The week ahead: USD, S&P 500, Nasdaq, GBP, EUR, JPY, Gold
13:49, 24 February 2023
Another week draws to a close and let’s face it, we’re no closer to figuring out what is going on in the economy. Markets are still confused as to where to go next, as evidenced by the sideways ranges that have dominated most of the last few days. The FOMC meeting minutes released on Wednesday reinforced the view that most were expecting: inflation risks remain to the upside and the hiking path will continue until there is clear evidence that inflation is returning to the long-term average of 2%.
So we still have a resilient economy as indicated by the better-than-expected data in January, with emphasis on a strong labour market and consumer prices that whilst falling, are doing so at a very stubborn pace, which is not ideal. Despite it being the beginning of the month next week, we’ll have to wait until the following Friday, March 10th, to get the updated jobs data for February which means we have a pretty empty economic calendar next week, aside from some further sentiment data like PMIs and consumer confidence.
Equities are likely to remain slightly tilted to the downside but lack any real conviction to move lower. The start of this week seemed like we were going to get some excitement as we saw a sustained drop on Tuesday after a long weekend in the US, but sellers failed to gain the upper hand and momentum flattened out once again. The Nasdaq has had a few bounces off the 12,000 mark which is showing a good area of support in the short term so I wouldn’t be surprised if any further pullback is capped once again. Something to watch out for is the RSI divergence whereby the RSI has dipped below the January 19th low but the price still remains firmly above, pointing to potential exhaustion in the retracement. The S&P 500 has also been holding steady despite a small dip below the 50-day SMA (3,980) on Thursday. Both these indices are holding above their 200-day SMAs and their 2022 descending trend lines which is keeping gains limited for now.
On the Foreign Exchange front, the US dollar has managed to regain some upside and the US dollar index (DXY) is now attempting to push above last week’s high at 104.33, which is currently acting as resistance. GBP/USD had a good run at the beginning of the week but has found resistance within a bearish SMA cross (20-day below 50-day) and is looking to end the week pretty much unchanged around the 1.20 mark. The pair also has some good support in from the bullish cross of the 100-day SMA above the 200-day SMA around 1.1935 meaning that further sideways consolidation is likely.
EUR/USD has been trending downwards but has found support at the 28.2% Fibonacci (1.0573) from the 1.2260-0.9530 drop between May 2021 and September 2022. The path of least resistance remains firmly to the downside but new sellers are finding it hard to determine a good reason to come in, meaning momentum has been left depleted in the short term. The RSI is starting to venture into oversold territory so we may see a slight rebound from here, but gains are likely limited above 1.0695, whilst support may arise around the 2023 lows at 1.0481.
USD/JPY is picking up some upside momentum once again after BOJ leadership candidate Kazoo Ueda appeared in front of parliament overnight. He supported the current ultra-loose monetary policy as necessary and is in no rush to change it, with any adjustments depending on upcoming data. He also failed to give a comment on yield curve control bands which disappointed traders that were hoping to see some policy normalisation from the likely new Governor. He will appear again next week and is expected to be appointed in March, ready to take the role when Kurd steps down in April. USD/JPY is edging towards a two-month high after having lost some momentum in recent sessions but its likely that the pair will face some resistance up ahead as it approaches the 136 psychological mark followed by an area of confluence around 136.85.
Much like most markets at present, gold is struggling to find a clear direction as there is a lot of uncertainty about how the economy will perform in 2023 and the path of interest rates. The key moving forward is going to be how the upcoming data fit in with this view of a resilient economy. Gold has seen a substantial rally in the past 3 months, aided by the shift from inflation concerns to recession concerns, and now that the outlook has shifted again it is stuck unsure as to where to go. If the data goes back to showing a weakening economy that will necessitate less aggressive monetary policy then gold is likely to continue the upward momentum towards the $2,000 mark, but a resilient economy that sees investors less likely to look for safer returns on their capital will put pressure on gold prices. For now, until further clarity is achieved we’ll likely continue to see a bearish trend in gold but with very limited momentum, staying between $1,835 and $1,810 over the coming days.