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Fed’s inflation fight results in a recession?

The Fed might not be able to cool down inflation without hurting the economy. This could result in recession. The latest data suggest some parts of the economy are still doing fine while more capital-intensive sectors are slowing down. Retail sales numbers from the US were better than expected. The m/m increase was 1.3% in October and was the biggest increase in eight months. Motor vehicle dealers gained 1.3% as supply chain constraints have been easing. The higher cost of petrol pushed sales at service stations 4.1% higher.

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Fedtalk: The Fed might create a recession

Kansas City Fed President George voiced her concerns that the Fed might not be able to cool inflation without inducing a recession. Yesterday’s industrial production data indicated activity was slowing and previous reports were revised lower. In other words, capital-intensive businesses are already struggling with higher interest rate levels.

Gold chart 11 17 inflation

Upside in gold turned out to be limited

It’s been my view that the upside in gold is limited. Now we have further confirmation for this view as it continued to weaken. The market now has a break of structure in the 8h chart as the 1768 support didn’t hold. A bearish channel breakout points to 1748. This is where we have the SMA(20) and a recent support level (1753). If sellers force the market to stay below the 1768 – 1770 range the 1753 level probably breaks and there’s more downside in gold. On the other hand, if the bulls overcome this supply and don’t allow gold to trade significantly below 1753 the market probably will have another go at the 1786 resistance.

Gold’s not what it used to be, a hedge against inflation. Perhaps it is providing safety against the dollar decline in the long run but it’s clear from the recent price action that gold is being push around by the expectations related to the Fed and it’s future rate policy.

USOIL chart 11 17 inflation

USOIL is ranging

Oil is ranging sideways in the daily chart. The recent lower daily highs indicate further weakness which could result in the market slipping towards the range low (81.25). In order to rally towards the higher end of the range the market needs to break decisively above the bear channel high (currently at 86.90). Lower oil prices translate into lower inflation expectations in the future so keep an eye on this market as you try to understand what the Fed might do in the future.

GBPUSD chart 11 17 inflation

GBPUSD trends higher

Cable is trending higher in the 8h timeframe and stays bullish above 1.1836. Below the level, the market is likely to retrace back to 1750 or so. If the bulls keep the market above the 1.1836 level we’ll probably see a move to the 1.2020 region. The UK inflation rate increased to 11.1% in October (September: 10.1%) and beat the analyst expectations of 10.7%. This is the highest inflation reading since 1981. The upward price pressure came mainly from housing and household energy services (26.6% vs 20.2%), namely gas (128.9%) and electricity (65.7%). The inflation report didn’t have a significant impact on Cable.

USDCAD chart 11 17 inflation

USDCAD tries to reverse the downtrend

There was another push to the downside but again USDCAD missed my downside target by a very small margin. This on its own is a bullish indication and now that the market has broken above 1.3326 we have further price action-based evidence that the bulls are gaining an upper hand and the market could be reversing the recent downtrend. The risk is that the market drops back inside the range but if the recent weakness in oil and other risky assets turns into serious selling then the dollar is the one to go higher. Keep an eye on how the risk appetite develops.

 The Next Main Risk Events

  • GBP Autumn Forecast Statement
  • USD FOMC Member Bullard Speaks
  • USD Philly Fed Manufacturing Index
  • USD Unemployment Claims
  • USD FOMC Member Mester Speaks
  • CHF Gov Board Member Maechler Speaks
  • GBP Retail Sales m/m
  • EUR ECB President Lagarde Speaks
  • USD Existing Home Sales

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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