The British consumer price inflation hit the critical 3% threshold in September. The solid inflation revived speculation that the Bank of England (BoE) may raise interest rates as soon as the next monetary policy meeting. BoE Governor Mark Carney will testify before the Treasury Select Committee today and is expected to voice his opinion on whether the UK economy could handle higher interest rates through the bumpy Brexit process. So far, Carney tolerated the rise in inflationary pressures due to the ‘Brexit situation’ and anticipated easing in price pressures as a result of the widening gap between price and wages inflation. Unfortunately, lower wages didn't translate into softer inflation this far.
With the inflation at the critical 3% level, the BoE is left with no margin for keeping the rates at the historical low level. The market assesses 81.8% probability for a November rate hike. This is up from roughly 20% in the beginning of September. The GBP-bulls could push for a renewed attempt on 1.3342 (Fibonacci 50% retracement on September – October decline), while a surprisingly soft stance from Mr. Carney could encourage a correction toward 50-day moving average (1.3196), before 1.3175 (minor 23.6% retracement) and 1.3086 (100-day moving average).
Euro nervous on Catalan tensions, Spain cuts 2018 forecast
It is still unclear whether Catalonia declared independence and the tensions escalate. Two separatists were jailed and the Catalan police chief’s passport has been confiscated due to investigations on agitation. Spain cut its 2018 growth forecast from 2.6% to 2.3%.
Catalonian President Puigdemont is gradually losing credibility. The major risk is Spain taking control on Catalonia if Puigdemont clarifies his independence position.
European equity markets are flat. The EUR/USD fell to 1.1755. Trend and momentum indicators are marginally bearish and losses could extend toward the 100-day moving average (1.1723).
The EUR/GBP is pushing lower as well. The formation of a death cross on the hourly chart on Monday (50-hour moving average crossing below 200-hour moving average) weighs on the sentiment as well. Intra-day resistance could be found at 0.8888 (plunging 50-hour moving average), 0.8925 (100-hour moving average) and 0.8931 (200-hour moving average).
US stocks hit new record, new Fed Chair talks hit treasuries
Appetite in the US stocks remains tight. The Dow Jones, NASDAQ and S&P 500 refreshed record on Monday. Wall Street banks gained 2%. Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) will release 3Q earnings today. Goldman Sachs warned investors that 3Q FICC (Fixed Income, Currencies and Commodities) revenue may have eased compared to last year’s, provided the extraordinary performance during the Brexit and the US presidential election. Morgan Stanley is focused on equity trading and may have outperformed its peers due to the unprecedented rally in the stock markets.
There are talks on who will be the next Federal Reserve (Fed) President. The US 10-year yields climbed past 2.30% on news that President Trump interviewed John Taylor in the White House last week. Taylor is known for his preference for higher interest rates.
According to news, the current FOMC Chair Janet Yellen will have an interview with Donald Trump on Thursday. Jerome Powell, a member of the Fed’s Board of Governors and Trump’s chief economic adviser Gary Cohn are other names on the list.
Japanese, Australian stocks gained; Chinese stocks lacked appetite
Nikkei (+0.38%) and Topix (+0.24%) advanced as USDJPY consolidated above 112 mark in Tokyo, Hang Seng index (+0.02%) failed to consolidate earlier gains, while Shanghai’s Composite (-0.19%) appeared to be barely attractive to foreign investors before the China Communist Party (CCP) congress due to start on October 18. Australia’s ASX 200 (+0.73%) outpaced thanks to inflows in mining stocks (+1.11%). Iron ore futures eased by 2%, although the daily MACD (Moving Average Convergence Divergence) indicator turned positive following 10% rebound from the October 12 bottom.
Traders reluctant to move away from yen
The marginally strong US dollar helped the USD/JPY holding ground above the 112 mark in Tokyo. However, yen traders may be reluctant to move into foreign currency allocations on the run up to the October 22 snap election in Japan. There are put options at 112.00 at today’s expiry. This level distinguishes between call and put options as investors seem to be hedging for both the upside and downside risks in yen before and after the election. In the short-run, the limited risk appetite could encourage a correction toward 111.40/110.95, a buffer area including 50, 100 and 200-day moving averages.
Gold gave no reaction to North Korean war threat
Gold (-0.48%) gave no reaction to North Korean warning that a nuclear war could break out any moment.
Risk-on trading pulled the ounce of gold below $1’300 level. The sentiment turned neutral. The October rebound could meet support at $1’288 (major 38.2% retracement) as a part of risk-averse investors would remain seated on safe-haven holdings due to global political and geopolitical risks. Below this level, the correction could deepen toward $1'277 (major 61.8% retracement on October bounce).
RBA minutes reveal concern on AUD, household debt
The Aussie traded below its 100-day moving average (0.7865) as the Reserve Bank of Australia (RBA) minutes warned against the Aussie appreciation and high household debt. Australian interest rates will likely remain stable in the foreseeable future. The RBA/Federal Reserve (Fed) divergence plays in favour of a further downside correction in AUD/USD. The key support to the September – October downside correction is presumed at 0.7882 (major 38.2% retracement).