The FOMC minutes published yesterday moved the markets sending the USD lower and the US equity indices higher. The minutes didn’t give any indications of the Fed officials being ready to hike the rates by 50 basis points on one go. The minutes are, however, not the main story moving the markets now. Rather it’s the potential for a major war breaking out in Europe that creates wild swings in some key markets. Oil, gold and stock indices react to the news flow which quickly throws the markets from risk-on mode to risk aversion and back. This leaves the FOMC in the shadows – at least for now. It’s likely that even the central banks are following what’s happening in Ukraine and will have a dovish reaction to any escalation of the war. 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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USOIL rallied about 4.5% from the low of our bull channel before the red team started to hit the bids. This created a lower reactionary high (at 93.05) and pushed the price below the channel low. We warned two days ago (here) that the trend was extended and vulnerable to good news. Now the price is thrown back and forth after the global news flow regarding the conflict (organised by Russia) has been just as muddled as Russia’s own communication about the crisis. Words and actions have been deliberately in stark contrast so that the west would be confused about Russia’s intentions. Yesterday’s comments from Putin that some of the troops would be called off were shown untrue by the US reports of Russia actually adding troops to the Ukraine border.
Increased price swings and the lower reactionary high (at 93.05) suggest uneasiness among the bulls. Unwillingness to take the price into new highs indicates that most traders believe (for now at least) that Russia will not attack or that the probabilities of an attack taking place have dropped to a level where they rather take some profits off the table and wait for more clarity on the situation at the Ukraine border. Like we said yesterday, oil is one of those markets that remain sensitive to war news and an escalation of the war in Ukraine (remember it’s now the 8th year since the Russian aggression started in eastern Ukraine) would most likely rally the price of oil higher.
When the words of political leaders mean nothing, we need to follow their actions and focus on facts. This also applies to the markets: What happens with price, is the only truth out there. Everything else is only speculation. Price action tells us how the supply and demand balance develops on daily basis and all we have to do is to buy and sell when we see our strategy giving us signals. The key technical levels for oil are 87.45 (last week’s low), 88.18 (yesterday’s low), 94.00 (this year’s high). If the 87.45 support level is broken decisively, the market is likely to test and possibly break the 85.73 level. Then we could see the price of oil trading to the 83.50 – 84.00 range. If the green team defends last week’s low and there is some serious follow-through buying then we are likely to see the price moving to the 93.00 – 94.00 range, and very likely much further if Russia escalates their current aggression.
DAX rally failed yesterday just as we expected. We said yesterday that “The bulls might become a little hesitant close to the resistance levels. We might see some traders taking some profits and possibly waiting for more newsflow on Ukraine. If yesterday’s positive news from the Ukraine border aren’t collaborated by evidence the index might retrace lower while some proof of meaningful withdrawal of Russian troops would certainly help the bulls in their efforts. The game plan for today is to follow the price action in intraday resolutions and see if there is newsflow that’s moving the market in either direction.”
This anticipation was spot on and DAX started to sell off after touching the channel high at 15542.80. Now the index is making lower highs and lows indicating the rallies could be sold again in today’s trading. Remember though that this market is sensitive to war news just like oil and gold so it makes sense to follow the news as well as price action.
The nearest key price levels for DAX traders today are 15008, 15246.70, 15515.44 (bear channel top) and 15542.80. Penetration of the 15246.70 support level would be likely to take the index to 15008 or so but if the level is defended we might well see the index challenging the resistance levels near the bear channel high. A breakout from the channel would turn the market bullish. Inside the bear channel, the downside risks still prevail.
Gold is also a market that is strongly impacted by the looming acceleration of the war in Ukraine. XAUUSD dropped almost 1.9% on the news that Russia might be withdrawing some of its troops. This big downswing quickly changed into another rally as soon as the doubts emerged that nothing was actually happening. Now gold is once again testing a weekly resistance level at 1877.09 and if there’s no real progress on the ground the price of gold is likely to rally beyond this high sooner or later. This is, however, as we have seen a very sensitive market to any war-related news flow so keep an eye on your news feed while you trade. The nearest key supports for gold are 1844.53 and 1851.33 while the nearest resistance is the 1877.09 high we referred to above. The next key resistance level above this high is at 1916.55.
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 – Philly Fed Manufacturing Index
- USD – Unemployment Claims
- USD – FOMC Member Bullard Speaks
- USD – FOMC Member Mester Speaks
- GBP – Retail Sales m/m
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- UK CPI 5.5%, (5.4% expected)
- Canada CPI 0.9% (0.6% expected)
- US Retail Sales 3.8% (2.1% expected)
- US Industrial Production m/m 1.4% (0.4% expected)
- Only 10K Russian troops withdrawn from the Ukraine border
- ZEW Economic Sentiment (48.6, 54.4 expected)
- German ZEW Economic Sentiment (54.3, 55.1 expected)
- US PPI (1.0%, 0.5% expected)
- Empire State Manufacturing Index (3.1, 11.9 expected)
- No indication yet that Putin has decided to invade Ukraine further
- 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)
Chief Market Analyst
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