By Naeem Aslam
Traders are ready to bag some bargains, while others continue to believe that the current bounce back in the markets may be nothing more than a dead cat bounce, as a result of which, caution is need.
European and US markets are very much moving forward, leaving behind all of the concerns that they faced during the price action that occurred over the past week.
The information that the significant data this week is the most essential thing for smart money is most likely to influence their choice.
European markets have started the week’s trading action very much on a positive note as the Stoxx 500 index surged 0.3%, the FTSE 100 index soared 0.58% and the IBEX moved in the positive territory by 0.54%.
However, what is important is the weekly losses that these indices are sitting on, such as the Stoxx 500 which closed last week with a loss of 2.9%, while the FTSE 100 wasn’t that far off either.
This week, traders and investors are focussing their attention on the positive aspects of the situation, and they are also waiting for significant economic data that will be revealed from the U.K., where the Bank of England has already begun the process of reducing interest rates.
As a result of the inflation data to be released this week, they will have a better understanding of the future course regarding interest rates.
Good vibes from BoE
We may see more good vibes from the Bank of England if the data continues to indicate that inflation is falling. There is a possibility that the BoE will exhibit its more optimistic side, which implies that there could be further interest rate decreases.
On the other hand, if the data does not indicate that much of a good side, then we can witness a lot of panic in the market. This would suggest that investors believe the BoE will hold rates for a longer period of time, or that there might be a delay in the next rate drop.
What is important is that traders know that the US NFP data wasn’t great which means that the Fed is under pressure, even though they are saying that that this was mere a data point and nothing more.
However, market players are concerned about growth tanking and a policy mistake from the Fed.
If the inflation reading continues to remain not too way off from expectations, then there is a stronger chance that the Fed may act fast and perhaps cut the interest rates by a deeper level. However, if the inflation data doesn’t do that and shows that inflation has started to move in the wrong direction and the move is aggressive as well, then the Fed will be very much in a trouble situation.
A State of Calm or Panic
Algo traders and high frequency traders are very ready to deal with the price action this week on the back of the US inflation which is bound to bring higher volatility for market players.
Traders are fully ready and without any adverse price action they will use the trading VPS, such as ForexVPS. Once the dust settles, traders may continue to trade under the emotional influence of the CPI data, but once that is over, a real trend will begin which is more likely to lead the markets for the rest of the month.
As a conclusion, this week, the statistics on the inflation report are the most crucial thing to pay attention to.
Traders and investors have either diverted their attention away from the statistics on the U.S. National Family Partnership (NFP) as a single data point or they have told themselves that their expectations were maybe too high. However, there are many who believe that the Federal Reserve ought to reduce interest rates in a more aggressive manner.
If the inflation data does not print a more satisfactory reading, then it would mean that the Fed might not be able to press the button on deep interest rate cuts. This would mean that the first interest rate cut by the Fed might only be 25 basis points, which is a situation that market participants might not like very much.
As a consequence, it is possible that again the markets may turn over.
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
