US data disappointed traders on Friday. Retail sales came in way below expectations (-1.9% vs.0.0% expected), Industrial production was confirmed at -0.1% (0.2% expected) and the University of Michigan consumer sentiment survey showed the mood souring a bit (0.68% vs. 70.0 expected). The price action showed, however, that market participants are focusing on Fed policy and inflation. Yields spiked higher as investors sold T-bonds with the expectation that the Fed will have to react strongly in order to curb inflation. The Fedtalk we heard last week from Fed members Barkin, Messer, George, Daly, Harker, Waller and Williams indicated that there will be a rate hike in March but now some prominent voices, like Jamie Dimon (J.P. Morgan CEO) and hedge fund manager Bill Ackman who have called for six or seven rate hikes with a 50 basis point start. This rallied the dollar and sent the NZDUSD lower. GBPUSD was pressured by the dollar strength but also the possible resignation of the UK PM Boris Johnson. 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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USD Index (DXA) rallied on Friday as traders saw the yields rising in the anticipation of a more hawkish Fed. Money flowed out of the bond market spiking the benchmark 10-year bond yield by 0.08% to 1.78%. At the same time, the probability for a rate hike moved to 93.6% and speculations for the future Fed action are getting more intensive. We, however, will stick to our old mantra and focus on price action to figure out what’s likely to happen. As short term traders, we don’t have to know how many rate hikes there will be this year. All we have to do is to do our price action analysis correctly and figure out what the probabilities are for a price move on any given day.
The rally started from a key support level (at 94.55) we highlighted in Friday’s report. The 95.53 resistance level that coincides with the 38.2% Fibonacci level is the next major hurdle for the dollar bulls. What’s most important now, is to see if the dollar bulls are committed enough to take the DXA again above the 95.53 and keep it there. A lower high below the level would increase the risk of the market breaking below the 94.55 support. Should this happen we might see a deeper correction in the dollar index with the first stop at 93.85 and then possibly 93.25. This scenario could happen if the Fed bankers softened their tune or there were further signs that inflation might be peaking. Last week the PPI release showed that for the first time since April 2020 the cost of goods (gasoline, meats, gas fuels, fresh and dry vegetables, diesel fuel, and primary basic organic chemicals) decreased.
GBPUSD is the strongest currency among the major dollar counterparts as the BOE has already hiked the rates and is expected to continue on this path. This is why Cable has had only a moderately bearish reaction to the USD strength. We have, however, a highly interesting political drama going on in the UK as PM Boris Johnson might see his exit taking place rather soon. This could create more downward pressure on the Sterling and while the process is likely to be slow due to the political process, we might see some twists and turns on only in the UK Parliament but also in GBPUSD prices action. If the USD rallies strongly and a growing number of conservative MPs submit letters of no confidence, or indeed the PM himself decided to resign there could be a sharper correction in Cable. This market is definitely worth following more closely in the coming days and weeks.
Technically GBPUSD is still in an uptrend but there have been no significant corrections over the last four weeks. This increases the probability for a correction taking place. The nearest key support and resistance levels for the near term are 1.3603 and 1.3748. If we now get a lower reactionary high below 1.3748 it’s likely that the market will test the 1.3603 – 1.3625 range. If it’s not defended by the bulls the next key price level after this is the 61.8% Fibonacci retracement at 1.3522. This is where is we also have the 20-day SMA and a historically significant price level at 1.3513 in the proximity of the level. If the bulls find the strength to push the market above the most recent reactionary high the next key price level is at 1.3815.
NZDUSD became under pressure with the other commodity currencies as the Dollar index (DXA) started to recover on Friday. We noted in Friday’s report how the downside in the DXA was getting limited and indeed the USD was bid higher. The move was helped by the Treasury yields spiking substantially (8 basis points to 1.78%) which in turn accelerated the correction in cyclical commodity currencies. NZDUSD dropped 0.91% before it started to recover. The recovery started right above a key support level (0.6764) we focused on earlier. With the US Treasury yields spiking higher it’d make sense to see some consolidation in NZDUSD as traders look to see if the bond selling that caused the spike in yields is going to continue (and support the USD) or not. Technically, the NZDUSD pair would need to create a higher low above 0.6733 to stay bullish. If this doesn’t happen, then we might see the 0.6702 low tested again. The next time we have important NZD related news is on January 26th. Until then traders are likely to focus on risk sentiment and the expectations for the Fed policy and NZDUSD technicals.
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
- CNY – GDP
- CNY – Retail Sales
- CAD – BOC Business Outlook Survey
- JPY – Monetary Policy Statement
- JPY – BOJ Press Conference
- EUR – ZEW Economic Sentiment
- EUR – German ZEW Economic Sentiment
- USD – Empire State Manufacturing Index
- GBP – CPI y/y and CPI m/m
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- 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)
- 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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