1. Forex Market Insight
The expected Fed cuts, seasonal demand and energy-driven instability have triggered a wave of bullish bets on the dollar, making it look like it will dominate in the months ahead.
Right now, evidence of the dollar’s dominance abounds. The risk reversal on the Bloomberg Dollar Index shows that investor confidence is close to the strongest level since the first wave of the Covid-19 pandemic. Even the disappointing U.S. non-farm payrolls report for September did not stop the dollar’s momentum as traders still expect the Federal Reserve to begin tapering its asset purchases this year.
In fact, the market interprets the report’s inflation signal as evidence that the Fed would have to raise interest rates earlier, and that favors yields and the dollar. The dollar is expected to rise further as U.S. Treasury yields rise and demand for emerging market assets is sluggish. Financing currencies such as the euro will continue to weaken as central banks in these regions are expected to raise interest rates later than the Fed.
(EUR/USD 1-hour chart)
Today, we pay attention to the support of the 1.1554-line. If the euro falls below the 1.1554-line, it will open up a further downside potential. At that time, pay attention to the support of the 1.1501-line. The top focus is on the suppression of the 1.1622 and 1.1663 positions.
GBP Intraday Trend Analysis
A closely watched indicator of long-term inflation expectations in the U.S. bond market suggests the Federal Reserve may be losing its grip on rising inflationary pressures. The 5 Year 5 Year forward break-even inflation rate is near its highest level in about seven years, the second time in recent months that the index has issued a similar warning. In May, a similar rise prompted Brian Sack, the former head of monetary and financial markets analysis at the Federal Reserve Board of Governors, to join other officials in warning the Fed of the need to signal a policy adjustment.
While the Fed said in June that it would begin discussing tapering bond purchases, which paved the stage for the November tapering statement issued last month, the spiraling energy prices and rising wages have once again pushed up break-even inflation. With the imminent tapering considered out of the question, only hints about the timing of rate hikes can be perceived by the market as hawkish signals from the Fed.
Inflation expectations are now clearly out of the low-inflation regime, with the 5 Year 5 Year forward breakeven inflation rate “once again knocking on the 250-basis point mark,” says Deutsche Bank. There is sufficient evidence that the break-even indicator will eventually move away from the low inflation regime of post-2014. As of Oct. 1, the Fed’s own 5 Year 5 Year forward breakeven inflation rate was 2.28%. It reached 2.55% on May 11, its highest level since February 2014.
Ultimately, continued supply chain disruptions are likely to keep inflation high, raise inflation expectations and force the Fed to raise rates early in 2022, leading to the pound remaining weak.
(GBP/USD 1-hour chart)
Today, the pound is still focused on the suppression of 1.3669, followed by the support of 1.3522 and 1.3409. Once the pound stands above the 1.3669-line, it will open up a further upside. At that time, pay attention to the suppression of the 1.3721-line.
2. Precious Metals Market Insight
Gold prices fluctuated and fell yesterday as markets bet that the Fed would not delay its plans to taper stimulus, but expectations of stagflation limited the decline. The main focus during the day will be on the U.S. JOLTs’ job openings for August and speeches by the Fed officials.
(Gold 1-hour chart)
Gold is still focused on the direction of the breakthrough in the range of 1745 to 1768 today. If it breaks through 1768 upwards, it will open up a further upside potential. At that time, it will pay attention to the suppression of the two positions of 1782 and 1801. If it falls below the 1745-line, it will open up a further downside space. With that, pay attention to the support strength of the two positions at 1740 and 1724.
3. Commodities Market Insight
WTI Crude Oil
At the 2021 Energy Intelligence Forum held last week, participants stated that global oil supplies will be sufficient to meet demand in the short to medium term. However, it will face energy shortages after 2026, unless the oil industry increases investment in new projects.
Global oil supplies will be sufficient to meet demand in the next few years because of their available idle capacity. Yet industry officials and analysts say the world will either need more new supplies to meet growing demand after the mid-2020s or will need to reduce demand to avoid a supply crisis. Given the long lead times for conventional projects from discovery to production, some officials have begun to call for greater investment in new supplies.
Meanwhile, oil exploration companies will need to boost their drilling budgets by 54% to more than $500 billion to prevent a serious supply deficit in the coming years. With this said, the industry will need to increase spending significantly, especially if oil and gas demand continues to climb beyond pre-epidemic levels by 2025, according to Moody’s Investors Service.
Moody’s quoted the International Energy Agency’s estimates that oil and gas companies are expected to spend $352 billion on drilling and related activities this year. If they increase to the $542 billion recommended by credit rating companies, this will be the highest in the world since 2015.
(Crude oil 1-hour chart)
Today, oil prices pay attention to the lower rail of the Bollinger Bands. Above the lower rail of the Bollinger Bands, oil prices still maintain the idea of taking advantage of the trend and focusing on the suppression of the 80 and 81.33 positions. In turn, pay attention to 80 and 81.33 two positions of the suppression strength. Once the lower Bollinger band falls, it will open up a further downside space. At that time, pay attention to 76.89 and 75.69 two positions of support strength.
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