USD tanked as the annual US inflation data was reported in line with expectations. Pandemic has created supply constraints causing inflation but soaring energy costs, labour shortages and increased demand have also played a major role as the US headline inflation reached 7% annually, the highest level since 1982. Tick higher from 6.8% in November the number (7%) was in line with analyst consensus prediction. Energy prices contributed the most in the inflation tracking basket while second-hand cars and trucks was an item that saw the biggest jump in prices, 37.3% y/y. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The market action showed (the substantial drop in the dollar) showed that it’s really the Fed that the market is focusing on. We’ve talked about this before and it’s worth repeating. The current environment we are in is about central banks and their policies. The Fed being the 800-pound gorilla is the one that really moves the markets. The key takeaway from this week’s Fed talk and inflation numbers is the sluggishness the Fed shows in the face of the highest CPI prints in 40 years. Powell’s comments on Tuesday indicated that it might take up to four FOMC meetings for the Fed to agree on balance sheet reductions. The question the investors are now asking is whether the Fed is going to be as slow and non-committal when it comes to rate hikes too?
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EURAUD broke below a key support level at 1.5730. This neckline break created a topping formation above the level and therefore indicates lower prices in this market. The drop also moved the pair below the bull channel low further indicating weakness for the EURAUD pair. We said yesterday that should the 1.5730 level break the market would be likely to move to the 1.5660 – 1.5690 range and then to 1.5630 should the market stay weak. This range has been now reached. The nearest key price levels for EURAUD are 1.5574, 1.5671 – 1.5690 range, 1.5730 and 1.5784.
ETHUSD rallied another 6% after the 3222 – 3274 resistance area was broken yesterday. We noted earlier how this market was breaking out of a bear channel and should the resistance zone at 3222 – 3274 be penetrated the market would have space to move to the 3550 – 3670 range. Now, this same range acts as a support. 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.
NZDUSD has rallied over 100 pips or approximately 1.5% since our last report. We noted at the time (here) that the pair was trading near to rising trendline support. It was our view that. provided the pair doesn’t violate the rising trendline it is likely that NZDUSD will penetrate the 0.6764 and rally to 0.6790 – 0.6798 range. This area was reached and penetrated in the strong rally that followed the US inflation release yesterday.
Now NZDUSD is trading at levels that used to support the market in September last year. The bull channel high is also pretty close which could slow the bulls down. It seems, however, that possible slow down is only temporary and the market is more likely to continue higher after the highest inflation numbers in 40 years in the US didn’t create a rally in the dollar but instead, the greenback plunged through the 95.56 support level and substantially lower.
The width of the bottoming formation indicates that (provided 0.6860 can be penetrated decisively) NZDUSD is likely to move to the 0.6980 – 0.7020 range. The key support and resistance levels are 0.6783, 0.6860 and 0.6980. A failure to penetrate 0.6860 would be likely to bring the 0.6783 support into 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
- USD – PPI and Core PPI
- USD – Unemployment claims
- USD – FOMC member Brainard’s speech
- USD – 30-yr bond auction
- EUR – ECB President Lagarde Speaks
- USD – Retail Sales and Core Retail Sales m/m
- USD – Industrial Production m/m
- USD – Prelim UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- 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)
- Bitcoin lower on Khazakstan upheaval
- US inventories weigh on oil
- US ISM Manufacturing PMI 58.7 (60.0 expected)
- US JOLTS Job Openings 10.56M (11.06 expected)
- OPEC not expected to deviate from earlier output plans
- Biden: US to act decisively if Russia attacks Ukraine
- Trading in Evergrande shares halted in Hong Kong
- US Durable Goods Orders m/m 2.5% (1.9% expected)
- US Core PCE inflation 0.5% (0.4% expected)
- US Final GDP 2.3% (2.1% expected)
- US CB Consumer Confidence 115.8 (111.1)
- Canadian Retail Sales m/m 1.6% (1.0% expected)
- Canadian Core Retail Sales m/m 1.3% (1.6% expected)
Chief Market Analyst
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