Risk off-trade is in full swing as the US, and European futures continues to plunge and have started the week on the back foot again. Looking at the sentiment in the market, it is evident that traders and investors are highly pessimistic, and it is highly likely that we will see more losses for the US stock market. This, despite Wall Street posting one of its worst weekly performances on Friday for this year.
The Dow Jones Industrial Average dropped 880 points or 2.73% on Friday. The Nasdaq 100 index tumbled by 3.52%, and the S&P 500 stock index fell by 2.91 on Friday’s last trading of the week.
The US consumer sentiment reading released on Friday pushed traders and investors further into the corner. The reading flirted with the level of 50, which made investors immensely nervous. In addition, the US CPI also had a multi-decade high reading, which confirmed that there is much more pain for the US economy. This is chiefly because the Fed will have to make difficult decisions in the coming weeks.
The Fed, which will be announcing its monetary policy decision later this week on Wednesday, is expected to take further action to tame inflation readings. But here is the biggest dilemma for the Fed if they continue to increase the interest rate like they have seen doing, it is likely to slow the growth of the biggest economy in the world. The consumer sentiment reading released on Friday has already started to flirt with the level of 50.
In addition, we also have the US Core Retail Sales m/m and Retail Sales m/m data due before the Fed’s monetary policy decision. Once again, the retail sales number isn’t expected to be stellar because consumers are already feeling the pain due to their eroding disposable income. We will likely see the retail sales data taming some of the most hawkish expectations about the Fed’s monetary policy.
Since Friday, the Euro and Sterling have been under tremendous selling pressure against the dollar. This is mainly due to the strong US CPI number. There is no doubt that the dead cat bounce for the EUR/USD and GBP/USD is over now. Now, it is time for traders to think more carefully. The BOE is expected to announce its monetary policy on Thursday, and it is widely anticipated that the bank will continue to increase its interest rate. The BOE is in the most challenging situation among the developed nations as the country continues to face slower economic conditions, soaring inflation, and conflict with Russia.
In terms of the price levels, we will likely see the GBP/USD touching or even breaking the critical support at 1.20, and if this does happen, we could see the price retesting the next support at 1.15. As for the Euro/dollar, the parity calls are likely to be very much back on the table.
The precious metal is in a different condition. Although we did see the metal price soaring on Friday on the back of the US CPI reading, the fact that the bets are strong for a more aggressive stance from the Fed has strengthened the dollar index, which has taken the wind out of the gold rally. We will likely continue to see this trend this week; however, an extreme bearish stance in the US equity market could spur some safe-haven trades, which means the downside for the gold price is limited.
The correlation between the equity market and Bitcoin continues to pick more strength as we see the Bitcoin price dropping much deeper in a bear market. The weekend’s price action was brutal for cryptos, and today’s price action isn’t encouraging either. The BTC price has retested the 25K support level, and we will likely see the price falling towards the 20K critical price. The weekly time frame shows that the price is way oversold, and we may see a relief rally soon.