The benchmark 10-treasury yield is moving higher in leaps and bounds. Yesterday the bond market sold off on a wide spectrum and pushed the 10-year yield to 1.87 from 1.78. Yield is now approaching 2-year highs. At the same time, traders believe that the first rate hike will definitely take place in March (the current probability is 97%). Yesterday we got an indication that industrial demand could be slowing down. The Empire State manufacturing index (-0.7, 25.0 expected) came in way below expectations. This morning UK inflation numbers came in slightly better (CPI 5.4% y/y, 5.2% expected) than the analyst consensus had predicted. Cable rallied initially but the move was quickly rejected and GBPUSD moved back to pre-announcement levels. Heads up for the Canadian CPI numbers later on today. The companies releasing earnings on our watchlist today are MS, USB, BAC and UNH. Look for additional volatility (trading opportunities) in these equity CFDs today. Companies reporting tomorrow: PG, CSX, ISRG, UNP and NFLX. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
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EURUSD remained weak as the bond investors off-loaded more inventory and again pushed yields higher. The USD index (DXA) rallied strongly which meant that there was no significant buying in EURUSD and the key support levels at 1.1382 and 1.1360 were broken. This is why we said yesterday that you should look for price action confirmation (bullish candle patterns) to justify long trades. EURUSD is now trading inside the 1.1310 – 1.1333 support area and right at the 50-day SMA with the bull channel low nearby.
NZDUSD touched the channel low (at 0.6752) we talked about yesterday and attracted some serious buying right there. Now the pair is trading 0.53% higher and attempts to climb above the 0.6787 resistance. A decisive break above this level would indicate the bulls are in charge and could potentially take the market to 0.6746 or so. If, however, the rally fails and both the channel low and the 0.6733 support below it are violated, the likelihood that the 0.6702 low gets tested again is pretty high. The next important NZD related risk event (CPI q/q) is scheduled for January 26th. Until then traders are likely to focus on risk sentiment and the expectations for the Fed policy and NZDUSD technicals. The nearest key price levels for NZDUSD are 0.6702, 0.6733, 0.6787 and 0.6890.
AUDUSD trades pretty much like the kiwi dollar as it also has retraced to bull channel low and has started to react to it. Provided these early signs of strength continue we might see a sizeable (approximately 1% or 85 pips) up move in the currency pair. A break below the bull channel would be likely to bring the 0.7130 low to play again.
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
- CAD – CPI m/m
- CAD – Common, Median and Trimmed CPI y/y
- GBP – BOE Gov Bailey Speaks
- AUD – Employment Change
- AUD – Unemployment Rate
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- UK December CPI 5.4% y/y (5.2% expected)
- Empire Fed manufacturing -0.7 (25.0 expected)
- BOJ leaves monetary policy unchanged
- New Zealand business confidence -28% (-11% previous)
- China GDP for Q4 2021 1.6% q/q (4.0% y/y)
- US December retail sales -1.9% (0.0% expected)
- ECB Lagarde: monetary accommodation needed still
- 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)
Chief Market Analyst
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