Not long after the Fed’s credibility came under question due to possibly mismanaging of the US economy and especially inflation (that’s 5% above the Fed’s target rate of 2%) we now have the first signs of inflation possibly easing later on this year. The US PPI or Wholesale prices as it is also known increased by 0.2% m/m in December 2021 (previous 0.8%). As a result, USD slipped slightly lower as, in theory, a decrease in wholesale inflation takes the pressure off the Fed to act decisively when it comes to confronting inflation. The 10-year Treasury yield dropped from 1.74% to 1.70% and the dollar closed 0.13% lower in yesterday’s trading. USD is, however, now trading near to a key support level after a sizeable drop so in this report we will take a look at how this could impact the markets we have been following lately. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
December PPI at 0.2% was substantially below the 0.8% rise in November and lower than the analyst consensus had predicted (0.4%). Cost of services edged higher by 0.5% while prices for goods declined 0.4%. This was the first decrease since April 2020! The cost of gasoline declined by 6.1% but prices for meats, gas fuels, fresh and dry vegetables, diesel fuel, and primary basic organic chemicals also decreased. The annualised producer inflation rate ticked down from the record 9.8% in November to 9.7% in December.
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USD Index (DXA) came tumbling down after the 95.53 support was broken. Now, however, the downside could be getting limited (at least in the short term) as DXA is trading near to a 61.8% Fibo-level which coincides with a support level at 94.55 that used to hold back price advances in October and November 2021. If the level holds (follow the price action to gauge the likelihood) then we might well see the index testing and perhaps exceeding the 95.53 resistance but at this stage, it’s too early to say what’s likely to happen. If the Fed continues being vague about their QT (balance sheet reduction) timetable then we might well see more softness in the dollar. The big move lower after the Fed Chair Powell said it’s likely to take up to 4 meetings to get the FOMC members to agree on how to QT indicates too much was priced in the dollar above the 95.53 support. If DXA doesn’t attract buyers at the 94.55 support the market could well test 93.85 next.
Gold reacted a little lower after we suggested (here) that some profit-taking might start to come in and therefore the bids might get softer. The idea was based on the fact that the market was approaching a resistance level at 1829.60 and there’s another resistance at 1831.66 so it takes some commitment from the bulls to push through this zone. At the time of writing this report, gold is trading at 1827.30 and therefore still below the resistance area. If the DXA starts to rally from the 94.55 support, gold might struggle with the resistance but in the opposite case or if the rally was weak, we might see gold eventually trading all the way to the 1845 – 1850 range. This, however, requires bulls to show that they can create a sustained break with a decent amount of follow-through buying above the zone.
ETHUSD has retraced back to the 3550 – 3670 range which should as a support area if the market is as healthy as the bulls would like it to be. Above this area, the market is bullish while below the level we’d be likely to see a move to the 2919.70 – 3070.90 range. The nearest key resistance area is at 3520 – 3572 where a bearish trendline, the 50% Fibo-level coincide. If the bulls now can muster some courage to push the market higher and test this area, there’s a good chance that the resistance will be eventually cleared. To summarise, above the 3550 – 3670 support area, the market is bullish while below could see a move to the 2919.70 – 3070.90 range. If the support is broken decisively we’ll re-evaluate the trading scenarios for this market based on how the market behaves below this level. Stay tuned! While we don’t provide investment advice our commentary supports you in Your Own analysis and helps you to create a trading plan that fits your goals and personality.
NZDUSD did rally after we highlighted the opportunity (here) but has also started to lose some momentum as we predicted in yesterday’s analysis. Now the key price level to focus on is 0.6849. If the level is broken decisively the pair could correct all the way down to the 0.6790 – 0.6810 range. The market is, however, bullish above 0.6727 and forming a bottom. The width of the bottoming formation indicates that (provided 0.6860 is sooner or later penetrated decisively) NZDUSD is likely to move to the 0.6980 – 0.7020 range. Edit: 0.6890 – 0.6810 changed to 0.6790 – 0.6810 (typo).
Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed has started tapering and expects it to end in the summer of 2022. The central bank was forced to change its views on inflation being transitional inflation traders expect the first hike in June 2022 (the probability of a hike is 80.9% at the time of writing this).|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.|
|Yields||In Q3 and Q4 2021 the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.|
|Employment||The December non-farm payrolls increased by 199K instead of 400K expected by the analyst consensus while the unemployment rate was a positive surprise at 3.9% (4.1% expected). Average hourly earnings came in at 0.6% (0.4% expected) moving the annual rate to 4.7% (4.2% expected).|
|Inflation||The annual headline inflation reading for December at 7% (6.8% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 5.5 per cent y/y (4.9% previous) This was the biggest annual increase in CPI since 1982.|
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The Next Main Risk Events
- EUR – ECB President Lagarde Speaks
- USD – Retail Sales and Core Retail Sales m/m
- USD – Industrial Production m/m
- USD – Prelim UoM Consumer Sentiment
- CNY – GDP
- CNY – Retail Sales
- CAD – BOC Business Outlook Survey
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- US GDP growth expected to be in 3% – 4% range
- Fed’s Clarida: Inflation will be transitory
- Fed’s Bullard: Four rate hikes in 2022 needed
- Fed’s Beige Book: Supply constraints slowing growth
- China December CPI +1.5% y/y (1.8% expected)
- World Bank cuts global GDP forecast to 4.1% (4.3% previous)
- US December non-farm payrolls 199K (400K expected)
- Canada December employment change 54.7K (24.5K expected)
- ADP Employment Change 807K (405K expected)
- US unemployment claims 207 (199k expected)
Chief Market Analyst
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