Powell dropped the word “transitory” (when referring to inflation) in a Senate hearing in November and now the word isn’t anymore expected to be part of the vocabulary in the FOMC Meeting Minutes that will be released this Wednesday. Against the background recent of high inflation numbers from the US and last week’s jump in US treasury yields it’d make sense to see a much more hawkish Fed and the dollar rallying strongly. The price action in the USD has, however, been quite sluggish. USD Index (DXA) has been moving sideways for six weeks above the 95.53 support level and there have been no serious attempts to challenge the 96.93 high that was put in in November. Does this speak of a lack of commitment on the long side of the market or is this just a period of consolidation after which we see further rallies in the dollar index? The time will eventually tell but until then traders will keenly follow the Fed meeting minutes and the US employment and earnings data to get some insights into Fed policies. 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) has been moving sideways for six weeks as USD bulls and bears battle out the future direction of the dollar and wait for the FOMC meeting minutes this Wednesday. On Friday we’ll get the US employment and earnings numbers that are hoped by investors to shed more light on future inflation trends. DXA has traded almost to the 95.53 support level after creating lower highs. Unless the index cannot break above the bearish trend channel top the pressure will build on the 95.53 support and eventually break it. This would be likely to take the dollar index to 94.95 or so where the 50% retracement level and the bear channel low coincide.
An increase in inflation expectations would pressure the bond markets and thus quite likely push the yields and the dollar higher. Friday’s average hourly earnings are therefore a key data point to keep an eye on. When it comes to the market expectations on the Fed policy, the Fed fund futures traders are currently betting that the Fed will hike the rates in June. They are currently placing a 91.2% probability for the first rate hike taking place in June.
Gold found some legs after a drop last week and performed nicely after Treasury yields spiking higher on Wednesday last week (to 1.55% vs. the previous close of 1.49%). We noted at the time that such a jump in yields indicates bond investors are worried about the rising inflation. It was our view that while is this bearish the price of gold should have long term support from those that still see it as an inflation hedge. In Thursday’s report, we took the view that gold was bullish above the 1784.82 support level. Now that the price has rallied above 1820.14 swing high we can safely say that this view was (and obviously still is) correct.
The nearest key support level is the 1820.14 swing high. As long as we can see sustained buying above this level we have reason to believe that that gold can move pretty quickly to the nearest key resistance level at 1849.67. Should this support not hold, the market is still bullish but could retrace to levels between the 20 and 50-period moving averages (1796 – 1810). A break below the 1784.82 would turn this market bearish.
GBPUSD has been a great success story lately as the market has been trading pretty exactly in line with our analysis. We need to thank the Bank of England for the bullishness and the great long trading trade opportunities in the currency pair. We’ve had a bullish view on the currency pair since the BOE became the first G7 central bank to hike the rates and suggested (here) that we could see Cable trading to 1.3513. Now GBPUSD has reached and even moved beyond this level. The most recent high it traded to was 1.3550. In doing so the pair completed a measured move that was based on a projection generated by a sideways range that preceded the rally. Now, this move is complete and Cable is reacting lower.
The nearest important support area below the current price is the channel low at 1.3454-1.3461. This is also where a former resistance level (after it was penetrated) has supported the price. In case the bulls let the market slip lower the next level intraday traders should focus on is at 1.3408. If the green team manages to push the market through the 1.3550 level we should see Cable trading to 1.3607.
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 the benchmark 10-year US Treasury yield has ranged between 1.1720% and 1.6830%. The hottest headline inflation reading since 1982 pushed the 10 yr. yield initially lower before bonds started to sell off (yield recovered). The reaction in the bond market indicates that traders’ expectations for Fed’s future policy haven’t changed.|
|Employment||Payrolls increased by 210K in November. This was a massive disappointment after the analyst consensus had predicted strong jobs growth of 553K.|
|Inflation||The annual headline inflation reading for November at 6.8% (6.2% previous) is the highest CPI print in almost 40 years. The core CPI (all items less food and energy) moved to 4.9 per cent y/y (4.6% previous) This was in line with market expectations and was the biggest annual increase in core consumer prices since June 1991.|
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The Next Main Risk Events
- EUR – Spanish Unemployment Change
- USOIL – OPEC-JMMC Meetings
- USD – ISM Manufacturing PMI
- USD – JOLTS Job Openings
- USD – ADP Non-Farm Employment Change
- CAD – Building Permits m/m
- USD – FOMC Meeting Minutes
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- 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)
- RBA Minutes: Omicron not likely to derail recovery
- German IFO Business Climate 94.7 (95.3 expected
- UK retail sales 1.4% (0.8% expected)
- Surprise 0.25% rate hike from the BOE (0.10% expected)
Chief Market Analyst
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