After breaching 2% on Thrusday the benchmark 10-year Treasury yield retraced to 1.92% but this didn’t stop the dollar from rallying and pushing stocks and major dollar counterparts lower. Equity investors are getting nervous as tightening monetary policies globally and the potential for a major war in the heart of Europe create an environment where risk factors have to be given higher multipliers when modelling the likely future outcomes for stock portfolios. 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 was pushed lower after the US CPI came in at a 40-year high. We have been highlighting the fact that the pair was trading close to a set of resistance levels (the upper end of a bear channel and some swing highs). We expected EURUSD to move to the 1.1325 – 1.1335 area. This is where the pair is trading at the time of writing this. The 1.1370 – 1.1374 area is the nearest key resistance that has been now tested once and the rally was easily rejected. Unless Lagarde comes up with some bullish statements in her speech today (at 4:15 GMT) the risks remain to the downside. If the 1.1325 – 1.1335 zone is penetrated EURUSD is likely to test the next significant support level at 1.1267.
DAX has just completed the fifth week of either bearish or lacklustre performance when measured on a closing basis. Swings have been wild but the index has lost about 4.7% per cent in 5 weeks. As a result, the index is trading relatively close to the recent weekly lows. Several risk factors, however, exist that could lead to further weakness in stocks: 1. Central banks are pressured to act as inflation has exceeded their estimates, 2) high inflation eats into companies profit margins, 3) a threat of Russian military aggression in Ukraine is creating a climate of uncertainty and 4) economic sanctions set against Russia would hurt the European companies also. If institutional investors refrain from buying more stocks (which under current circumstances looks likely) the market could become vulnerable. Especially if institutions start to reduce risks in their portfolios and exit some of their equity holdings. Technically the market is showing some signs of weakness as there are two lower swing highs, one created on 2nd and one on 10th February. This increases the risk of the index either consolidating further or breaking below the next supports. What would make the outlook more positive would be a decisive break above the latest swing high at 15615. The nearest key support levels for Dax are 14838, 15057, 15615 and 15739.
BTCUSD wasn’t able to penetrate the 45633 resistance and started to lose momentum over the weekend. Now Bitcoin is trading in a bear channel and the price fluctuates between 41741 and 43034. If rallies are sold and the market cannot penetrate the resistance levels it’s quite likely that the 41141 support is broken this week. This could take Bitcoin to 38946. But, even if the market breaks above 43034, it’s likely that Bitcoin stays medium-term bearish below last week’s high. A rally above 46000 looks unlikely. If Russia invades Ukraine further the price of gold is likely to stay bid and could attract allocations from Bitcoin. This inverted relationship has existed in the past and a major war in the heart of Europe could trigger more buying in gold. The nearest key price levels for BTCUSD are 38946, 41141, 41741, 43034, 43697 and 45633.
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 could be hiking rates significantly this year and even raise the rates by 50 basis points per FOMC meeting (instead of the normal 0.25%). The Fed believes that rates could rise significantly before hurting employment.|
|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 January non-farm payrolls increased by 467K while the analysts had expected only 110K new jobs. Average hourly earnings were confirmed at a much better level than predicted (0.7%, 0.5% expected).|
|Inflation||The annual headline inflation reading for January came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).|
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The Next Main Risk Events
- USD – FOMC Member Bullard Speaks
- EUR – ECB President Lagarde Speaks
- AUD – Monetary Policy Meeting Minutes
- EUR – ZEW Economic Sentiment
- EUR – German ZEW Economic Sentiment
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- UK Prelim GDP q/q (1.0%, 1.1% expected)
- US Prelim UoM Consumer Sentiment (61.7, 67.2 expected)
- US Wholesale Inventories 2.2% vs 1.7% prior
- US Average Hourly Earnings m/m (0.7%, 0.5% expected)
- US Non-Farm Employment Change (467K, 110K expected)
- US Unemployment Rate (4.0%, 3.9% expected)
- Canadian Ivey PMI (50.7, 55.1 expected)
- BOE hikes 0.25% as expected
- ECB keeps the rates at 0% but turns less dovish
- ISM Services PMI 59.9 (59.5 expected)
- Unemployment Claims 238K (245K expected)
- OPEC to increase oil production by 400k BPD from March onwards
- BOC Macklem: higher rates needed to tackle inflation
- ADP Non-Farm Employment Change -301K (185K expected)
- Crude Oil Inventories -1.0M (1.8M expected)
- New Zealand Employment Change 0.1% (0.4% expected)
- New Zealand Employment Rate 3.2% (3.3% expected)
- Canadian GDP m/m 0.6% (0.4% expected)
- US ISM Manufacturing PMI 57.6 (57.4 expected)
- JOLTS Job Openings 10.93M (10.35M expected)
Chief Market Analyst
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