I previously discussed the situation regarding inflation and interest rates and concluded that it is necessary for another Federal Reserve rate hike. However, economists at Radobank believe that an additional rate hike is no longer required because the bond market will handle the Fed’s job. To briefly recap, the yield on 10-year government bonds has risen to 5%, which significantly increases investors’ appetite for these securities. Investment flows are being redirected into bonds (or bank deposits, which are currently also attractive) from the real economy. As a result, the economy starts to slow down because the money is being invested in passive income sources rather than businesses and companies.
If the economy slows down, inflation also begins to decelerate. Currently, it stands at 3.7%, and core inflation is slightly higher. In my opinion, one bond market alone cannot achieve the goal of bringing inflation back to 2%. However, Fed Chair Jerome Powell has tried to convey to the market that the tightening cycle is not definitively over. Radobank experts have concluded that high employment, low unemployment, and strong economic growth maintain the possibility of rate hikes, but at the moment, the “dynamics are neutral,” so “a rate increase is unlikely on November 1st.”
Instead, the rate may rise at the December meeting as a final move in the entire tightening cycle. Radobank believes that the bond market can do the job for the FOMC, but if economic data remains strong, the Fed will eventually need to resume tightening monetary policy.
In my view, such information will support the US dollar. The first factor in its favor is the wave analysis, which continues to suggest the formation of a downtrend. The second factor is the maintenance of a “relatively hawkish” stance. The third factor is the market’s lack of belief in further tightening of the Bank of England’s policy. Recall that representatives of the British regulator have also begun to hint at keeping the rate at its current level for an extended period, abandoning statements about further increases.
Based on what I mentioned, I do not see any good reasons to back the pound and the euro’s rally in the near future. I believe that everything will proceed according to the scenario that I have been consistently describing lately. Corrective waves 2 or b will be constructed, followed by a resumption of the decline for both instruments.
Based on the analysis conducted, I conclude that a bearish wave pattern is currently being formed. The pair has reached the targets around the 1.0463 level, and the fact that the pair has yet to break through this level indicates that the market is ready to build a corrective wave. In my recent reviews, I warned you that it is worth considering closing short positions because there is currently a high probability of forming an upward wave. Failing to break the 1.0637 level, corresponding to 100.0% according to Fibonacci, points to the market’s readiness to resume the downward movement, but I believe that Wave 2 or b will turn out to be three-wave.
The wave pattern for the GBP/USD pair suggests a decline within the downtrend segment. The most that we can expect from the pound in the near future is the formation of Wave 2 or b. However, there are currently significant issues, even with the corrective wave. At this time, I would not recommend new short positions, but I also do not recommend longs because the corrective wave appears to be rather weak.
The material has been provided by InstaForex Company – www.instaforex.com
I previously discussed the situation regarding inflation and interest rates and concluded that it is necessary for another Federal Reserve rate hike. However, economists at Radobank believe that an additional rate hike is no longer required because the bond market will handle the Fed’s job. To briefly recap, the yield on 10-year government bonds has risen to 5%, which significantly increases investors’ appetite for these securities. Investment flows are being redirected into bonds (or bank deposits, which are currently also attractive) from the real economy. As a result, the economy starts to slow down because the money is being invested in passive income sources rather than businesses and companies.
If the economy slows down, inflation also begins to decelerate. Currently, it stands at 3.7%, and core inflation is slightly higher. In my opinion, one bond market alone cannot achieve the goal of bringing inflation back to 2%. However, Fed Chair Jerome Powell has tried to convey to the market that the tightening cycle is not definitively over. Radobank experts have concluded that high employment, low unemployment, and strong economic growth maintain the possibility of rate hikes, but at the moment, the “dynamics are neutral,” so “a rate increase is unlikely on November 1st.”
Instead, the rate may rise at the December meeting as a final move in the entire tightening cycle. Radobank believes that the bond market can do the job for the FOMC, but if economic data remains strong, the Fed will eventually need to resume tightening monetary policy.
In my view, such information will support the US dollar. The first factor in its favor is the wave analysis, which continues to suggest the formation of a downtrend. The second factor is the maintenance of a “relatively hawkish” stance. The third factor is the market’s lack of belief in further tightening of the Bank of England’s policy. Recall that representatives of the British regulator have also begun to hint at keeping the rate at its current level for an extended period, abandoning statements about further increases.
Based on what I mentioned, I do not see any good reasons to back the pound and the euro’s rally in the near future. I believe that everything will proceed according to the scenario that I have been consistently describing lately. Corrective waves 2 or b will be constructed, followed by a resumption of the decline for both instruments.
Based on the analysis conducted, I conclude that a bearish wave pattern is currently being formed. The pair has reached the targets around the 1.0463 level, and the fact that the pair has yet to break through this level indicates that the market is ready to build a corrective wave. In my recent reviews, I warned you that it is worth considering closing short positions because there is currently a high probability of forming an upward wave. Failing to break the 1.0637 level, corresponding to 100.0% according to Fibonacci, points to the market’s readiness to resume the downward movement, but I believe that Wave 2 or b will turn out to be three-wave.
The wave pattern for the GBP/USD pair suggests a decline within the downtrend segment. The most that we can expect from the pound in the near future is the formation of Wave 2 or b. However, there are currently significant issues, even with the corrective wave. At this time, I would not recommend new short positions, but I also do not recommend longs because the corrective wave appears to be rather weak.
The material has been provided by InstaForex Company – www.instaforex.com