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Japan fin min Suzuki says its important for FX to move stably in line with fundamentals

Japan finance minister Suzuki says its important for FX to move stably in line with fundamentals. • Will keep monitoring the FX market with a sense of urgency. • FX rates should be set by market. • No change in his stance of responding to FX moves in an appropriate way. • Excess FX volatility, disorderly moves can hut the economy. Rinse, repeat yen comments from Suzuki. He has made similar comments many time during the run higher for USD/JPY over previous months. These are a verbal form of FX intervention.

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China to cut gasoline, diesel retail prices

BEIJING, Dec. 5 (Xinhua) — China will cut the retail prices of gasoline and diesel from Tuesday based on recent changes in international oil prices, the country’s top economic planner said Monday.

Gasoline and diesel prices will reduce by 440 yuan (about 62.51 U.S. dollars) per tonne and 425 yuan per tonne, respectively, said the National Development and Reform Commission.

It is China’s second consecutive reduction in gasoline and diesel prices since Nov. 21, which will cut the costs for daily and logistics transportation.

Under China’s current pricing mechanism, if international crude oil prices change by more than 50 yuan per tonne and remain at that level for ten working days, the prices of refined oil products such as gasoline and diesel will adjust accordingly.

China’s three biggest oil companies, namely the China National Petroleum Corporation, the China Petrochemical Corporation, and the China National Offshore Oil Corporation, have been directed to maintain oil production and facilitate transportation to ensure stable supplies.

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Dollar and Risk Asset Reversals Throw Off Anticipation of Major Tend Developments

The speculative charge that we had initially witnessed through the middle of last week didn’t exactly reach a rolling momentum heading into the weekend. For risk-leaning assets such as US indices, the technical breakout stalled quickly after launch and maintained some serious overhead resistance. In comparison, the Dollar’s slide was managed to achieve a little more traction in its own slide to five-month lows and through the closely-watched 200-day SMA (on the DXY Index). Both moves have experienced a correction to start the week, opening up discussion as to what the prevailing trend is versus the counter move. Big picture, 2022 has seen an overall bear trend for the S&P 500 – as a benchmark for ‘risk’ – both in the technical sense (20 percent correction from all-time highs) and generalized market participant assessment. Therefore, the -1.8 percent drop from the index Monday could be viewed as simply returning to the prevailing trend or a pullback within the context of the past two month’s rising wedge. This is where technicals can exert a little more influence on bias. While there remains notable fundamental event risk to generate volatility, the heavy-hitting stuff is expected next week. Therefore, for now, my focus remains on the 20-day SMA and wedge floor from the October 13th low at 3,965 as my guide for support while the 2022’s trendline resistance of major swing highs around 4,090 is the roof to congestion.

Chart of the S&P 500 Overlaid with the 20 and 200-Day SMAs (Daily)

I was dubious of the S&P 500’s ability to commit to a trend this week given the anticipation of the FOMC and other key events the week following and the uneven response to the PCE deflator and NFPs through the end of last week. The ISM service sector activity report released this past session added to the erosion of fundamental traction. Generally, the most representative (and timely) measure of the US economy unexpectedly accelerated from 54.4 to 56.6 – fending off the concerns following its factory counterpart released last week. Further, the component readings showed that business activity surged (55.7 to 64.7), employment turned positive (49.1 to 51.5) and the prices gauge was little changed (70.7 to 70.0). Overall, that can feed speculation that the Fed will pursue the higher terminal rate that Powell reiterated last Wednesday, where the market initially focused on the slower pace of hikes comment.

The same backdrop for speculative view likely exists for the US Dollar, but here the pricing the December and terminal rate levels is likely less sensitive. The Greenback charged to multi-decade highs despite many of its peer central banks pursuing tightening regimes of their own. Rates may still matter for the currency, but not in the format we typically suspect. Below, I have overlaid the 2-year Treasury yield (a proxy for Fed Fund rates) and the VIX volatility index (the measure of ‘fear’). Both enjoy a high correlation to the Dollar over a 20-day rolling basis, suggesting it is playing the role of a traditional carry currency. Will this be enough to restore the bulls?

Chart of the DXY Dollar Index with 20 and 200-Day SMAs, 20-Day Rate of Change (Daily)

One consideration working against the prospect of the Dollar mounting a serious recovery trend is the lack of sizable event risk ahead. It is possible that a general bias can carry the market to a meaningful trend, but such productive movement usually requires serious conviction. There are macro events to monitor on the docket, but nothing that stands out as a capable of redefining the scale of sentiment nor the Fed’s overall monetary policy ambitious. The US trade balance and LMI Logistics Manager Index for October and November respectively can offer insight, but are unlikely to change the tone of the market. Nothing of that magnitude from the US side really shows up until Friday’s UofM Consumer Confidence survey; but by that time, we will be in the full pull of the FOMC rate decision on December 14th.

Critical Macro Event Risk on Global Economic Calendar for Next 48 Hours

Calendar Created by John Kicklighter

Speaking of rate decisions, we are coming into the run of major developed and emerging market central bank rate decisions scheduled for this week. Kicking off Tuesday trade, we are due the Reserve Bank of Australia’s (RBA) call on stance. The economist consensus is for a 25bp hike to a 3.10 percent benchmark. The tempo and previous statements suggests this central bank is nearing the terminal rate more quickly than counterparts like the Fed. Less than a month ago, the forecast for the RBA’s benchmark rate via futures suggested the group would lift up to a level around 3.90 percent, but the same instruments are currently pricing in a 3.42 percent level by mid-2023. The 25bp move at this meeting will likely generate little heat among Aussie traders (unless they hold or hike more aggressively), rather the focus will be on the rhetoric. If they indeed depress the breaks further, it could extend the AUDUSD correction or urge a 91 break from AUDJPY. Looking a little further ahead, it will be important to be mindful that the Bank of Canada is up on Wednesday along with the Reserve Bank of India and Brazilian Central Bank.

Graph of Relative Monetary Policy Standing of Major Central Banks

 

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How to Create a Trading Plan in 7 Steps

What is a Trading Plan?

A trading plan is essentially a framework that guides traders through the entire trading process. It sets the conditions under which a trader enters trades, identifies markets, exits trades and manages risks along the way. The trading plan ensures accountability and keeps traders focused on their personal strategy.

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How to Create a Trading Plan

1) Choose Your Analytical Approach

The analytical approach answers the question, “how do you identify trade set-ups?”. It could be a combination of price support and resistance, trend lines, chart patterns, Fibonacci levels, moving averages, Ichimoku Clouds, Elliott Wave Theory, sentiment or the use of fundamentals etc.

This initial step of the trading plan helps traders to narrow their focus on a handful of scenarios that the trader is comfortable with. Thereafter, traders can look for opportunities to trade based on preferred trade set ups.

2) Select Your Favourite Trade Set Ups

The trade set up is at the core of the trading process. But first, think of the analytical approach as the event that triggers the trade set up. An example of this would be viewing a consolidation pattern (listed in the analytical approach as a chart pattern) which then gives rise to subsequent action from the trader, i.e. the trader will decide to trade the breakout or wait for a pullback or combine breakouts with pullbacks only after the chart pattern has successfully played out.

Set ups are based on a number of factors that collectively lead to higher probability trades. If you are new to forex trading, this process may take some time to figure out but it is essential for traders to find a trade set up that works best for them.

3) Limit the Markets to Focus on

When starting out, it is important for traders to limit the number of markets in focus. No market is the same and limiting the scope of markets can assist traders to understand the nuances of the market in question. Traders can even focus on specific time frames on a single market to familiar themselves with its characteristics and movements.

4) Think About Your Holding Period

Time frames will depend on the type of trader. Traders that focus on short term trades (trades opened and closed on the same day) include scalpers and day traders. Medium term traders usually hold trades for a few hours up to a few days and are referred to as swing traders. Long term trading involves time frames ranging from a number of days, weeks, months and in some cases, years.

Planning is essential to any trading plan

5) Know Your Risk Tolerance

Each step in the trading plan is important, however, if risk management is missing, the whole plan will fall apart. In this step traders will need to discover their personal risk tolerance which corresponds with how far a trader is willing to set stop losses when limiting downside risk.

At DailyFX, we researched over 30 million live trades to discover that traders with a minimum risk to reward ratio of 1:1 were three times more likely to turn a profit than traders without any defined risk to reward. This and other information all traders should know can be found in our Traits of Successful Traders report.

6) Plan How You Will Handle Adversity (and Success)

All traders will eventually experience the dreaded drawdown, so it is important for traders to set a few rules to follow once this happens in order to manage emotions. An effective way to do this is to quantify an amount, or percentage loss, that would force the trader to take a step back and evaluate what went wrong/ is going wrong. Do not fall into the trap of setting this figure along the way, rather quantify this upfront.

 Now the good news – what to do when trades are successful. Confidence is good, but overconfidence can quickly turn winning trades into losing trades. If the market moves favourably it is not unusual to increase risk/exposure however, this should be kept to a minimum.

7) Have a Routine For Staying on Track

Traders should set aside time to reflect on the week’s events and analyze individual trades. It’s a good idea to regularly review the trading plan and make tweaks if necessary. Periodical trade review and journaling are excellent ways to ensure you are following the process outlined in the trading plan. Make a note or save charts relating to successful/unsuccessful trade set ups that can be reviewed later on.

Trading plans should be rigid to begin with but should become a little more malleable as the trader becomes more familiar with the market in focus. The purpose of a trading plan is to give you a strong foundation and boundaries to operate within.

Trading Plans: A Summary

  • Traders should implement a trading plan in order to establish a clear framework when navigating financial markets.
  • Be disciplined and find out what works best for you. Read our trading guide on how to build your confidence in trading.
  • Regularly track your progress in a trading journal and review the current trading plan. Make alterations if needed.
  • For more information, check out Senior Analyst Tyler Yell’s dedicated podcast on the importance of a trading plan and how to put one together.
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Gold Price Sinks on ISM Services Surprise, XAU/USD Bearish Technical Warning Eyed

Gold prices sank over 1.6% on Monday, offering a pessimistic start to the new trading week. The anti-fiat yellow metal was pressured by a combination of a surging US Dollar and Treasury yields, likely reflecting more hawkish Federal Reserve monetary policy expectations. Unsurprisingly, Wall Street broadly underperformed.

A key culprit was strong ISM services data, which crossed the wires at 56.5 for November against the 53.3 estimate. ISM jumping to 56.5 from 54.4 in October was also the most aggressive since March 2021. The data underscored the health and vigor of the services industry, which also likely speaks to solid consumer expenditures. The latter is the largest segment of GDP.

With the Fed in a blackout period until next week’s interest rate decision, markets will likely remain very sensitive to incoming economic data as the key driver for momentum. Last week, a solid US non-farm payrolls report crossed the wires as the country unexpectedly added 263k positions for November against the 200k estimate.

Looking ahead to the remaining 24 hours, the economic docket is light. That places the focus for XAU/USD on general risk appetite. This could leave gold vulnerable if markets continue to marinate on the implications of both NFPs and the ISM Services report.

Gold Technical Analysis

Looking at the daily chart, gold prices have left behind a bearish Evening Star candlestick pattern. Downside follow-through could open the door to reversing gains achieved since early November. Keep a close eye on the 20-day Simple Moving Average, which is immediate support. Clearing lower exposes the November 23rd low at 1725. Otherwise, a daily close above 1810 opens the door to uptrend resumption, exposing the 61.8% Fibonacci extension at 1830.65.

XAU/USD Daily Chart

XAU/USD Daily Chart

 

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Australian Dollar Yawned After RBA Hike by 0.25% as Expected. Where to for AUD/USD?

The Australian Dollar eventually kicked higher after the Reserve Bank of Australia (RBA) raised the cash rate target by 25 basis points (bps) as anticipated to 3.10% from 2.85%.

This brings the monetary policy tightening total for this cycle to 300 bps since May. Going into the meeting, the market was somewhat undecided with 16 bps priced in by the futures market. The majority of respondents to a Bloomberg survey forecast a 25-bps lift.

Some parts of the market were looking for a potential 15 bp rise to make a nice round figure of 3.00% for the cash rate. The RBA have previously indicated that they are not concerned about the rate being a round number.

The domestic backdrop to today’s move by the bank is somewhat muddied after mixed signals coming from inflation gauges.

For the first time, the Australian Bureau of Statistics (ABS) published a monthly CPI figure last week. There will be two such releases between the quarterly figures. These prints will cover 62-73% of the weighted quarterly basket. More details can be read here.

The official CPI reading for the RBA’s target band of 2-3% will remain as the quarterly number. The monthly CPI print from last Wednesday showed 6.9% year-on-year inflation in October, way below forecasts of 7.6%.

This is in contrast to the broader third quarter inflation read of 7.3% year-on-year to the end of October instead of 7.0% anticipated and 6.1% prior, an acceleration in price pressures.

An interesting component in today’s accompanying Monetary Policy Statement (MPS) was that the monthly CPI was cited and noted to be too high.

The bank maintained that they expect inflation to peak at 8% toward the end of this year. They also reiterated their somewhat sanguine view that current high inflation is temporary.

Today’s decision is the last by the RBA until February next year and the setting might have been impacted by the lengthy gap between meetings.

Three hours before the change in rates, the ABS released current account figures that revealed a AUD -2.3 billion deficit for the first time since the first quarter of 2019.

A healthy trade surplus has been offset by a record income deficit, that has been largely attributed to dividends paid by miners to offshore entities.

The Aussie Dollar has been swayed by international developments of late. The market reaction to Federal Reserve Chair Jerome Powell’s comments last week sent the currency higher.

Overnight, perceptions of the Fed getting serious about rate hikes saw a reversal of fortunes across many asset classes with AUD/USD tumbling in the process.

Looking ahead, The Federal Open Market Committee (FOMC) meeting on December 14th could be a crucial driver for AUD/USD. In the interim, it appears that Fed commentary might be the focus for market gyrations across several markets.

The full statement from the RBA can be read here.

AUD/USD CHART

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Crude Oil Ponders Course as Markets Fear the Return of the Fed. Lower WTI?

Crude oil slipped lower in the US session overnight but has steadied through Asia today as markets consider the implications of strong US data.

The US Dollar gained after the ISM services index came in at 56.5 rather than the 54.4 anticipated for November. Factory orders and durable goods orders also beat expectations at 1.0% and 1.1% respectively for October.

The data appeared to remind markets that the US economy is running near full capacity and that if the Fed wants to get inflation back under control, the bank will need to tighten financial conditions more than previously thought.

Crude oil was caught up in the melee and the WTI futures contract to a low of US$ 76.77 bbl while the Brent contract touched US$ 82.52 bbl. Both contracts recovered slightly into the close and have been steady so far today.

Treasury yields soared higher across the curve and the 2s 10s inverted beyond 80 basis points (bps) again.

Wall Street went lower on tightening fears with the Nasdaq leading the way, down -1.93% in the cash session.

Asian equity markets have been mixed with Japan’s Nikkei 225 and China’s CSI 300 showing small gains. Hong Kong’s Hang Seng index and Australia’s ASX 200 are in the red.

The RBA hiked rates by 25 basis points today to 3.10% as forecast, eventually underpinning the Aussie Dollar. The yield curve flattened with Australian Commonwealth Government Bonds (ACGB) bumping up in yield. The 3-year note added 6 bp to be near 3.10%.

Japanese Yen was hardest hit with USD/JPY trading above 137 again today. Gold is trading near US$ 1,770 at the time of going to print.

Looking ahead, after German factory orders, the US and Canada will see trade data.

The full economic calendar can be viewed here.

CRUDE OIL TECHNICAL ANALYSIS

The WTI contract broke below the 10-day simple moving average (SMA) in the last session to reclaim its position below all period SMAs. This may indicate that bearish momentum could evolve.

Support could be at the breakpoints of 76.25, 75.27, 74.96 and 74.76 or at the recent low of 73.60.

On the topside, resistance might be at the breakpoints and the recent high of 81.30, 82.63 and 83.34.

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UK service sector remains in downturn during November

The UK service sector registered another modest contraction of activity during November as levels of incoming new work continued to fall amid ongoing economic uncertainty and cost of living challenges weighing on discretionary spending. Cost pressures showed little signs of abating, with operating expenses again rising sharply, although pricing power was limited to some degree by rising competition and falling sales. Firms continue to hire additional staff as they sought to address skills shortages at their units, but confidence in the outlook remains historically subdued, despite improving noticeably since October.

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GBP/USD Catches its Breath as the Dollar and Risk Sentiment Remain the Driving Force

GBP/USD FUNDAMENTAL BACKDROP

Cable reached a high of 1.23420 against the greenback in Asian trade before the European open brought a modest dollar recovery pushing the pair back below the 1.2300 handle. The initial bounce in the Asian session could be attributed to news over the weekend regarding the relaxation of ‘Covid Zero’ protocols in China boosting overall sentiment.

Friday’s US NFP report failed to keep dollar bulls interested as gains made following the release were surrendered by the end of the US session. The jobs data on Friday may still be on the mind of investors as wages (average hourly earnings) continued to show growth in the US hinting that inflationary pressures remain a concern. Despite the increase in wages the probability of a 50bps hike by the Fed at its upcoming meeting continued to increase (80% today vs 76% pre-NFP). The only significant data out today is the ISM non-manufacturing PMI for November which could provide some support to the dollar should it beat estimates.

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For all market-moving economic releases and events, see the DailyFX Calendar

Cable on the other hand has limited high impact data releases this week while the economic outlook remains cloudy. The recent bounce has had more to do with dollar weakness and improving market sentiment than any significant changes to the UKs outlook moving forward. The recent inflation print out of the UK showed food prices continue to rise which could in theory dent sales around the festive season as households prioritize essentials purchases.

 From a technical perspective, GBP/USD remains in overbought territory while moves continue to be driven by the dollar index and broader sentiment. We remain above the 200-day MA which could provide support should we see a retracement. Given that the Federal Reserve and the Bank of England have entered their blackout periods and a lack of data from the UK there remains a possibility that the GBP/USD struggles to maintain its recent momentum. On the upside 1.2500 remains a key psychological barrier that could cap any further gains. A return of some dollar strength could bring support at the 1.2000 level into play.

GBP/USD Daily Chart – December 5, 2022

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