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Market Update: Risk-off Sentiment and Global Central Bank Actions

**Week Ahead News Brief: Impact on Markets and Possible Asset Movements**

We're approaching the next trading week with a lot of news hitting at the same time. We ended the week with risk-off volatility across the markets as traders respond to the Bank of England's (BOE) 50bp interest rate hike. Concerns about ongoing tightening cycles by central banks worldwide are also contributing to the market sentiment. Disappointing PMI figures from Europe, Japan, and Australia last week have boosted the US dollar to a seven-day high above 103 on the Dollar Index. Central banks such as the BOE, Swiss National Bank, and Bank of Canada have implemented or signalled rate hikes, indicating an ongoing tightening process.

On top of this, we have to add the mix of the events on Saturday that will influence the markets tomorrow.

**Russian Coup Attempt Raises Concerns in Financial Markets**

Yesterday's possible coup attempt in Russia has sparked significant concerns among investors and analysts. The potential repercussions for the markets are substantial. While the situation has de-escalated with the turning back of heavily armed Russian mercenaries, uncertainty surrounding President Vladimir Putin's grip on power remains. Market experts highlight that unfolding and uncertain events, particularly related to Putin and Russia, tend to negatively impact markets. Safe-haven assets like Treasuries, gold, and the Japanese yen are likely to gain favour. The outcome of the power struggle in Russia will determine the impact on markets, with a swift resolution potentially having a positive short-term effect. However, lingering uncertainty about leadership and potential instability may keep investors cautious.

**Recap of Last Week's Events**

Last week witnessed several significant events. Jerome Powell's congressional testimony warned of potential future rate hikes by the Fed. UK inflation continued to rise, leading to a 50bp hike by the BOE and increased recession concerns. The Swiss National Bank also hiked rates, and expectations rose for another Bank of Canada hike following strong retail sales. The Reserve Bank of Australia kept the possibility of further rate hikes alive, while the People's Bank of China cut their 1-year LPR to support the weakening economy.

**Key Events and Themes for the Week Ahead**

Daily Technical Analysis

1. **ECB Forum on Central Banking 2023**: The annual ECB forum on central banking will be held in Sintra, Portugal. Key speeches and discussions by central bank leaders, including Jerome Powell, Christine Lagarde, Governor Ueda, and Governor Andrew Bailey, are expected. Traders will closely analyse the policy panel for insights into macroeconomic stabilization in a volatile inflation environment.

2. **US Core PCE Inflation and GDP Data**: Market participants eagerly await the release of US core PCE inflation data, the Fed's preferred gauge, to assess the inflation trajectory and potential impacts on future rate hikes. Additionally, the GDP report will provide insights into the overall economic health of the US.

3. **Canadian Inflation Report**: Strong inflation data following the recent hawkish hike by the Bank of Canada could increase expectations for another rate increase and potentially strengthen the Canadian dollar.

4. **European Data**: The IFO business sentiment survey for Germany and flash CPI reports for Europe, along with state-level inflation for Germany, will be closely watched. These releases may influence euro pairs and ECB policy expectations.

5. **China PMIs**: China's efforts to stimulate its weakening economy will be in focus. PMI data will provide insights into economic performance, and any notable disappointment could increase expectations for further stimulus.

**Trade Directions for a Stronger Dollar**

1. **Long USD/JPY**: Given the prevailing risk-off sentiment and the yen's strength against other currencies, consider a long position on USD/JPY to capitalize on the potential strength of the US dollar and weakness in the yen.

2. **Long USD/CAD**: The Bank of Canada's recent hawkish stance, coupled with strong Canadian retail sales, suggests a potential for further rate hikes. A long position on USD/CAD can benefit from the expected strength of the US dollar against the Canadian dollar.

3. **Short EUR/USD**: Concerns about the global tightening cycle and the ECB Forum on Central Banking may weigh on the euro. Consider a short position on EUR/USD to take advantage of a potential stronger US dollar against the euro.

**Trading Ideas**

1. **Oil**: Consider going long on WTI crude oil if China PMIs surprise to the upside, indicating a potential boost in oil demand. Monitor geopolitical developments and supply disruptions that could impact oil prices.

2. **Gold**: A risk-off sentiment and remarks related to inflation and interest rates from central bank leaders may affect the price of gold. Consider a long position on gold if concerns about economic stability and inflation persist.

3. **European Stocks**: Monitor European stock indices such as the Euro Stoxx 50 and DAX for potential trading opportunities. The ECB Forum on Central Banking could influence these indices, with a dovish tone supporting European equities.

4. **Emerging Market Currencies**: With the risk-off mood and the surging US dollar, consider short positions on emerging market currencies like the Mexican peso (USD/MXN) or the South African rand (USD/ZAR). Monitor economic data and geopolitical developments that could impact these currencies.

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**Note:** Trading ideas are speculative and subject to market volatility and risks. Traders should conduct thorough analysis, utilise risk management strategies, and adapt to changing market conditions before executing any trades.

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