The Swing Overview – Week 45
The major central banks decided on interest rates last week. The Fed, the Reserve Bank of Australia and the Bank of England kept rates on hold. In contrast, the Czech National Bank raised rates strongly. The Czech crown has space for further appreciation against the euro.
The US Fed is starting tapering of bond purchases. However, this did not prevent the stock indices from climbing with the DAX, SP 500 and NASDAQ making new highs.
Data from the US economy were again strong
Initial jobless claims fell by 14,000 to 269,000 in the week ending October 30, below economists' expectations of 275,000. This data is indicative of high demand for labor and it is the fifth consecutive decline.
On Wednesday, the ADP non-farm employment change data was reported. The creation 571,000 new jobs exceeded analysts' expectations, who had predicted a gain of 400,000 jobs. But the most important data from the labor market will come on Friday, November 5, when the unemployment data and the NFP report will be reported.
Among other important indicators, the ISM purchasing managers' index in manufacturing for October came in at 60.8 and in services at 66.7, indicating optimistic expectations for the future development of the economy.
Fed rate decision
The US Fed left interest rates on hold at 0.25%. Jerome Powell emphasized that there is no reason to rush to raise interest rates as the inflationary pressures that currently exist in the US are temporary. However, already in November there will be a reduction in the pace of government bond purchases of $120 billion by $15 billion.
The reaction to this decision was a drop of the dollar after the monetary policy announcement. On Thursday, however, the dollar began to strengthen again.
The US stocks are still strengthening
The US stocks were not deterred by the reduction in bond purchases and continued to rise. They were helped by the fact that the Fed is not considering raising rates yet. This sent US bond yields down and in turn gave support to bulls on equities.
The SP 500 index continues to be in an uptrend and has reached a new all-time high. In such strong uptrends, we need to wait for some resistance to form. On the SP 500, the resistance could be the upper trend line of the rising channel from the daily chart.
Figure 1: US SP 500 index on 4H and D1 chart
Supports, on the other hand, can be found on the H4 and daily charts. The closest support then is the consolidation at the price around 4,630. The next support is at 4,600.
A new all-time high was formed last week on the NASDAQ index, which is in a sharp uptrend. The chipmaker sector gained strongly after Qualcomm reported strong financial results and its shares jumped 12%.
Figure 2: The US 100 index on H4 and D1 chart
Last week a new all-time high was made at 16,388. The nearest support according to the H4 chart is the area around 16,200 and then 16,000. The moving averages EMA 50 and SMA 100 on both time frames confirm the current uptrend.
German DAX index
The DAX has caught up with the US equity indices and also made a new all-time high, which is now at 16,060.
Figure 3: The DAX on H4 and a daily chart
The index is near the previous peak, so there is a double top pattern. This can be seen as resistance. The closest support is at the consolidation around 15,950. The next significant support is at around 15,800 where the previous resistance turned into the current support.
The CNB hawks have raised rates the most since 1997.
The CBN raised the key interest rate by 1.25% to 2.75%. This is the highest rate hike since 1997. With this move, the central bank has signaled that it wants to put the brakes on rising inflation as inflation is well above the bank's target of 2%. In October, inflation was 5.5% year-on-year.
According to the CNB's projections, the inflation should continue to rise until the end of 2021 and a break in the trend should occur during 2022. Inflation should then reach the 2% target in 2023.
The Czech koruna strengthened strongly in response to the news. According to the CNB Governor, the koruna should benefit from the interest rate differential between the euro and the koruna and should soon reach CZK 25 per euro.
Figure 4: The EURCZK on daily and 4H chart
The nearest resistance according to the H4 chart is around 114.3. The support is in the range between 113.0 - 113.2.
The euro continues to weaken
Nothing significantly new has happened on the EURUSD and the pair is still in a downtrend. In terms of technical analysis, we see a bearish constellation of moving averages on the H4 chart, with the EMA 50 below the SMA 100.
Obrázek č.5: EURUSD na H4 a denním grafu
The nearest resistance is in the area between 1.1610 - 1.1620. Very strong support is at 1.1525, which the price approached last week.
The BoE left rates unchanged
The Bank of England surprised the markets by not raising interest rates on Thursday. This is because the market expected a response to rising inflation based on the rhetoric of central bankers, so this expectation led to the GBP strengthening during October.
However, following the rate announcement, the pound weakened sharply in response to unfulfilled expectations.
The BoE said that if the economy performed as expected, it would likely need to raise the bank rate from an all-time low of 0.1% "in the coming months".
Figure 6: The GBPUSD on H4 and a daily chart
The British pound is currently in a downtrend. It has currently reached the price of 1.35 and there is room for further depreciation to 1.34 in the short term. The nearest resistance is around 1.3550. The nearest support is at 1.3410.