The next few days promise to be eventful and potentially volatile for financial markets thanks to key economic reports from major economies, corporate earnings, and crucial central bank meetings.

November has already kicked off on a positive note with European markets trading firmly higher, led by mining shares and robust earnings from British Petroleum which posted its second-highest quarterly profits ever. In Asia, shares flashed green amid the improving risk sentiment while US futures pointed to a positive start as traders looked ahead to the Fed rate decision on Wednesday. In the currency space, the dollar fell along with Treasury yields while sterling wobbled around 1.1500. Although gold has taken the opportunity to shine this morning as the greenback declines, the Fed meeting and US jobs report are likely to set the tone for direction in November.

In other news, the Reserve Bank of Australia hiked interest rates by 25bp for a second consecutive month while revising up its inflation forecast and downgrading its growth projections for 2022 and 2023. While the fierce war against inflation fuels recession fears, RBA doves are back in the building as the central bank steps away from aggressive rate hikes. This could hit the AUD which has weakened against almost every single G10 currency this quarter.

All eyes on the Fed meeting

The FOMC rate decision on Wednesday could rock financial markets.

Markets widely expect the central bank to raise interest rates by 75 basis points. Given how such a move has already been priced into markets, much attention will be on the language in the statement and the press conference for clues on future monetary policy. Should the central bank strike a cautious tone and signal that future rate hikes could be smaller, this could weaken the dollar as doves enter the scene. We have already seen some central banks switch into a slower gear on rate rises with the Bank of Canada and Reserve Bank of Australia two prime examples.  A similar step down by the Fed would hit the mighty dollar as bets of aggressive rate hikes beyond November rapidly diminish. Traders will also have to contend with Friday’s monthly non-farm payrolls report which is expected to show solid job gains and still-low unemployment.

Talking technicals, the DXY remains in a healthy uptrend on the daily charts, but some cracks are forming. Another breakdown below 110.00 could signal a selloff towards 109.00 and lower. If prices can push back above 112.50, bulls could target 113.50.

Currency spotlight – Pound waits on BoE decision

Watch this space. GBPUSD could turn explosively volatile this week thanks to the Federal Reserve and Bank of England meetings.

On Thursday, the Bank of England is likely to deliver what would be the biggest UK rate hike since 1989. With inflation at 10.1% and hitting levels not seen in 40 years, market players expect the central bank to join the 75bp hike club. However, sentiment towards the UK economy remains fragile with recent economic data including retail sales and manufacturing reports among others showing signs of a slowing economy. On top of this, the recent political drama over ex-Prime Minister Liz Truss’s controversial mini-budget has left a sour aftertaste with the new government on a mission to restore the UK’s fiscal credibility. 

In which light, markets think the bank will hike rates by 75bp but signal that this is a one-off move. Such a development could fuel speculation around less aggressive hikes from December and into 2023. There is a possibility that the MPC disappoints markets with a 50bp hike given the state of the UK economy and fears that the country may already be in recession. Whatever the outcome on Thursday, it will certainly have a lasting impact on sterling.

Looking at GBPUSD, prices are trading above 1.1500 as of writing. Should this level prove to be reliable support, a move back towards 1.1750 and 1.1850 could be on the cards. Weakness below 1.1500 may open a path towards 1.1400 and 1.1200 respectively.

Commodity spotlight – Gold

Gold drew strength from a weaker dollar and falling Treasury yields on Tuesday as investors braced themselves for the Federal Reserve meeting.

Although the central bank is widely expected to raise rates, gold could come out of this meeting smiling if the Fed hints of a slowdown in monetary policy in the future. Given how such a pivot could provide more room for gold bugs to fight back, prices would head north in the near term. Looking at technical levels, a breakout above $1655 could trigger a rise toward $1680 and $1700. Weakness below $1655 may open a path towards $1615 and $1600, respectively.