Risky assets including GBP, AUD, stocks and oil are gaining some ground at the time of writing this report. Dax is rallying higher after it broke above a key resistance level and the US indices are following but with a more measured pace. This price action suggests that the market participants believe the Fed is likely to be less hawkish than expected earlier. This early rally in DAX also suggests that there should plenty of opportunities for day traders today both before and after the FOMC. We will have a BOC rate decision today also but the main risk event today is the FOMC press conference. 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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DAX has broken out of a bearish trend channel and is trading above a key resistance level (15283) at the time of writing this. Before the breakout happened the index was moving sideways in range (15000 – 15283) and the width of this range indicates that the market could move to the proximity of the 61.8% Fibonacci retracement level. This level coincides with the 15623 resistance level. The nearest key support and resistance levels in this market are 15000, 15283, 15623 and 15902.50.
DJ created a higher low yesterday which is a positive for this market that is still in the oversold territory. DAX breaking higher is a positive for the US stock market too even though the European stocks have been somewhat stronger than the US stocks for some time now. Dow is still in a downward pointing trend channel and it needs to clear the 34670 – 34894 resistance area before the rally can continue and become more solid.
EURJPY has broken out of a bear channel after creating a bullish wedge. The pair is now in a tight trading range just below 128.82 resistance that roughly coincides with a 23.6% Fibonacci retracement level. The next resistance level above it is at 129.20. If we see some USD weakness and stocks start to recover then the EURJPY is likely to break the resistance levels and we could see a move to the 129.70 – 130.10 range. Alternatively, there’s no EUR strength which could happen under a scenario where the Fedspeak turns out to be more hawkish than the market participants have expected and the risk aversion continues. This would be likely to support safe-haven currencies including JPY. This would probably move the EURJPY pair to levels near a swing low created at 127.50 in December.
AUDCAD continues its consolidation above the 0.8676 support. As the analysis is still relevant we repeat for the benefit of new readers. The recent consolidation has moved AUDCAD out of a bear channel and could become a candidate for long trades if these early signs of strength continue. Look for a decisive break above the 0.9072 resistance to confirm the bullish indications. If the price breaks out the AUDCAD pair would be likely to move to the 0.9128 – 0.9155 range. This is an area where a recent swing high, the 50% retracement level and a level that support the pair in December coincide. This would be the likely first phase move but the market could move higher than this. An alternative scenario would be that there is no break above the 0.9072 resistance.Then the market would be likely to test and break the 0.8676 support level. Under this scenario, a decline below the support level could be steep.
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
- CAD – BOC Overnight Rate and Rate Statement
- USD – Crude Inventories
- CAD – BOC Press Conference
- USD – FOMC Statement
- USD – Federal Funds Rate
- USD – Press Conference
- NZD – CPI q/q
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- CB Consumer Confidence 113.8 (111.4 expected)
- Australian CPI q/q 1.3% (1.0% expected)
- GermanFlash Manufacturing PMI 60.5 (56.9 expected)
- UK Flash Manufacturing PMI 56.9 (57.7 expected)
- Canada Retail Sales 0.7% (1.2% expected)
- UK Retail sales -3.7% (-0.6% expected)
- Canada December CPI y/y 4.8% (4.8% expected)
- UK December CPI 5.4% y/y (5.2% expected)
- Empire Fed manufacturing -0.7 (25.0 expected)
- BOJ leaves monetary policy unchanged
- New Zealand business confidence -28% (-11% previous)
- 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
Chief Market Analyst
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