What we are looking for
- USD beginning to threaten a recovery: After the US JOLTs data reflected continued tightness in the US labour market, there has been a shift towards buying the USD, with a risk negative bias on major forex
- Indices begin to slip back: After gains earlier in the week, less positive sentiment is taking hold. US futures are beginning to drop slightly, weighing on the DAX and CAC in Europe.
- Commodities retrace previous moves: Precious metals are unwinding gains from earlier in the week, whilst oil has rebounded.
- Data traders: USD traders will be watching for any tightness in the US labour market with the ADP Employment Change. There will also be a look at much the US trade levels decline on both imports and exports. Then later watching out for the comments of two Fed speakers.
The initial risk-positive bias to major markets that greeted traders following their holiday breaks is beginning to crack. Traders are looking past the benefits of the falling energy prices in Europe. Instead, they cast a cautious gaze towards the US where continued tightness in the labour market could prevent the Fed from easing off in its monetary policy tightening. Yesterday’s JOLTs jobs openings remained strong, and this will increase the focus on not only today’s ADP Employment Change data but also tomorrow’s Nonfarm Payrolls.
This risk aversion is weighing on pro-cyclical currencies (AUD, NZD and GBP are underperforming), whilst silver is falling harder than gold. US futures have been dragged back overnight and this is weighing on European indices this morning.
The ADP jobs data will be in focus today, along with some second-tier US data and two Fed speakers to watch for on the economic calendar. However, initially, the final UK Composite PMI is not expected to show any revisions from the flash reading of 49.0. Into the US session, the ADP Employment Change is expected to increase slightly to 150,000. After the JOLTS jobs data suggested the US labour market remains tight, attention will turn to what the ADP can tell us. The US Trade Balance is expected to show a mild improvement in the deficit. However, this is expected to be driven by reductions in both imports and exports, just that imports are expected to contract more. Weekly Jobless Claims are expected to be unchanged at 225,000. Later in the US session, the Fed speakers will take the interest of traders. Raphael Bostic is a gauge of where the centrists sit on the FOMC, whilst James Bullard is very much at the hawkish end of the spectrum.
Market sentiment is looking more cautious: Flow out of pro-cyclical currencies and towards the USD is a feature on forex markets. Silver is underperforming gold in a correction, whilst equity markets are giving back previous gains.
Treasury yields tick higher: Despite the very little reaction to the FOMC minutes (see below) there has been a tick higher this morning on both 2s and 10s
FOMC minutes bring no surprises: The minutes seemed to emphasise that slowing the pace of hikes did not mean that the Fed was wavering its commitment to bringing inflation lower. “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023”. Also, there was no discussion of the size of the February hike.
US interest rate futures barely move: In the wake of the Fed minutes, Fed Funds futures have barely moved. The curve is still suggesting the terminal rate will be a shade under 5% in 2023.
China Caixin Composite PMI improves slightly: The composite PMI has improved to 48.3 in December (from 47.0 in November).
Cryptocurrencies unwind previous gains: Crypto has been tracking higher over the past few sessions but is pulling back slightly this morning. Bitcoin is -0.1% at $16800 with Ethereum -0.3% at $1248.
Two Fed speakers to watch for today: Traders will be watching for comments from the FOMC’s Bostic (2024 voter, a shade hawkish) at 14:20 GMT and FOMC’s Bullard (2025 voter, extremely hawkish) at18:20 GMT.
- UK final Composite PMI - (at 09:30 GMT) The final December PMI is expected to be unrevised at 49.0 (slightly up from 48.2 in November)
- ADP Employment (at 13:15 GMT) An improvement to 150,000 is expected in December (from 127,000 in November).
- US Trade Balance (at 13:30 GMT) The trade deficit is expected to reduce to -$73.0bn in November (from -$78.2bn in October).
- US Weekly Jobless Claims (at 13:30 GMT) Claims are expected to remain at 225,000 in the last week (225,000 previously)
Major markets outlook
Forex: There is a risk negative bias with AUD, NZD and GBP underperforming, whilst USD is looking stronger again. EUR is holding on to gains though.
- EUR/USD is holding up well following the sharp move lower earlier in the week. The rebound off 1.0520 has formed a new two-month uptrend and is holding back above the rising 21-day moving average (c. 1.0605). This is adding protection above the bigger support band between 1.0440/1.0495. The RSI is holding just above 50 which retains a mild positive bias, for now. A break back above the initial resistance at 1.0610/1.0650 is needed to continue the move higher.
- GBP/USD has been drifting lower in recent weeks. Despite rebounding from the initial important higher low at 1.1900 the resistance building between 1.2085/1.2125 is once more restricting any recovery move. As the 21-day moving average rolls over this is a deteriorating outlook. As the market rolls over again this morning, another bull failure would again increase pressure on 1.1900, below which also completes a top pattern.
- USD/JPY has been trending decisively lower for the past ten weeks. Although the market has rallied there is consistent resistance that has formed around old key supports. We see rallies as a chance to sell. With the RSI unwinding towards 40/45 (where other rallies have faltered) we look for selling opportunities under the strong resistance at 133.60/134.50 and around the downtrend. Above 134.50 changes the corrective outlook. Initial support is at 131.45 but a close below 129.50 opens 126.35 as the next support.
Commodities: Precious metals are starting to pull back. Oil is trying to build support.
- Gold has accelerated higher in the first week of the year, but is just beginning to unwind some of the gains. The rally has turned back from $1865 under the next key resistance at $1879. The breakout above $1824/$1833 means this is the initial support band, whilst the eight-week uptrend and the rising 21-day moving average (c. $1805) are strong gauges of support.
- Silver has been less positive than gold in the opening moves of 2023. It has failed to ignite a rally and is now turning lower. The decline today is confirming a broken two-month uptrend. A close below support at $23.37/$23.51 would complete a small top pattern and could imply an unwind towards the $22.00/$22.55 bigger support area. Watch for the RSI moving below 50, this would be an added warning signal. Initial resistance is $23.90 with $24.545 now a key high.
- Brent Crude oil has fallen dramatically in the past couple of sessions. The move has broken the recovery uptrend and a close below support at $81.40 turns the market corrective again. Reaction to a minor rebound from $77.50 this morning will be a gauge. A failure under the $81.00/$81.55 resistance would suggest further downside in due course towards a potential test of the recent low at $75.50.
Indices: US markets lack a decisive trend, whilst European indices begin to retrace previous gains.
- S&P 500 futures have failed to ignite early in 2023, with choppy moves day to day. The market has continued to reject moves higher around the resistance at 3912 and this leaves the market with a neutral configuration. A tick back lower this morning continues this uncertain phase. The resistance at 3912/3945 will continue to define the outlook. However, holding the support at 3788/3805 sustains this as a neutral outlook.
- German DAX has moved decisively higher in the past few sessions, but the move is just starting to run out of steam around 14500, just under a test of the highs between 14605/14680. Reaction now could determine whether the market is developing an ongoing consolidation rectangle range of around 100 ticks between 13690/14680. There is a mid-range pivot between 14125/14195 that will now become a gauge of new support.
- FTSE 100 has started 2023 on the front foot and is remaining bid today, despite other markets slipping back. There is a positive bias within what is now a trading range between 7305/7635. This means that a test of 7635 is coming once more today, despite being rejected twice in the past couple of sessions. The RSI is improving above 60 and points towards mounting upside pressure. Initial support at 7541/7556 is growing.
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