As risk flows return to markets early Tuesday, the greenback continues to weaken against its rivals with the US Dollar Index dropping to fresh three-week lows near 93.60. Moreover, the benchmark 10-year US Treasury bond yield is down more than 1%, putting additional weight on the USD’s shoulders. September Housing Starts and Building Permits will be featured in the US economic docket. Christopher J. Waller and Michelle Bowman, members of the Board of Governors of the Fed, will be delivering speeches as well. Nevertheless, investors will remain focused on the US T-bond yields and the overall risk perception.

Supported by strong gains seen in the Consumer Discretionary, Technology and Communication Services sectors, the S&P 500 rose 0.35% on Monday and the tech-heavy Nasdaq added 0.85%. The Nikkei 225 and the Shanghai Composite indexes rose 0.75% and 0.68%, respectively, on Tuesday, mirroring the improving market mood. With Earnings ahead for some is there any more room to the upside?

What can we expect from the week ahead?

US: Renewed strong case for Fed tapering?

With the economy posting stronger activity numbers, as the Delta Covid wave subsides, and with inflation pressures showing no sign of abating, the case for a tapering of the Federal Reserve’s quantitative easing programme is very strong. OK, jobs growth of 194,000 in September was disappointing, but this is a supply problem with workers reluctant, unwilling, or unable to return. There is no issue with demand given that there are the best part of 11 million job vacancies in the US with wages clearly on the rise. The minutes to the September FOMC meeting show that a 3 November announcement is highly probable, and the tapering could actually start that month. Based on a $15b reduction in purchases each and every month, this would mean QE ends in June. However, given decent demand and obvious supply problems right through the economy, we wouldn’t be surprised to see the Fed bring QE to an even earlier conclusion.

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One point to bear in mind has been Powell’s rhetoric around tapering and what that could mean for interest rate hikes. Currently the market seems to have two rate hikes priced in for 2022. Given recent dollar weakness and misses on the most recent NFP numbers, coupled with growth downgrades by the IMF among others we believe there is a growing belief that we will see one rate hike in 2022 and this could be the driving factor behind the weaker dollar we are seeing since yesterday.

UK inflation less of an issue for the Bank of England than current data implies

UK inflation may have held steady in September, but it won’t last. Headline CPI is set to rise above 4% by the end of the year and will peak at 4.5% or above when the next energy price cap rise comes through next April. Markets are taking this as a sign that the Bank of England will need to act aggressively over coming months to stem a possible de-anchoring of inflation expectations. We’re less sure. We agree with markets that an interest rate hike is drawing nearer, though are still less convinced we’ll see a rate hike this year (February is growing more likely). But we think the UK wage growth story is a little less exciting than headlines about shortages of lorry drivers imply. Remember too, that any more than two rate rises next year will trigger the gradual unwinding of the BoE’s balance sheet, which would add to the tightening environment. We therefore think a lot needs to go right for market expectations of a 1% Bank rate by end-2022 to come through.

GBP/USD is edging higher toward 1.3800 on Tuesday. The UK and the EU will be discussing the Northern Ireland Protocol later in the week and the UK’s Office for National Statistics will release the September Consumer Price Index data on Wednesday, which could have a significant impact on the Bank of England’s rate hike expectations.

Eurozone: Consumer confidence and PMI figures to show negative impact of soaring energy prices

Next week’s survey indicators for the eurozone will be watched with great interest. Consumer confidence, often overlooked by markets, will provide early insights into whether consumers are already feeling the effects of soaring gas prices. While the impact on consumer prices is lagged for a few of the larger economies, announcements in the news of higher bills could already be having an impact on spending expectations. PMIs will show how one of the other concerns ‘du jour’ is developing: labour and input shortages. Eurozone GDP growth seems to be past its initial rebound boom and is dropping to more normal levels in the fourth quarter. This release should show how high that growth rate could potentially be as the economy still has quite some ground to recover.

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EUR/USD managed to hold above 1.1600 during the Asian trading hours and started to push higher. Currently, the pair is trading at its highest level since late September around 1.1650. August Construction Output data from the Eurozone will be published later in the session but the dollar’s valuation is likely to continue to drive the pair’s action.

China 3Q GDP in focus

The economic calendar thins out a bit in Asia this week although we have had some important China activity releases to start it off. China reported 3Q GDP, retail sales and industrial production with 3Q GDP expected to moderate to 4.0% year-on-year from the 7.9% expansion in 2Q. GDP dissapointed as expected with a figure of 4.9% vs 5.2% as expected with industrial production also missing by 1.3%. Unemployment and retail sales were positive however in a key global market for consumption. For continued growth globally in 2022 we need to see continued growth from China or we risk a knock on effect on global trade and growth.

Gold started the week on the back foot and spent the majority of the day moving sideways above $1,760. However, falling the US T-bond yields seem to be helping XAU/USD gain traction on Tuesday. The price has been stuck in this range for a while now and the main driving force appears to be US T-Bond Yields. At the time of press, the pair was up more than 0.7% at $1,778.

Cryptocurrencies: BITCOIN TO THE MOON?

Bitcoin trades above $60,000 and continues to close in on the all-time high it set near $65,000 back in April. From a technical standpoint last week we closed above the previous candle body highs which gives us renewed belief in a new high being achieved. My only question is whether we will see pullback before going higher. Also Proshares has launched its long awaited exchange-traded fund on the New York Stock Exchange linked to Bitcoin futures, the firm and the exchange told DealBook. The E.T.F. will give investors exposure to Bitcoin without having to hold the cryptocurrency directly, via any ordinary brokerage account. This could be the shot in the arm that pushes us to new highs. From a quarterly perspective many analysts have discussed $80000-$85000 as a target heading toward the end of 2021. Ethereum keeps the bullish bias in the near term but needs to clear $4,000 in order to target a new record top.