” but to sell into rallies.

The Chinese government is continuing to crack down on various sectors and markets and is quite clearly behaving in an anti-capitalist fashion.  Combined with the repression and political unrest in Hong Kong, investors are quite nervous about any Chinese or Hong Kong equities and the charts tell the story.Screenshot 2021-10-01 at 16.08.13

The Hang Seng Index (HK50) is displaying a curious Ascending Triangle which we don’t often see with equities, with resistance at today’s level of 24564, which was a low point in August.  As we know, Ascending Triangles can go either way once they break the lower trend line or resistance.Screenshot 2021-10-01 at 16.17.09

On the back of a faltering Chinese economy, we see the Australian AUS200 bearish all month below the 50-day Moving Average, which had previously acted as a dynamic line of support for almost a full year.

US Equities

August saw new highs, repeatedly, as investors still had massive confidence in the US Economy regardless of the pessimism over the COVID Delta variant.Screenshot 2021-10-01 at 14.49.01

September was not so nice as our “Buy-the-Dip” strategy fell apart.

Investors, going into October are "Risk-off" and we are all eyeing a variety of factors including labour shortages, supply delays and problems, inflation in every sector, energy crises, US Congress, and possible tax increases.  Let's see if investor optimism in the US economy carries us forward as it did throughout the pandemic.

Gold

The chart tells the story as price action has been falling in a bearish channel all month.Screenshot 2021-10-01 at 13.02.55

From the technical standpoint, we can predict that price action will bounce off the upper trend line and continue down with the Stochastic Oscillator showing Overbought on the H4 chart.

Of course, further USD strength, and the lack of geopolitical events precluding the need for safe-haven investments, will have the bearish trend continuing.Screenshot 2021-10-01 at 13.18.59

Should prices continue lower, a major level of support is found at the lower level of the Double Bottom from May of this year, at $1,683.

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 October.

Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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