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Equities retreated on concerns that inflation could weigh on the global economic rebound, pushing central banks to raise interest rates sooner than expected

Market Focus

Equities retreated on concerns that inflation could weigh on the global economic rebound, pushing central banks to raise interest rates sooner than expected.

Traders took some risk off the table as data signalled house builders are struggling to break ground on projects amid high materials prices and ongoing labour shortages. Target Corp. sank after warning that cost pressures are creeping up, stoking fears they will dent profits at retailers. In late trading, Cisco Systems Inc., the biggest maker of computer networking equipment, slumped on a lacklustre revenue forecast, hurt by a shortage of components that’s making it difficult to keep up with demand.

Meanwhile, according to data from Bloomberg, Private equity firms are rapidly pulling money out of their companies, thanks to investors that are pouring money into loan funds to get protection from inflation.

Companies this year have borrowed, or are planning to borrow more than $88 billion in the U.S. leveraged loan market to fund dividend payments to their private equity owners. That’s the most for a year since at least 2013 when Bloomberg began compiling the data, which includes loans whose proceeds are in part for dividend payments but also go toward uses like refinancing debt.

Private equity firms are reaping the benefits, using the intense demand for loans to pile even more borrowing onto the heavily-indebted companies they own. KKR & Co.’s Internet Brands, whose assets include the WebMD medical advice website, is borrowing $4.8 billion to refinance debt and to pay a dividend of around $1 billion, according to a report by Moody’s Investors Service.

Main Pairs Movement

The Greenback’s recent hike seemed to run out of gas on Wednesday, with the dollar index falling back to the 95.80s by the end of the New York session, having printed fresh 16-month highs at 96.26 in the early Asia session. The White House has said that a final decision on the Fed chair nominee would be made before Thanksgiving (11/25).

Mixed US housing data failed to spur the Greenback higher as positive retail sales, regional Fed manufacturing survey and Consumer Price inflation data did in recent sessions. US yields pulled back a little, with the 10-year benchmark dropping 2bps back to 1.60%, somewhat eroding the dollar’s rate advantage.

Most of the major currencies added value against the US dollar. Among all, the Japanese yen was the best performer, as USD/JPY rallied 0.6% amid the US/Japan rate differentials tightened. On the flip side, AUD/USD is down 0.5%. The RBA’s dovish stance has started to cap the Australian dollar as the inflationary pressure has driven most major central banks to a tighter monetary policy.

Gold closed in the green for another day after the two-day correction at the start of the week. Refreshed inflation fears help boost the yellow metal and analysts have set goals up to $1910/ounce. Crude oil prices, however, were smashed on Wednesday, with WTI dropping 3% to $78.20, while Brent declined 2.6% to $80.20.

Technical Analysis

EURUSD (4- Hour Chart)

Following yesterday’s slide to the 1.132 area, EUR/USD continued to stay in negative territory on Wednesday. The pair tumbled further and touched new 2021 lows near the 1.126 level in the mid-Asian session, but then rebounded back above 1.132 to pare its intraday losses. The previous sharp pullback in the pair was mainly due to US dollar strength, as the upbeat Retail Sales data and rising US Treasury bond yields on inflation fears both acted as a tailwind for the greenback. In the Eurozone, the CPI report showed that inflation arrived at 4.1% YoY in October, which is the same as market expectations. Earlier in the day, ECB president Christine Lagarde’s and the dovish comments dragged the pair lower, saying that tightening monetary policy to ease inflation could suppress the eurozone’s recovery.

On the technical side, the RSI indicator is at 23 as of writing, suggesting that the pair is in the oversold zone, and a trend reversal could be possible. The MACD is now sitting below the signal line, which also indicates a possible downward trend for the pair. Looking at the Bollinger Bands, the price moves alongside the lower band, therefore the bearish momentum is likely to persist. In conclusion, we think the market will be bearish as the pair remains under pressure, and a test of the 1.1168 support is likely.

Resistance: 1.1464, 1.1608, 1.1692

Support: 1.1168, 1.0871

GBPUSD (4- Hour Chart)

GBP/USD advanced on Wednesday, continuing to recover from yearly lows that touched last week. The pair preserved its bullish momentum and reached a fresh daily top near the 1.349 area during the early American session. Cable was last seen trading at 1.3485, rising 0.42% on a daily basis. Recent buying witnessed in the GBP/USD pair rose from the hotter-than-expected UK CPI report, which showed that consumer prices surged to 4.2% in October with the fastest pace since December 2011. The stronger data underpinned the GBP/USD pair and enhanced expectations for an early rate hike by BoE. However, the prospects for an early policy tightening by the Fed might cap the upside for the pair.

From a technical perspective, the RSI indicator is at 59 as of writing, suggesting bull movement ahead. Looking at the MACD indicator, the increasing positive histogram also indicates a possible upward trend for the pair. As for the Bollinger Bands, the price is moving out of the upper band, therefore a strong trend continuation could be expected. In conclusion, we think the market will be bullish as the pair is heading to re-test the 1.3607 resistance. The bullish tone could be intensified if the pair break above that resistance.

Resistance: 1.3607, 1.3698, 1.3830

Support: 1.3353

USDCAD (4- Hour Chart)

Following the previous day’s rebound from 1.250 area, USD/CAD continued to climb further on Wednesday. The pair edged lower and touched a daily low in the early European session, but started to see heavy buying entering American trading hours. Now, the USD/CAD pair is flirting with the 1.260 level, currently rising 0.32% on a daily basis. Falling crude oil prices weighed heavily on the commodity-linked loonie and acted as a tailwind for the pair as WTI dropped to fresh daily lows despite a positive inventory report. The surging oil demand might encourage the Biden administration to release crude oil reserves.

On the technical side, the RSI indicator is at 71 as of writing, suggesting that the pair is in the overbought zone, and a trend reversal could be possible. Looking at the MACD indicator, the MACD is now sitting above the signal line, which also indicates a possible upward trend for the pair. As for the Bollinger Bands, the price is moving out of the upper band, therefore a strong trend continuation could be expected. In conclusion, we think the market will be bullish since the pair has risen above the previous 1.2605 support.

Resistance: 1.2648, 1.2775, 1.2849

Support: 1.2493, 1.2387, 1.2288

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