With less than two weeks until the midterm elections, it’s galling to me to see Republicans making headway in their effort to present themselves as better stewards of our economy than the Democrats. It’s a lie. Of course, when we talk about the economy in this context, we’re really talking about inflation. Other than inflation, the state of the economy is quite good, with the unemployment rate near a post-war low and virtually all of the pandemic-related job losses now recovered. Regardless, Republicans are hoping and expecting the electorate to hold Democrats responsible for our currently unacceptable rate of inflation. Unfortunately, it seems that not enough of the public have realized that (a) it’s a dishonest accusation and (b) the Republicans haven’t offered a credible path forward that could reasonably be expected to solve the problem. Republicans cite the “excessive” government support offered in connection with the American Rescue Plan and the Inflation Reduction Act as causing the inflation, giving little acknowledgment to the covid-related supply chain problems we experienced starting with the onset of the pandemic or to the market disruptions caused by Russia’s war in Ukraine. Somehow, the fact that inflation is a world-wide problem rather than purely a US concern is lost on the Republicans. For them, nothing matters except the Democrats’ culpability. How disingenuous is that? At present, with Democratic control in Congress and the White House, we’re poised to do the right thing. The appropriate fiscal policy to fight inflation calls for a contractionary stance to reduce upward price pressures, and that’s what we’re currently doing. Arguably, the single most meaningful indicator of that policy is the federal deficit. A rising deficit is expansionary; a falling deficit is contractionary. We’re at a point now where the deficit has declined significantly from its Covid-related peak, and it is projected to continue declining through 2023. This transition from expansionary to contractionary policy occurred largely because of the cessation of much of the support that had been authorized under the Covid-Relief Plan. The Covid-related increase of spending was expansionary; the subsequent cutoff has been contractionary. With inflation being our primary economic focus. our contractionary policy is as it should be. I suppose inflation critics on the Republican side may believe that the current policy is not sufficiently contractionary. Satisfying these critics would require cuts in government spending, including social security and Medicare expenditures. You may not hear all that many of the current crop of Republican candidates loudly broadcasting this position, but their reticence is a cover. Kevin McCarthy, the presumed next majority leader in the House if Republicans gain control has gone on record with the Republican game plan. His intention is to use the leverage of the upcoming debt limit authorization bill to extract exactly these kinds of cuts. It’s worth remembering that this party introduced more than 60 bills to kill Obamacare. McCarthy’s stated objectives should be taken seriously. Ya gotta hand it to Republicans. If at first you don’t succeed, try and try again, even at the expense of precipitating a crisis of lasting consequences if the debt limit ceiling isn’t raised. It’s nothing short of ludicrous to believe that the party willing to jeopardize the credit standing of the United States to achieve its political goals should be the architect of our economic policy. And if the threats to critical and popular safety net programs and to the credit standing of the US weren’t serious enough, McCarthy also added some unneeded uncertainty as to the strength of our nation’s commitment to the support of Ukraine. Not satisfied with sabotaging domestic government programs and responsibilities, McCarthy and his cohorts are ready to screw things up internationally, as well. Perhaps my biggest beef with the Republican orientation to fighting inflation is the resistance to tax increases for higher income taxpayers. For those genuinely committed to a more aggressive effort to combat inflation than that offered by the Democrats, lowering the deficit should take high priority. The commitment to do so, however, without reliance on raising taxes gives a lie to their purported concerns. It’s not just that Republican’s won’t support tax increases, all the while bemoaning the level of inflation we’re facing, they’re looking to cut taxes — a policy prescription akin fire fighters bringing kerosene to douse the flames of a burning building. If tax increases were on the table, undoubtedly those increases would fall heavily on higher earners. Perish the thought. It’s a bit rich to hear Republicans criticizing Biden and the Democrats for not dealing with inflation appropriately while ruling out raising taxes. Instead, by focusing exclusively on cutting back on safety net spending, their policy platform would impose the cost of fighting inflation disproportionately on the members of our society that can least afford it and who likely bore little responsibility...

From the weekly on Sunday: EUR/USD broke 0.9993 and first target at 1.0057 achieved destination, USD/JPY from 147.64 completed target at 148.40. DXY broke below 111.25 and traded to 109.00's. DXY from Sunday struggled and dropped from 112.00's. DXY's break below 111.25 allowed EUR/USD and GBP/USD to break above most vital levels at 0.9993 and 1.1572. EUR/CHF and GBP/CHF assisted EUR/USD and GBP/USD higher by breaks above EUR/CHF 0.9842 and GBP/CHF 1.1381. AUD/USD and NZD/USD failed to break above vital 0.6578 and NZD/USD 0.5913 to join EUR/USD and GBP/USD. AUD/USD and NZD/USD must break above vital levels or EUR/USD and GBP/USD must drop to maintain uniformity. EUR/USD levels for today: 1.0072, 1.0078, 1.0084, 1.0091, 1.0104, 1.0110, 1.0117 Vs 1.0015, 1.0021, 1.0027, 1.0040, 1.0050, 1.0053 Most Vital 1.0015 and 1.0040 Vs 1.0091 and 1.0117. EUR/USD vs DXY EUR/USD for next week must break 1.0005 and another line around 0.9950 to target again 0.9700's. Next target above 1.0171. DXY maintains a big break at low 111.00's to target 113.00's. DXY traded 302 pips this week to EUR/USD 297. EUR/USD maintain perfect paces to DXY as DXY drives all markets. EUR/USD strategy is short and long DXY and USD currencies. Overall DXY is oversold and targets low 111.00's or 200 ish pips higher and this takes EUR/USD to 0.9800's if 0.9950's break below. USD/CAD trades oversold and just above big break for lower at 1.3423. Oversold USD/JPY maintain a range from 144.41 to 145.93. Above targets again 148.98. Watch USD/CHF at 0.9844. JPY cross pairs JPY cross pairs 2 weeks running trades severely overbought to include CHF/JPY. JPY cross pairs are range trading rather than break or focus on breaks at vital averages in order to trend. JPY cross pairs are pretty much day trades with a short only trade strategy. GBP/JPY leads the way forward while EUR/JPY traded in tiny ranges this week.. Both USD/JPY and EUR/JPY trade just above vital 142.00's. Much lower on a break and GBP/JPY at 164.00's. EUR/CAD trades massively overbought while nothing special exist to GBP/CAD except to follow EUR/CAD lower. GBP/USD big break are located 1.1572 and targets 1.1450 and only below 1.1450targets levels back to 1.1200's. AUD/USD and NZD/USD trade in do or die mode to either follow EUR/USD and GBP/USD higher and break vital levels or EUR/USD and GBP/USD trade lower to take AUD/USD and NZD/USD down. Lower for AUD/USD targets 0.6300's and NZD/USD middle 0.5600's. AUD/USD trades practically pips for pip to AUD/EUR and explains EUR/AUD trading in tiny ranges over last qwwks. Both AUD/USD and AUD/EUR trade oversold. GBP/NZD trades overbought vs oversold EUR/NZD. EUR/NZD leads the way for GBP/NZD as EUR/AUD dictates moves to GBP/AUD. Best strategy is shorts to EUR/AUD and EUR/NZD. AUD/USD 0.6578 and NZD/USD 0.5911 holds EUR/AUD and EUR/NZD progress to trade in wider ranges.

Federal Reserve rate meeting – 02/11 – there is unlikely to be too many surprises this week when the Federal Reserve is expected to raise the Fed Funds rate by another 75bps, following on from three similar moves in June, July and September. In September Fed chair Jay Powell indicated that the FOMC were “strongly committed” to driving inflation lower while signalling that more rate rises are on the way. Powell went on to say that there was no painless way to drive inflation lower, with the prospect that we could well see another 100bps by the end of this year at the bare minimum. The tone was also markedly different, with the Fed downgrading its annual GDP target to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025. Since then, we’ve had a succession of Fed speaks talking up the prospects of even more aggressive tightening, with the prospect that we might see another 150bps by year end which would put the Fed Funds rate at 4.75% by year end. At the end of last month there was some chatter that some Fed officials were becoming uneasy at the pace of the current hiking cycle. That would seem eminently sensible but for the fact that apart from Fed vice chair Lael Brainard there has been precious little articulation of that line from any Fed official in recent public speeches. Even the likes of Neel Kashkari of the Minneapolis Fed have shown little sign of the need for a pause or a pivot at this point, commenting back in October that the Fed would be in no position to slowdown the pace of rate rises if inflation was still rising. Having said that we could be starting to see signs of cracks in the consensus after San Francisco Fed President Mary Daly said that after November the time could be ripe for talk about stepping down the pace of rate hikes. Thus, the Powell press conference is likely to be just as important in the context of whether he comes across as hawkish as he did in September. Bank of England rate meeting – 03/11 – the weakness of the pound in recent weeks, along with the political turmoil has had a significant upward impact when it comes to UK inflation, whether it be in terms of a lower pound raising import costs, but also higher borrowing costs pushing up mortgage rates. The various downgrades from the ratings agencies won’t have helped but they are unlikely to have moved the dial that much. The bigger question now is whether we get a 50bps rate rise this week or a 75bps move. With fiscal policy now set to be a lot tighter despite warnings about raising tax rates into a slowdown, the scope for the Bank of England to be more aggressive is now said to be more limited, due to concerns about the impact on demand. It seems a little bit late for that at this point in time, given that the actions of the government in raising taxes is likely to mean any recession is now likely to be much more prolonged, which in turn could mean that the pound stays under pressure for longer. It still seems more likely than not that we’ll see 50bps from the Bank of England this week, given rising concerns about slowing growth, with any rate increases after that likely to be much slower. The Bank of England will also have to deliver its latest economic forecasts for inflation and GDP. Let’s hope they are more accurate than they have been so far this year. US non-farm payrolls (Oct) – 04/11 – the US labour market has continued to hold up well despite concerns over slowing consumer spending and increased costs on the part of some US businesses. We have started to see reports of job losses from some companies in the most recent earnings reports which may at some point start to work its way into the headline numbers. At the moment that isn’t happening with job vacancies still high and weekly jobless claims still at a very low 230k a week. The September payrolls numbers were decent, coming in at 263k, while the unemployment rate fell to 3.5%, although that was largely down to a similar drop in the participation rate to 62.3% from 62.4%. This continues to be a puzzle given the continued rising cost of living and the fact it is 1% below the levels it was pre-pandemic. Wage growth at 5% isn’t exactly ripping up any trees either, falling to its lowest level this year. Expectations are for another slowdown in jobs growth to 200k which would be the...

Another extraordinary week is coming up. The Fed is almost certain to raise rates, putting the spotlight on Chairman Powell, who needs to open the door for a smaller rate hike in December without giving the impression of a pivot. Meanwhile, central bank decisions in the UK and Australia will be crucial for those currencies, before the week concludes with the latest edition of nonfarm payrolls. 

US economy is forecast to grow at an annual rate of 2.4% in Q3. Investors reassess Fed’s policy outlook following dismal US data. DXY technical picture points to a bearish tilt. The US Bureau of Economic Analysis will release its first estimate of the third-quarter Gross Domestic Product (GDP) on Thursday, October 27. Markets forecast the US economy to expand at an annualized rate of 2.4% following the 0.6% contraction recorded in the second quarter. The Federal Reserve Bank of Atlanta’s latest GDPNow estimate, published on October 19, however, showed that the GDP is expected to grow by 2.9% in Q3. Following the Federal Reserve’s decision to hike the policy rate by 75 basis points (bps) in September, policymakers have acknowledged the heightened risks of an economic downturn but reiterated that they will remain focused on taming inflation until they see a consistent increase in the unemployment rate – full employment being another of their key mandates. In the Summary of Economic Projections released alongside the policy statement, Fed officials projected the GDP to grow by 0.2% in 2022 and 1.2% in 2023.  Market implications Nick Timiraos, The Wall Street Journal’s chief economics correspondent who correctly leaked the 75 bps hike a few days before the July policy meeting, wrote recently that policymakers were planning to communicate smaller rate hikes from December. The disappointing S&P Global PMI surveys revealed earlier in the week that the economic activity in the private sector contracted at an accelerating pace in early October, triggering a dollar sell-off. Additionally, the Conference Board’s sentiment survey revealed that consumer confidence deteriorated in October, causing the greenback to continue to weaken against its major rivals. Dismal US data releases following Timiraos’ article seem to have revived expectations for the Fed to adopt a less aggressive policy stance. According to the CME Group FedWatch Tool, markets are pricing in a more than 50% probability of the US central bank raising the policy rate by a total of 125 bps by the end of the year, compared to only 20% last week. As mentioned above, FOMC officials are unlikely to put too much weight on the GDP report when assessing the policy outlook. However, the market reaction to the latest US data, which had not been big market movers in the past, suggests that investors might be looking for an excuse to get out of their dollar longs while re-evaluating their positions ahead of the Fed’s policy announcements on November 2. Hence, a Q3 GDP reading slightly below or at the market projection of 2.4% could force the dollar to stay on the backfoot after the kneejerk reaction, while a print below 2% could open the door for another sharp decline in the US Dollar Index (DXY). On the other hand, a GDP growth at around the Atlanta Fed’s estimate of 2.9% should help USD stay resilient against its peers, at least until next week’s Fed meeting. DXY technical outlook The Relative Strength Index (RSI) indicator on DXY’s daily chart declined to its lowest level since early August below 50 following the dollar sell-off witnessed in the first half of the week, pointing to a bearish tilt in the short-term outlook. On the weekly, the RSI has exited overbought, giving a sell signal. Additionally, the index broke below the 50-day SMA for the first time in over two months. On the downside, 110.00 (psychological level) aligns as interim support. In case DXY falls below that level and starts using it as resistance, it could extend its slide toward 109.60 at around the level of a major multi-month trendline and the Fibonacci 50% retracement of the August-October uptrend. Further down still lies 108.50, the Fibonacci 61.8% retracement and the level of the 100-day SMA. Key resistance seems to have formed at 112.00 (Fibonacci 23.6% retracement, 20-day SMA). Only a daily close above that level could be seen as a significant enough bullish development to trigger another leg higher toward 113.30 (static level) and 114.00 (end-point of the uptrend).

EUR/USD: 0.9957 Euro's rise from Oct's 0.9632 trough to 0.9875 last Tue suggests further 'volatile' swings above Sep's 2-decade trough at 0.9537 would continue, yesterday's break of 0.9899 to 0.9976 would re-test 0.9999, above extends said upmove from 0.9537 towards 1.0050 objective later. On the downside, only a daily close below 0.9899 would indicate a temporary top made and risk weakness towards 0.9849, then 0.9808. Data to be released on Wednesday Australia CPI, Japan leading indicator, coincident index. France consumer confidence, Italy trade balance, Swiss investor sentiment. U.S. MBA mortgage application, building permits, goods trade balance, wholesale inventories, new home sales and Canada BOC rate decision.