Friday´s NFP figure was disappointing and arrived well below expectations (210k vs 531k expected). Nevertheless, the unemployment rate dropped to 4.2 % and the participation rate is rising. The relief rally in the stock market might not last as traders realize that the jobs report as a whole was pretty strong and that it could pave the way for a faster unwinding of the Federal Reserve´s stimulus measures.
Further Dollar strength appears likely towards year-end, while equities could stay under pressure amid a combination of tapering fears and uncertainty surrounding the pandemic.
USTECH in particular could struggle as investors are heading for the exit door ahead of the year-end. Tech stocks were investors´ favorites in 2021, but the prospect of a hawkish Fed and concerns about the omicron variant – which has investors rushing into buying safe havens – will keep the pressure intact in the near-term.
The daily close below 15,725 support on Friday suggests the correction might extend to 15,288 points, after which USTECH bears would start to eye the important support zone between 14.381 and 14.602 points.
Fed Chair Powell's hawkish turn caught investors by surprise. He hinted at an accelerated unwinding of the central bank's bond buying program and acknowledged that rising inflation is no longer transitory.
The Fed switching its focus from the employment market to inflation could be big, and investors are already preparing for the central bank to announce a faster policy tightening as early as next week.
The labor market is looking healthy, but inflation is running hot, which gives the Fed a good reason to accelerate its tapering. While the Omicron coronavirus variant is certainly concerning, not enough is known yet about it to estimate the impact it will have. This week's inflation data is likely to confirm this view, as the Core CPI headline figure could cross the 5 percent mark.
What does this mean for markets?
The Dollar is likely to strengthen further across the board. Gold could struggle in the near-term, especially if Omicron fears start to fade. Traders should keep a close eye on the rising trendline from the August low and the $1758 support level. A clear break below both lines of support could signal the beginning of a deeper correction towards at least $1680.
The Fed is not the only central bank that has its focus on inflation. The Bank of Canada will keep its interest rates unchanged on Wednesday, but strong economic data and rising inflation hint at a more aggressive rate hiking phase next year.
The market is already pricing in five rate hikes for 2022, but the Canadian Dollar has been struggling in the past few weeks as Oil prices collapsed, and the broad risk-off sentiment weighed on commodity currencies. CAD gains might therefore stay limited in the near-term, particularly against the US Dollar.
Nevertheless, traders looking to trade a CAD recovery might find GBP/CAD more interesting as the currency pair has again struggled to breach resistance at 1.7110 and could head towards the lower end of the range it has been stuck in since September this year.
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The Federal Reserve is the headline act in markets this week, with US interest rates firmly in the spotlight.