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Markets cautious as investors eye central banks

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By Lukman Otunuga, Senior Research Analyst at FXTM

Asian shares were mixed on Tuesday as investors braced for a pivotal week, jampacked with key central bank meetings and economic reports from major economies.

Currency markets are holding in tight ranges, while gold prices rose slightly due to a softer dollar. European markets were mixed, despite US stocks climbing to a record high on Monday.

Risk appetite may sour as market players look ahead to the Fed decision and US monthly non-farm payrolls report from a safe distance.

The Reserve Bank of Australia (RBA) was in the spotlight after scrapping its ultra-low target for bond yields. This was seen as a step towards winding back the emergency measures introduced to support the economy during the coronavirus pandemic.

The RBA also announced that the latest data and forecasts do not warrant an interest rate rise in 2022. However, it did scrap a reference saying that the bank doesn’t expect that to happen “before 2024”.

 

Countdown to Fed decision

The Federal Reserve is widely expected to keep interest rates unchanged at the end of its two-day FOMC meeting on Wednesday. However, investors will be more concerned with the possible tapering announcement and any details on the pace, timings, and composition.

After talking about tapering for many months, this meeting should mark a crucial turning point for the Fed as it steps away from its emergency policy.

Markets widely expect the central bank to announce it will reduce its bond purchases by $15 bln every month, with the taper to be completed by June 2022.

It’s worth keeping a close eye on the central bank’s language on inflation and any hints on the timing for a first rate hike since December 2018. Traders are currently pricing in a 69% chance of at least one rate hike by mid-June 2022.

A hawkish sounding meeting that strikes all the right notes could boost expectations over the Fed raising interest rates sooner than expected. Such an outcome could inject dollar bulls with renewed confidence ahead of the highly anticipated US jobs report on Friday.

 

GBP depreciates

The pound has stumbled into November, depreciating against every single G-10 currency, ahead of the Bank of England policy meeting on Thursday. A sense of uncertainty over the BoE’s policy stance and escalating post-Brexit row with France over fish continues to weigh heavily on the currency.

GBPUSD is trading below its 50-day, 100-day, and 200-day simple moving average with prices trading below 1.3670. Sustained weakness under this level could encourage a decline towards 1.3570. Alternatively, a strong move above 1.3670 would signal a move towards 1.3750.

 

Gold volatile

The week ahead could be volatile for gold prices amid the string of central bank meetings and economic data. The yellow metal is likely to be influenced by the dollar’s movements, Treasury yields, inflation expectations, and global risk sentiment.

Although prices seem to be pushing higher, bulls remain trapped in a sticky region with the 200-day simple moving average and $1800 acting as the first level of resistance. Beyond this point, prices may test the October high at $1813.67, ahead of $1833.84, the highest level hit in September.

Ultimately, how gold ends the week will be impacted by the Federal Reserve meeting and US jobs report on Friday.

 

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