Downbeat sentiments to end the trading week: EUR/USD, Nikkei 225, AUD/USD

Market Recap

The aftermath of the Federal Open Market Committee (FOMC) meeting was met with an echo of rate hikes from the Bank of England (BoE) and the European Central Bank (ECB), which delivered similar responses that rates need to move higher while downplaying the slowing pace of hikes. That drove further de-risking in markets, with major US indices falling sharply with its second consecutive day of losses. On the technical front, the sell-off followed after the formation of various bearish shooting star candlesticks on Tuesday and marked a retreat from their respective trendline resistance, which dampened the chances that we could see a year-end rally.

The US Federal Reserve (Fed) has displayed a clear stance that tackling inflation still takes precedence over economic conditions, and the huge underperformance in retail sales (-0.6% versus -0.1% consensus) that followed yesterday did not provide the assurances of a soft landing. Consumers are pulling back from spending into the holiday season, with sales dipping in nine of the 13 categories in the report. Elsewhere, the BoE took the cue from the Fed in raising rates by 50 basis-point (bp) to 3.5% in a largely-expected move, but the vote split among policymakers seems to carry a ‘less hawkish’ outlook. Further downshift to 25 bp moves are on the table in February or March next year.

On the contrary, the ECB seems to take on a tougher stance. Inflation forecasts are revised higher, quantitative tightening is guided to start from March 2023 and interest rates may stay higher for longer, as the central bank plays catch-up. With that, despite some renewed strength in the US dollar overnight, the EUR/USD continues to defend its 1.061 level of support. Further upside could leave the 1.080 level on watch next, which marks its May 2022 high. On the contrary, any breakdown below the 1.061 support could prompt a move towards the 1.037 level as the next line of support.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.58%, ASX -0.54% and KOSPI -0.94% at the time of writing, as the risk-off session in Wall Street provided a negative handover this morning. The US dollar found some renewed strength, but much is still needed to determine if it is a clear reversal, considering that the dollar still trades within a downward trend. The Hang Seng Index remains capped by its 200-day moving average (MA), coming after a 35% rebound since November this year. While there is further progress in US regulators’ audit of Chinese companies, which aided to dampen some delisting risks, the Nasdaq Golden Dragon China Index has pared its initial gains overnight as the macro backdrop weighed. This may drive a more downbeat mood in Chinese equities, as market watchers also have to weigh further pressure on Chinese tech companies by the US government in securing US technology.

After failing to overcome its 28,400 level of resistance, the Nikkei 225 index took the cue from its US counterparts in paring its recent gains. The moving average convergence/divergence (MACD) runs the risk of heading below the zero-line, which could suggest a reversal in momentum to the downside. The 27,400 level will be on watch ahead. Failure for the level to hold could pave the way towards the 26,900 next.

On the watchlist: AUD/USD back to retest channel trendline support

With risk sentiments taking a beating yesterday following the back-to-back conclusion of key global central banks’ rate decisions (BoE, ECB, Fed), the risk-sensitive AUD/USD has registered an evening star formation, with the sharp reversal paring back all of its Tuesday gains. This brought the pair to retest its channel trendline support, which has been guiding the AUD/USD since November this year. A breakdown of the channel could pave the way towards the 0.654 level next, where a Fibonacci confluence zone stands.

Thursday: DJIA -2.25%; S&P 500 -2.49%; Nasdaq -3.23%, DAX -3.28%, FTSE -0.93%