Understanding Elliott Wave Theory

Dollar experienced a broad upsurge overnight, propelled by a robust rebound in benchmark treasury yields and a general mood of risk aversion. This strength continued into the Asian trading session, particularly notable in the greenback's gains against Japanese Yen, which have now extended past the significant 150 mark. Despite verbal interventions from Japan, Yen has received no notable support, leaving Dollar to dominate.

Attention now turns to the U.S. Q3 GDP data release, which could be pivotal in determining Dollar's short-term momentum. Additionally, the global forex markets are keenly awaiting today's ECB rate decision. While a hold on rates is widely anticipated, investors and analysts are eager to gauge ECB's perspective on the resurgence of inflation risks, economic slowdown, and escalating geopolitical tensions.

Australian Dollar is the weakest currency for the day so far, feeling pressure from RBA Governor Michele Bullock's cautious remarks about the recent stronger-than-projected CPI data and the chance of a rate hike in November. Sterling and Kiwi Dollar trail behind as subsequent underperformers. In contrast, Canadian Dollar, presently positioned as the second strongest after U.S. Dollar, is attempting to recuperate from the post-BoC dip witnessed yesterday. Swiss Franc holds its ground as the third strongest, engaging in consolidations against both Euro and Sterling.

From a technical standpoint, NASDAQ resumed the decline from 14446.55 overnight to close at 12821.22. Immediate focus is on 38.2% retracement of 10088.82 to 14446.55 at 12781.89 could prompt downside acceleration through near term channel support. In that case, next target will be 12269.55 resistance turned support.It will be interesting to monitor how the NASDAQ responds to the upcoming GDP data and the subsequent impacts on currencies.

In Asia, at the time of writing, Nikkei is down -2.16%. Hong Kong HSI is down -0.82%. China Shanghai SSE is down -0.20%. Singapore Strait Times is down -0.41%. Japan 10-year JGB yield is up 0.0251 at 0.886. Overnight, DOW dropped -0.32%. S&P 500 dropped -1.43%. NASDAQ dropped sharply by -2.43%. 10-year yield rose 0.113 to 4.953.

In the Senate Economics Committee session today, RBA Governor Michele Bullock indicated that the bank was not entirely caught off guard by the stronger than expected CPI data released yesterday. She refrained from offering a definitive direction for the bank's next steps

The Q3 and September CPI data, which Bullock admitted "came out a little higher" than the projections in the August Statement on Monetary Policy, still aligned with the bank's expectations. She clarified, "The numbers were pretty much where we thought it would come out".

When queried on the prospect of another rate hike in the forthcoming meeting, Bullock responded, "We're still analyzing the numbers at the moment. I wouldn't like to say more or less likely, we're still looking at it."

Bullock reiterated the bank's position, stating, "We've always said we have a low tolerance" on inflation surprises. She added, "We are wary and we don't know if the job has been done yet."

Looking forward, Bullock hinted at imminent changes to their economic projections, announcing, "We will be releasing a new set of forecasts after the board meeting." Moreover, she alluded to the significance of these revisions by stating, "There is going to be a change to our forecasts. We have to look at whether or not it's material enough to change our views on monetary policy."

In a significant move, USD/JPY surpasses the key psychological level of 150 today, marking its highest point in a year. This uptick has reignited concerns among investors regarding market interventions by Japan, given that the 150 mark is widely regarded as a trigger point for such actions.

Japanese finance minister Shunichi Suzuki addressed the market developments, reiterating, "I'm watching market moves with a sense of urgency, as before." Notably, despite the heightened speculation, he refrained from commenting on any immediate intervention measures. This silence has led to further ambiguity, especially considering the suspected actions by Japan on October 3 to buy Yen, actions that have yet to be officially confirmed.

A primary reason for the sustained pressure on Yen can be attributed to increasing yield gap between Japan and other major economies. This disparity intensifies the debate on the necessity for BoJ to revise its yield curve control, especially in light of rising global interest rates. There are rumblings about a possible adjustment to the 10-year yield cap, even though it was adjusted only three months prior, especially with a policy meeting on the horizon.

Nevertheless, BoJ has consistently asserted that previous adjustments to the yield curve control were primarily to rectify any irregularities in the bond market's operations. The current yield curve appears more natural, especially when contrasted against the noticeable dip in 10-year yield in the curve from a year ago. It remains uncertain whether BoJ feels the immediacy to modify its YCC in the near term.

Today, ECB is broadly anticipated to maintain its main refinancing rate at 4.50% and the deposit rate at 4.00%. Having increased rates consistently during its previous ten meetings to tackle surging inflation, ECB hinted at a pause last month, reflective of the policy's apparent efficacy, as evidenced by deceleration in the Eurozone economy.

President Christine Lagarde, along with other top officials, has been keen to redirect discussions toward the duration for which the interest rates might need to remain at these current restrictive thresholds.

Amid this backdrop, there's also been speculation regarding ECB's potential move for an early reduction in bond holdings within its colossal EUR 1.7T euro Pandemic Emergency Purchase Programme. However, given the prevailing climate of heightened macroeconomic, geopolitical, and financial ambiguities, it's probable that the ECB will resist any hasty decisions to expedite quantitative tightening.

Technically, it's possible that EUR/USD's recovery from 1.0447 has completed at 1.0693, after rejection by 55 D EMA. Immediate focus for today is 1.0522 minor support. Firm break there should strengthen this bearish case. Further break of 1.0447 will resume whole fall from 1.1274, and target 61.8% retracement of 0.9534 to 1.1274 at 1.0199 next.

U.S. GDP is another major focus today. Durable goods orders, goods trade balance and jobless claims will also be featured.

USD/JPY's rally from 127.20 resumed by breaking through 150.15 resistance. Intraday bias is back on the upside for 151.93 high medium-term resistance next. On the downside, below 149.84 minor support will turn intraday bias neutral first, and bring consolidations. But near-term outlook will now stay bullish as long as 147.28 support holds, even in case of deep retreat.

In the bigger picture, while rise from 127.20 is strong, it could still be seen as the second leg of the corrective pattern from 151.93 (2022 high). Rejection by 151.93, followed by sustained break of 145.06 resistance turned support will be the first sign that the third leg of the pattern has started. However, sustained break of 151.93 will confirm resumption of long term up trend.

Yesterday, the corrective pullback for the US dollar in major currency pairs was interrupted. But at the same time, important support held, which may indicate that greenback sellers will make another attempt to resume the downward movement.

The USD/CAD currency pair yesterday once again tried to go above 1.3750, but, as we can see, to no avail. Good data on the PMI in the US services sector contributed to the growth of the US dollar, but strategic levels have so far remained untouched.

Today, the Canadian currency is facing an important fundamental day, and perhaps the pair will be able to get out of the flat corridor between 1.3750 and 1.3650. At 17:00 GMT+3, a meeting of the Bank of Canada will be held, at which a decision on the base interest rate will be announced. A press conference of the Canadian regulator is scheduled a little later, at which Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Caroline Rogers will speak. Analysts assume that the rate will remain at the same level, 5%. For market participants, the comments of officials regarding the regulator's further monetary policy will be primarily important.

Last week, the AUD/USD pair dropped below 0.6300, but failed to interrupt the recent extremes. On the daily timeframe, the emergence of a triple bottom figure can be seen. The development of this combination may be a breakdown of the base at 0.5450. A move below 0.6280 will break this combination and could contribute to a new downward impulse in the direction of 0.6000.

This morning, positive data on the consumer price index in Australia for the third quarter was published. The indicator increased by 1.2% against 0.8% in the previous quarter. At the American session, we are waiting for data on the number of building permits issued in the United States for September, as well as indicators on new home sales for the same period.

The single European currency is testing support at the alligator lines on the daily timeframe. The recent attempt at growth was interrupted by weak data on the Eurozone Services PMI and Composite PMI. If buyers hold above 1.0600, an upward correction in the direction of 1.0700-1.0800 may resume. A move below 1.0600 could encourage a retest of 1.0450.

Today at 11:00 GMT+3, we are waiting for data on the business climate index in Germany for October. It is also worth paying attention to the speech of ECB Chairman Christine Lagarde, which is scheduled for 20:00 GMT+3.

European markets managed to eke out a gain yesterday in what turned out to be a relatively choppy session, ahead of today's important ECB rate decision.

US markets on the other hand took their cues from a negative reaction to the latest Q3 numbers from Google owner Alphabet which saw its biggest one-day loss since March 2020, due to a slight miss on its cloud revenues. This in turn saw the Nasdaq 100 fall to 4-month lows, as the rest of the tech sector got sold off heavily, including Facebook owner Meta Platforms, whose shares fell over 4% ahead of the release of their Q3 numbers.

Having come off such a poor day last night's numbers from Meta really needed to see a decent beat to help reverse some of the negativity from yesterday.

We do appear to have seen that after Q3 revenues came in at the top end of forecasts at $34.15bn, and profits of $11.58bn or $4.63c a share.

Operating expenses fell 7% to $20.4bn, with the company adjusting its annual expenses estimate down to $87-89bn.

Q4 revenues are forecast to come in at $36.5-40bn. No end in sight for the losses in Reality Labs which are expected to continue year over year, where we saw another $3.7bn of losses during the quarter, taking losses year to date to -$11.47bn. Q3 revenue here came in at $210m, pushing total revenue year to date to $825m. The intial gains seen in the aftermath of the Q3 numbers soon disappeared however after the company warned on ad revenues due to a deteriorating economy in Q4.

Nonetheless last night's slide in US markets and a similar decline in Asia, looks set to translate into a lower European open, ahead of another big macro day with the ECB and US Q3 GDP set to be the major focus.

Is the ECB done hiking? The decision to hike rates back in September to a record high of 4.5% was somewhat of a surprise given some of the narrative that had been coming from ECB President Christine Lagarde in the lead-up to the decision.

It has also become apparent that there are clear divisions on the governing council on the future path of monetary policy with the northern part of the euro area, and specifically Germany keen to keep the pressure on, lest inflation run higher despite the recent sharp falls in the headline rate.

In comments made a week after the decision to raise rates last month Bank of Latvia Governor Martins Kazaks argued that the September increase was appropriate and that future increases couldn't be ruled out given the upside risks posed by higher energy costs and real income growth.

Nonetheless the tone of the September press conference was one of a wait and see approach from here on in given the downgrade to growth forecasts, which saw 2023 moved down to 0.7% from 0.9%, and in 2024 from 1.5% to 1%, while inflation was revised upwards to 5.6% in 2023 and 3.2% in 2024.

While ECB President Lagarde has been at pains to insist that the ECB isn't done on the rate hike front, the ECB would be foolhardy in the extreme to hike rates again in a week that has seen economic data show little signs of picking up. It's already almost certain that Q3 saw the EU economy slide into contraction, and the latest October data has shown little sign that is likely to change.

Moving on to the US economy which is still showing remarkable resilience even after multiple rate hikes. Today we get the first iteration of Q3 GDP and recent data would suggest that today's numbers will confirm that the US economy has grown at the fastest rate since Q4 of 2021, and at over double the rate of Q1 and Q2, which could pose problems for the Federal Reserve when they meet to decide whether to hike rates, or perhaps wait until December.

In Q1 the US economy managed to grow by 2.2%, followed by 2.1% in Q2. The final revision in Q2 saw personal consumption revised substantially lower to 0.8% from 1.7.

The slowdown in consumer spending during Q2 was a little worrying given how much of the US economy is driven by consumption, however the retail sales numbers during the summer suggest we've seen a strong rebound since then.

Nonetheless there was also a sharp revision higher for business investment in factories as the trickle-down effect of the inflation reduction act started to kick in.

Growth estimates for today's Q3 numbers are higher, with estimates as high as 4.5%, given how strong retail sales have been between July and September, with personal consumption expected to come in at 4%. On prices we're expecting to see a slowdown from 3.7% to 2.5%.

With a strong labour market and US earnings also looking strong there is a considerable upside risk that a big number today could prompt another spike higher in yields as the market goes to price in one more rate hike between now and the end of the year.

Weekly jobless claims are expected to rise from 198k to 207k.

EUR/USD – failed to overcome the 50-day SMA at the 1.0700 area and has slipped back towards trend line support from the recent lows at 1.0450, which is also a key support area.

GBP/USD – has slipped back from the 1.2300 area and trend line resistance at the trend line from the July highs. Support remains at 1.2100, while a move through 1.2300 is needed to push up to the 200-day SMA at 1.2400.

EUR/GBP – resistance remains at the highs this week at 0.8740. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.

USD/JPY – continues to creep higher and has moved above the previous highs at 150.16, making a new high for the year, potentially opening up a move towards 152.20. Support at the lows last week at 148.75.

Gold prices remained in strong demand due to the Israeli–Hamas war. The price rallied above the $1,920 and $1,950 resistance levels.

The 4-hour chart of XAU/USD indicates that the price settled above the $1,965 resistance, the 100 Simple Moving Average (red, 4 hours), and the 200 Simple Moving Average (green, 4 hours).

It even spiked toward the $2,000 level before the price started a minor downside correction. The price dipped below the $1,965 level. It tested the 50% Fib retracement level of the upward move from the $1,908 swing low to the $1,997 high.

There is also a connecting bullish trend line forming with support near $1,968 on the same chart. The current price action suggests there are high chances of more upsides above $1,980.

Immediate resistance is near the $1,995 level. The first major resistance is $2,000. An upside break above the $2,000 level could send the price soaring toward the $2,050 resistance. The next major resistance is near the $2,080 level, above which Gold could revisit the key $2,120 resistance zone.

On the downside, the price might find support near the $1,968 level. The next key support is near the gap area at $1,950. If the bulls fail to protect the $1,950 support, there is a risk of a major decline. In the stated case, the price could decline toward the $1,930 level.

Looking at crude oil prices, there was a downside correction and the bears were able to push the price below the $85 level.

US Initial Jobless Claims - Forecast 208K, versus 198K previous.

US Gross Domestic Product for Q3 2023 (Preliminary) – Forecast 4.2% versus previous 2.1%.

The BoJ is set to hold their monetary meeting across 30 – 31 October 2023, with wide consensus for its short-term interest rate target to be kept unchanged at -0.1% and for the 10-year bond yield around 0%.

The key focus will revolve around whether the central bank will deliver further tweaks to its yield curve control policy (currently at a 1% upper limit) or any other policy adjustment, given the recent rise in Japan's 10-year government bond yields to its decade high. Recent media report by Nikkei revealed that it will be a topic of discussion at the upcoming meeting, but there has not been a clear consensus among policymakers around the central bank's next move or its timing just yet.

Thus far, broad market expectations are priced for Japan to scrap its negative rates in the first half of 2024, still very much anchored by the BoJ Governor Kazuo Ueda's previous comments of having enough data by this year-end to determine its rate outlook.

This week, the Japanese 10-year government bond yields witnessed a fresh decade high, with yields briefly touching the 0.875% level, almost double the 0.460% level just three months back. While there are still room before it tests the BoJ's 1% upper limit, the relentless rise in Japan's 10-year yields reflects some resilience to the six rounds of bond-buying operations by the BoJ since July 2023 and continues to reveal hawkish bets in place for further policy normalisation.

The implied volatility for the 10-year government bonds futures has also witnessed a surge ahead of the upcoming meeting, suggesting that markets are expecting the meeting to be a 'live' one with possible BoJ policy action. Japanese Government Bond (JGB) futures are also back to retest its nine-year low, with broad positioning in place for potentially weaker bond prices.

Back in July this year, inflation forecasts for FY2023 and FY2024 were guided at 2.5% and 1.9% respectively, but current expectations are that these figures may be revised higher at the upcoming meeting. This follows after core inflation in Japan came in higher-than-expected in September for its third straight month, while oil prices have gained more than 20% since its July meeting. Market focus will revolve around policymakers' views of whether an upward revision in the inflation forecasts may meet their condition of 'sustainable inflation' for a policy pivot.

On the other hand, BoJ doves may still tap on the absence of an upward build in wage pressures to argue their case for more wait-and-see. Japan's wage growth has softened to 1.1% in August, which marked its third straight month of moderation. The conflicting signs seem to make any policy move at the upcoming meeting harder to grasp, with a more even split in views likely to trigger volatility on any BoJ action (or inaction).

Rising US-Japan bond yield differentials have been supportive of USD/JPY's upside, but recent moves for the pair has stalled around the key psychological 150.00 level – a level where Japanese authorities intervened back in October 2022 with US$42.4 billion of yen-buying to prop up the currency. A move similar to that of October 2022 was observed recently on 3 October 2023, where a retest of the 150.00 level was met with a strong sell-off of 280 pips within a span of minutes.

The sharp move has raised speculations of possible intervention efforts by authorities and although it has not been acknowledged by Japanese officials, the 150.00 level is now looked upon as a line of caution for buyers, serving as a key resistance for the USD/JPY to overcome.

Overall, the higher-highs-higher-lows formation since the start of the year still keeps an upward trend intact for now, with its daily Relative Strength Index (RSI) hovering above the key 50 level. Any success in reclaiming the 150.00 level may support a move towards the 152.00 level, while on the downside, any retracement may leave the 145.80 level on watch as immediate support.

The Nikkei 225 index has been guided by a falling channel pattern since June this year, with recent moves attempting to find support from the lower channel trendline at the 30,700 level. This level coincides with a 38.2% Fibonacci retracement from its January 2023 low to June 2023 high, which may support some views of a bullish flag formation still in place.

Any signs of a quicker pivot from current accommodative policies at the upcoming meeting may translate to downside risks for the index, with any breakdown of the lower channel trendline support potentially paving the way to retest the 29,800 level next. On the upside, the upper channel trendline may serve as key resistance to overcome at the 32,400 level.

While Canada's economy has shown pockets of strength in recent months, incoming data continues to point to increasing challenges and slower growth for the Canadian economy ahead. The main bright spot for Canada has been the labor market, which added a combined 103,700 jobs in July and August, while hourly wage growth for permanent employees remains elevated at 5.3% year-over-year. Even so, the employment gains are perhaps not as strong as they might appear at first glance. A 48,000 gain in full-time jobs accounted for less than half of the increase, whereas for the outstanding level of employment, full-time jobs make up 82% of total employment. Moreover, the July-August period saw a decline in private sector employees, with the jobs increase instead driven by a rise in public sector employees and self-employment. Other areas of the economy are noticeably less robust. Despite the employment gains, higher interest rates and cost-of-living issues appear to be contributing to consumer caution, with real retail sales having declined for three months in a row through August. More broadly, Canada's Q2 GDP growth contracted at a 0.2% quarter-over-quarter annualized rate and, based on available data for July and preliminary data for August, is at best on track for only very modest positive growth in Q3.

Moreover, economic fundamentals and forward-looking indicators do not point to an improvement in Canada's growth prospects any time soon. From a consumer perspective, the outlook is mixed. Growth in real household disposable income has returned to positive territory and the household saving rate of 5.1% remains slightly above pre-pandemic levels. However, the Bank of Canada's monetary tightening has led to a rising interest and debt servicing burden for Canadian households. In Q2, interest costs were 9.0% of disposable income, while total debt servicing costs (that is, principal and interest) were 14.8% of disposable income. Those metrics are elevated by historical standards, and suggest continued consumer restraint going forward. The outlook for businesses is similarly subdued. Declining corporate profit growth has led to a drop in business fixed investment through mid-2023, and the central bank's Q3 Business Outlook Survey suggests the outlook may have worsened further since. The Bank of Canada's (BoC) Business Outlook Indicator fell further to -3.5, the weakest reading since the depths of the pandemic. In addition, the Indicators of Future Sales balance, which takes into account factors such as order books, advance bookings, sales inquiries and so on, fell to zero in Q3, also the weakest reading since Q3-2020. Finally, more than half of firms surveyed by the BoC believe that the effects of past monetary tightening on their businesses are far from over. To the extent that more cautious businesses scale back hiring plans, that could add to headwinds for Canadian households and consumers. Against this backdrop we have pared our growth forecast for Canada, and now anticipate GDP growth of 1.1% in 2023 (previously 1.2%) and 0.7% in 2024 (previously 1.0%).

While recent news on Canadian growth has been disappointing, news on the inflation front has been slightly more hopeful. The message from actual inflation data as well as forward-looking indicators are the same—inflation remains too high for now, but is gradually heading in the right direction. With respect to the September CPI, both headline and core inflation surprised to the downside. The headline CPI slowed to 3.8% year-over-year, while the average core CPI similarly eased to 3.8% year-over-year. Importantly, the average core CPI rose at a 3.67% three-month annualized pace through September. That is less than the increase seen in August, even if the recent trend of underlying inflation remains above the central bank's 2% target and the underlying pace of disinflation remains frustratingly slow.

Survey data also point to elevated inflation trends that are nonetheless moving in a more favorable direction. The BoC's Business Outlook Survey showed more firms expecting slower input and output price inflation over the next 12 months. For example, the net balance for input price inflation fell to -63 in Q3 from -53 in Q2 (that is, more respondents seeing slower input price inflation), while the net balance for output price inflation fell to -43 in Q3 from -33 in Q2 (more seeing slower output price inflation). In terms of firms' CPI inflation expectations over the next two years, 53% saw inflation above 3% during that period, still high but less than the 64% in Q2 and 79% in Q1. Finally, in a separate survey of consumers during Q3, one-year ahead and two-year ahead inflation expectations were still elevated at 5.03% and 4.04% respectively. Nonetheless, that same survey said consumers who expect more adverse effects from rate hikes are less likely to plan major purchases such as cars or appliances, and more likely to spend on discretionary items like vacations and concerts—a hint perhaps that higher interest rates are having some impact on consumer expectations.

Against this backdrop of slowing growth and gradually slowing inflation, the Bank of Canada once again held its policy interest rate steady at 5.00% at its October monetary policy announcement. In its accompanying statement, the BoC acknowledged softer economic activity, saying:

The softer outlook is also reflected in the central bank's updated projections, which forecast GDP growth of 1.2% in 2023 (compared to 1.8% in July) and 0.9% in 2024 (compared to 1.2% in July).

At the same time, the BOC kept the option of further tightening on the table, saying it is "prepared to raise the policy rate further if needed." The central bank clearly remains somewhat wary about the inflation outlook, saying it "is concerned that progress towards price stability is slow and inflationary risks have increased." Those inflation concerns are also reflected in the BoC's updated inflation forecasts, which see CPI inflation at 3.0% for 2024 (previously 2.5%) and 2.2% for 2025 (previously 2.1%).

Although BoC maintained a moderate rate hike bias, we continue to believe that further tightening remains a possibility rather than a probability. We expect Canadian economic growth to slow more quickly than the central bank's forecast, and as a result, we see slightly slower CPI inflation next year than does the central bank. We believe the Bank of Canada will hold its policy rate steady at 5.00% for an extended period. That said, as growth remains subdued and underlying inflation measures move a bit closer to the central bank's 2% target, we still forecast Bank of Canada rate cuts beginning in Q2-2024, and a cumulative 150 bps of easing to 3.50% by the end of next year. As Canadian growth remains subdued and in the absence of further BoC tightening, we also see potential for further Canadian dollar weakness. The USD/CAD exchange rate has already reached our medium-term target of CAD1.3700, but a further move closer to CAD1.4000 over the next several months cannot be ruled out. We will provide a full assessment and updated currency forecasts in our International Economic Outlook, due for publication later this week.