• NZD/USD has sensed demand from around 0.5560 amid an improvement in the risk appetite.
• Improvement in US CPI has left no other option for the Fed than to continue the current pace of rate hike.
• Kiwi’s inflation rate for Q3 is expected to decline to 6.6% vs. the prior release of 7.3%.

The NZD/USD pair is displaying a rebound move after witnessing exhaustion in the downside momentum. The major has given an upside break of the consolidation formed in a narrow range of 0.5550-0.5567 as the risk-off impulse has taken a sigh of relief after remaining in the spotlight. S&P500 futures have rebounded firmly after a bearish Friday, therefore, the risk appetite is emerging now.

The US dollar index (DXY) has dropped in the initial trade to near 113.10 as the risk-on impulse has rebounded. It seems that investors have started shrugging off the fears of a bigger rate hike by the Federal Reserve (Fed). After the release of bigger-than-projected inflation numbers last week, odds of a fourth consecutive 75 basis points (bps) rate hike have jumped dramatically. As per the CME FedWatch tool, the chances of an increment in the interest rates by 75 bps stand at 99.4%.

The impact of accelerating rate hikes by the Fed seems absent on the price pressures. The core CPI that excludes oil and food prices stepped up to 6.6% vs. the expectations of 6.5% and the prior release of 6.3%. While the headline CPI increased to 8.2% from the projections of 8.1% but lower than the prior release of 8.3%. It seems ‘fit and proper to claim that the responsiveness of decline in headline CPI with the extent of increment in rate hike is extremely poor while the relationship with core CPI stands positive.  Therefore, the Fed has been left with no other option than to tighten its policy measures further.

On the NZ front, investors are awaiting the release of Tuesday’s inflation data. Projections for annual inflation data for the third quarter are extremely lower at 6.6% vs. the former release of 7.3%. A drop of 70 bps looks mouth-watering from the front of Reserve Bank of New Zealand (RBNZ) policymakers. An occurrence of the same would bolster the case of a slowdown in the current pace of hike in the Official Cash Rate (OCR) by the RBNZ.

• EUR/GBP retreats from support-turned-resistance, grinds lower of late.
• Looming bull-cross on MACD contrasts with downbeat RSI to confuse sellers.
• Bulls need to cross 0.8800 to retake control.

EUR/GBP struggles to extend the week-start losses, grinding around an intraday low of 0.8651 during the initial hour of Monday’s Asian session. In doing so, the cross-currency pair reverses from the six-week-old previous support line to extend the previous week’s losses.

However, the MACD appears to test the bears and sluggish RSI adds to the trading filter, which in turn suggests further hardships for the bears.

That said, the latest trough surrounding 0.8610 lures intraday sellers before highlighting September’s bottom of 0.8566.

It should be noted, though, that a clear downside break of 0.8566 won’t hesitate to challenge the mid-August peak close to 0.8510 before directing the EUR/GBP bears towards the 0.8340 mark comprising the August month’s bottom.

Alternatively, recovery moves not only need to cross the support-turned-resistance line, around 0.8705 by the press time, but also the 61.8% Fibonacci retracement level of August 17 to September 26 upside, at 0.8718 by the press time, to tease the buyers.

Even so, a convergence of the 13-day-old descending trend line and 50% Fibonacci retracement level, around 0.8800 appears a tough nut to crack for the EUR/GBP bulls before they can retake control.

EUR/GBP: Four-hour chart

Trend: Further weakness expected

GBP/USD

Alternatively, GBP/USD struggles to extend week-start gains as it grinds higher of late. That said, firmer oscillators and sustained trading beyond 10-day EMA favor buyers. It should be noted, however, that a five-week-old resistance line near 1.1340 appears the key hurdle while bears need to conquer 1.1085 to return to the throne.

Also read: GBP/USD propped up in pre-open APAC on BoE Bailey weekend comments

GBP/USD: Daily chart

Trend: Limited upside expected

• EUR/USD bulls attempt to move the needle to the upside in the open. 
• The euro will remain under pressure below 0.9800. 

EUR/USD is catching an opening bid at the start of the week but the weekly chart is pressured on the front side of a well-defined trendline as the following analysis will show. 

EUR/USD weekly chart

The weekly wick highlighted was followed by a lower low last week, so while last week's close was an indecisive one, the path of least resistance remains to the downside until a close above last week's highs near 0.98 the figure. 

EUR/USD daily charts

The daily chart's structure aligns with the bearish weekly bias. The M-formation's neckline is holding up, so far, as resistance and the price remains below Friday's and last week's high in the open. Another test and failure to break there, near a 50% mean reversion of the prior bearish impulse, 0.9815, could lead to a downside extension for the days ahead. A break of last week's low will likely seal the deal for a move into the bear cycle lows of 0.9535 and beyond with 0.9400 on the radar. 

EUR/USD H1 chart

EUR/USD's structure is bearish while the price remains below the trendline resistance. The double top and M-formation would be expected to keep the pressure tilted to the downside for the opening sessions of the week. 

• Gold price has rebounded after dropping to near $1,640.00 as the risk-off impulse eases.
• A 75 bps rate hike by the Fed looks real as the odds have reached almost 100%.
•  Soaring odds for hawkish Fed have pushed 10-year yields above 4% confidently.

Gold price (XAU/USD) has sensed a buying interest after dropping to near $1,640.00 in the Tokyo session. The precious metal has witnessed a loss in the downside momentum and a rebound move has played in, which is approaching $1,650.00.

The rebound move has developed as the risk-off sentiment has been eased for a while as investors have already discounted the expectations of a 75 basis point (bps) rate hike by the Federal Reserve (Fed). The US dollar index (DXY) oscillates around 113.30 after a firmer rebound from 112.20. Also, the 10-year US Treasury yields are above 4% on soaring bets for a hawkish Fed ahead.

As per the CME FedWatch tool, the chances of an increment in the interest rates by 75 bps consecutive for the fourth time stand at 99.4% at the press time. The odds of continuation of a bigger rate have jumped after the release of higher-than-expected US Consumer Price Index (CPI) data, released last week. The headline US CPI landed higher at 8.2% than the projections of 8.1% but lower than the prior release of 8.3%. While the core CPI advanced to 6.6% vs. the expectations of 6.5%.

Gold technical analysis

Gold price has picked demand after dropping to near the horizontal support plotted from Sep 29 low at $1,641.59. The 20-and 50-Exponential Moving Averages (EMAs) at $1,652.68 and $1,660.00 are declining, which adds to the downside filters.

Also, the Relative Strength Index (RSI) (14) is oscillating in a bearish range of 20.00-40.00, which favors more weakness ahead.

Gold hourly chart

The UK's Daily Mail's front pages report on the Conservative party leader's plot to topple the UK's Prime Minister Liz Truss despite warnings that this could lead to an early general election. 

UK politics has been a driver of financial markets given the uncertainty over Truss initially betting her premiership on true-blue pleasing tax cuts only to U-turn on the proposal and fire the head of the Treasury, Kwasi Kwarteng and replaced him with Jeremy Hunt, a long-time lawmaker who has served three previous stints as a Cabinet minister. The PM is attempting to restore confidence and rebuild her credibility with international investors and members of her own party after the “mini-budget” she and Kwarteng unveiled three weeks ago sparked political and economic turmoil.

The government’s September 23 announcement of a plan to cut taxes by 45 billion pounds ($50 billion) without detailing how it would pay for them or offering independent analysis about the impact on public finances caused havoc on the money markets as investors worried that the government's borrowing could rise to unsustainable levels. GBP/USD has been a roller coaster ride and there is little abating of the same in sight.

GBP/USD H1 chart

In the open today, there was a big bullish gap of around 50 pips:

So long as the bears stay committed on the front side of the trendline, favouring the US dollar, then the price would be expected to close the gap and on a break of the 1.1150's doors will be open for a downside extension to test below 1.1100.

• AUD/USD bulls could be stepping in at this juncture.
• Eyes on 0.6275 on the upside and 0.6170 on the downside. 

AUD/USD will be at the mercy of risk sentiment and the value of the US dollar this week. However, technically, the price is decelerating on the offer and we could see a correction as the following technical analysis illustrates: 

AUD/USD H1 chart

As per the hourly chart, the price is well below last month's lows and will remain in the bear's hands so long as Friday's highs of near 0.6250 are not violated. However, there are prospects of a correction into the greyed areas which are price imbalances on the hourly chart. This will put the prior bull candle's lows in focus near a 61.8% Fibonacci retracement near 0.6275. While below this area of resistance, the focus will be on a break of the fresh bear cycle lows near 0.6170 and for a downside continuation. 

Such a thesis will stem from a strong US dollar outlook as follows: 

DXY daily chart

If the US dollar bulls commit to the April/May 2002 areas, then this will be expected to weigh on the Aussie for the foreseeable future. 

St. Louis Federal Reserve President James Bullard said on Saturday that it is ''way too early'' to discuss the end of QT and noted that the rapid interest rate increases have contributed to the strength of the dollar against other currencies. He said that this might only ease once the US central bank reaches the point of pausing the rate hikes, "where the committee thinks we're putting meaningful downward pressure on inflation," so rates don't need to continue rising, he said.

• GBP/USD set to open bid on UK politics and BoE noise. 
• The BoE gov spoke on Saturday and said inflationary pressures might require a stronger interest rates response.

GBP/USD is set to open regular forex hours on the bid as indicated by pre-open markets in the Asia Pacific with the pair up over 0.9% into 1.1270s. Cable closed on Friday offered at 1.1177 and down 1.2%. As explained here, BoE Gov Bailey: Stronger rates response needed to fight inflation, GBP/USD back above 1.1230 pre-open, the Bank of England Governor Andrew Baily said on Saturday that inflationary pressures might require a stronger interest rates response from the central bank than it had envisioned in August.

"We will not hesitate to raise interest rates to meet the inflation target," Bailey said at an event on the sidelines of the International Monetary Fund Meetings in Washington. 

However, the price would be weighed if markets continue the way they left off on Friday. As analysts at ANZ Bank explained, ''risk was firmly off in US markets as earnings results rolled in and the University of Michigan survey showed consumer inflation expectations rising for the first time in seven months.'' The analysts noted that ''the immediate market reaction to Truss’ tax U-turn was muted; Monday will bring the real test.''

Lizz Truss, the UK's new Prime Minister sacked her Chancellor Kwasi Kwarteng on Friday and then scrapped her plan to freeze corporate tax next year. “It is clear that part of our mini budget went further and faster than the markets were expecting,” she said.

''The initial market response wasn’t exactly a high five – GBP extended its losses, while 10-year gilts trimmed gains after Truss’ press conference. But the gilt market’s immediate concern is the cessation of BoE emergency bond-buying. Monday’s market action will provide a test, not only for the survival of Truss’ low-tax vision, but also her political future,'' the analysts at ANZ Bank explained.

UK CPI eyed

Meanwhile, the data this week will be key. UK inflation is on the cards and analysts at TD Securities expect the ''Consumer Price Index to once again enter double-digit territory after declining to 9.9% YoY in August, as further strength in core and food inflation likely more than outweighed another large decline in petrol prices. Looking ahead, we think September will finally mark the peak in core inflation, while headline should peak in October after the next energy price cap update.''

GBP/USD technical analysis

GBP/USD is trading at 1.1270 in pre-open markets, up 0.9%. Impossible to draw a technical analysis on such a move but the price will have broken trendline structures. However, if the gap were to be filled and if 1.1150 gives, 1.1050 will be eyed. A break of 1.1280 would be significant on the upside. 

Reuters reported that the Bank of England Governor Andrew said on Saturday that inflationary pressures might require a stronger interest rates response from the central bank than it had envisioned in August."We will not hesitate to raise interest rates to meet the inflation target," Bailey said at an event on the sidelines of the International Monetary Fund Meetings in Washington.

"And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August."

The remarks would be expected to support GBP/USD in the open. Early prices are showing GBP/USD rising by 0.58% into the 1.1230s in thin markets.