The mood of market participants improved noticeably on Friday after a difficult week. The US stock indexes closed confidently in the positive zone. The markets of the Asia-Pacific countries are also trading in the green zone on Monday, so it is clear that Europe will open positively. News from the pharmaceutical company Merck helped lift market sentiment on Friday. It is believed that its drug can be used as a treatment for COVID-19 and reduced the risk of hospitalization or death by 50% in phase 3 studies. Coronavirus news continues to have a dominant influence on traders' moods.
As for economic data, the ISM manufacturing index turned out to be higher than expected and amounted to 61.1 p, which is one of the highest values in the last 30 years. The volume of new orders remains high at the level of 66.7. However, it is necessary to note problems with the supply chain. In Japan, the Tankan survey showed an unexpected increase in the index of large manufacturers: to 18 in the third quarter from 14 in the second quarter, and this is the highest level since 2018. It is obvious that production activity remains very high so far, despite the ongoing supply chain problems and the pressure of rapid growth in energy prices.
According to the CFTC, the cumulative long position on the US dollar increased by almost 2 billion during the reporting week and reached 16.1 billion, approaching the peak from February 2020 (18.2 billion). Long-term speculators continue to bet on the growth of the US dollar.
It can be assumed that this week will be positive for the US dollar, which will retain its status as the main favorite of the market. Commodity currencies will also benefit from this.
EUR/USD
The prospects for the eurozone are deteriorating, and there are objective reasons for this. Despite the fact that the share of gas (1.9%) and electricity (2.9%) in the calculation of inflation seems to be small, the increase in raw material prices will have a strong impact on a number of related indicators. Inflation has already reached 3.4% in September, which means that it will be significantly higher than the agreed average wage growth by the end of the year.
The prolonged growth of inflation will lead to a reduction in purchasing power, which will be expressed in a decrease in consumption, a fall in real incomes, and a decline in production. We can say that the approaching winter will significantly increase the likelihood of an economic crisis in the eurozone, which will prevent the ECB from starting to reduce stimulus in any form.
The euro's speculative positioning is rapidly moving in a bearish direction. According to data published by the CFTC, the long position of the euro declined by 1.645 billion, namely to a symbolic 127 million during the reporting week, which is the lowest level since March 2020.
The support level of 1.1665 didn't resist, and now, the nearest target is the support of 1.15. There is currently no reason to expect a bullish reversal in the euro.
GBP/USD
For the pound, the situation remains uncertain. If a short position was formed a week earlier, albeit with a minimal margin, then during the reporting week, the bulls added 185 million, so we see a long position again. The advantage is minimal, and the pound does not have a stable direction.
NIESR assumes that inflation may reach 5% at the beginning of next year, and if Britain faces the problem of a sharp increase in inflation expectations affecting prices and wages, then controlling them may require extraordinary measures – a sharp increase in rates and a recessionary reduction in demand, which the Bank of England is completely unprepared for against the background of an approaching energy collapse.
BoE's forecasts are based on the fact that inflation expectations will remain tied to its target, but it seems that the calculations will be refuted by harsh reality. Uncertainty is growing, and so, the main thing to do now is to survive this period, as the head of the BoE Bailey frankly said during his speech at the ECB forum.
The dynamics of the estimated price of the pound are better than that of the euro, which gives chances for a resumption of growth, but the situation is complicated by the growing energy crisis. The resistance zone is 1.3580/3600. It can be assumed that the pound will not be able to break through this barrier, and as the strength of the short-term bullish impulse is exhausted, the sell-off will resume. The long-term target is 1.3120/80.