Pound Plunged, Dollar Soared, Yen Saved by Intervention
It’s a week full of surprises. Probably the most important was the free fall of the pound, as the market reaction to the new UK government’s “mini-budget” was overwhelmingly negative. Commodity currencies and the euro also came under pressure due to risk aversion.
The dollar became the strongest after the Fed’s hawkish rise, the massive sale of risky assets and the surge in Treasury yields. The yen just grabbed second place as Japan’s first such intervention since 1998 failed to reverse the tide with the greenback. The Swiss franc was the third strongest, further supported by its rally against the euro and the pound.
With a relatively light calendar ahead and the end of the quarter approaching, markets may have a break this week. But… never say never.
GBP/USD breaks free at parity after radial mini-budget
The pound was already under pressure after the Fed’s hawkish rate hike. The BoE’s decision to raise the bank rate by 50 basis points was not unanimous, with three MPC members voting for 75 basis points and one for just 25 basis points. But the freefall only took off after Finance Minister Kwasi Kwateng’s mini-budget, seen by some as the most radical since 1972.
Market reactions have been overwhelmingly negative to the plan. FTSE lost -1.97% on Friday and could barely defend the 7000 handful. its highest level since 2010. GBP/USD fell below 1.09 for the first time since 1985.
Investors believed the plan would push inflation even higher and the BoE would be forced to raise interest rates further to 5.50% in the money cycle, adding further weight to the economy. The combined reaction suggests lack of confidence in the government’s ability to handle bloated debt.
Although the fall in the FTSE has been deep, it is not yet the end of the world for the UK. The key medium-term level to defend is a 38.2% retracement from 4898.79 to 7687.27 at 6622.07. As long as this level holds, the highs and lows, while important, are seen only as part of a medium-term sideways pattern.
As for GBP/USD, it hopes to get support between parity and the 61.8% projection from 1.7190 (2014 high) to 1.1409 (2020 low) from 1.4248 (2014 high). 2021) at 1.0675. stabilize, at least for the first attempt. It is far too early to judge how far the current downward trend would extend. But if the parity is suppressed firmly, the next target could be a 100% projection from 2.116 to 1.3503 from 1.7190 to 0.9532.
Japan finally stepped in, but USD/JPY just limited
Another significant development last week was Japan’s intervention in the currency markets, the first act to support the yen since the Asian financial crisis of 1997-98. Japan intervened in mid-markets, but these actions were aimed at slowing the currency’s advances. The move came after USD/JPY hit a 24-year high and threatened to approach the 1998 high at 147.68.
While the yen rebounded after the intervention, there has been no follow-up buying against the dollar so far. USD/JPY uptrend remains intact with 139.37 resistance turned support intact. In other words, USD/JPY could still have another attempt at 147.68 to test Japan’s resolve.
A firm break of 139.37 will be an indication of a medium term top. But based on current market sentiment and policy divergence between the Fed and BoJ, there is little chance of breaking the next level of support at 130.38 in the foreseeable future.
Dollar and yields up, stocks down after FOMC
Moving on to the US, the Fed raised interest rates by 75 basis points to 3.00-3.25% as widely expected. The biggest surprise was found in the new economic projections, which predict that the interest rate will reach 4.4% by the end of this year and peak at 4.6% in 2023. But there is still room for improvement. room for a further upward revision of the policy trajectory in the December projection if high inflation persists.
DOW breaches previous low at 29653.29 to resume medium term correction from 36952.65 high. For now, the short-term outlook will remain bearish as long as the resistance at 31026.89 holds, even if there is a strong rally. The correction could aim for a 100% projection of 36952.65 to 26953.29 from 34281.36 at 26982.00, or even a 61.8% retracement from 18213.65 to 36952.65 at 25371.94, before completion.
The 10-year yield jumped to 3.483 to resume the long-term uptrend last week, and hit a high of 3.773. TNX is now close to the 61.8% projection from 1.343 to 3.483 from 2.525 to 3.847. There may be some consolidations below this projection level first. But either way, a fresh rally is in favor as long as 3.353 support holds. A firm break of 3.847 could lead to further acceleration towards a 100% projection at 4.665.
At the same time, it’s also worth noting that the 2-year yield rose 0.345 over the week to close at 4.212, hitting the highest level since 2007. The 2-year and 10-year yield reversal , at -0.51, is now the deepest since 1981, topping -0.43 in 1989.
As for the dollar index, it accelerated to close strongly at 113.19 as the uptrend resumed. DXY is now pressing medium-term channel resistance and two-decade channel resistance. It is also close to the 61.8% projection from 94.62 to 109.29 from 104.63 to 113.69. Thus, there is the prospect of further loss of bullish momentum and some consolidations.
But still, the break of the resistance of 109.29 become support is necessary to confirm the overshoot. Otherwise, a new rally will remain in favor. A sustained break of 113.69 will open the way for a 100% projection of 119.30, which is close to the psychological level of 120 and the 2001 high.
GBP/JPY Weekly Outlook
GBP/JPY’s sharp decline and break of 155.57 support suggests a medium-term top at 169.10. This came after several rejections by the long-term Fibonacci level at 167.93. Initial bias remains bearish this week for 150.95 support next. On the upside, minor resistance above 159.10 will turn the intraday bias neutral and bring consolidations, before initiating another dip.
Overall, the rejection by a 61.8% retracement from 195.86 (2015 high) to 122.75 (2016 low) at 167.93 suggests that the rise from 123.94 ( 2020 low) is over. A deeper fall would be seen until the 38.2% retracement from 123.94 to 169.10 at 151.84. Some support could be seen there to provide a bounce. But the risk will now remain on the downside as long as the resistance at 169.10 holds. Sustained trading below 151.84 will target a 61.8% retracement at 141.19.
Looking further ahead, as long as the 55-month EMA (now at 150.40) holds, the upside from 122.75 could extend further at a later stage. However, a sustained breakout of the 55-month EMA will confirm that all upside is over and open a deeper drop towards the 116.83/122.75 support area.