USD outperformance remains the bias
- US inflation ticks higher: The Fed’s preferred inflation gauge, the core PCE, increased in January.
- USD strength developing once more: The USD is looking strong on major forex pairs once more.
- USD strength is also weighing on metals: In commodities, there is a continued trend of correction on gold and silver.
- Equities trying to form support: Equities fell sharply on Friday but are looking to build support today. US futures closed off their lows on Friday and are marginally higher today. This is helping European indices to a stronger open this morning.
US inflation concerns help USD to strengthen
The Federal Reserve’s preferred inflation gauge, the Core Personal Consumption Expenditure (PCE) increased in January.
Monthly inflation increased by a worrying +0.6% (higher than the forecast +0.4%). YoY inflation increased to +4.7% (from 4.6%) but more importantly, this compared to an expected decline.
The CPI inflation data (announced a couple of weeks earlier) will always be the data that markets react more to than the PCE.
However, this rise in the core CPE further plays into the fears that markets have that inflation will be sticky. The Fed may need to hike rates further and keep them higher for longer.
The USD strength is firming
There was a decisive move higher for the USD on Friday. The Dollar Index has moved to close strongly above the previous resistance at 104.65.
It means that the January lower high at 105.63 becomes the next big test. Break higher through this resistance and it would confirm considerable momentum in a breakout.
This means that the USD strength is eyeing some important levels on major forex pairs. Here’s what we are looking out for:
- EUR/USD to test the key January low at 1.0481
- GBP/USD to test the key January low at 1.1840
- AUD/USD to fall towards the key December low at 0.6629
- USD/JPY to continue to rally to test the December high of 138.17
- USD/CAD to test the December high of 1.3705
The USD is set to test key levels on major forex
There has been a slight pullback on Friday’s USD strength this morning. However, this move is likely to be short-lived.
The pair has been sliding lower since the beginning of February. With a run of negative candlesticks in recent sessions the market is now eyeing crucial support at 1.0480.
There is a growing corrective outlook forming:
- The 21-day moving average is falling and is about to cross below the 55-day moving average. It is also becoming a basis of resistance.
- The daily RSI is in negative configuration, consistently below 50 but also has further downside potential in the mid-30s.
This suggests selling into strength and that the 1.0480 low will be tested.
There is now a band of resistance between 1.0610/1.0705 which would likely capture any near-term rebound. It would need a move above the key lower high at 1.0804 to sustainably improve the outlook now.
Cable has been developing a consolidation range for a few weeks now. However, there are growing signs of a fall to test the important low at 1.1840.
- The 21-day moving average is a basis of resistance and is now falling decisively.
- The daily RSI is failing consistently below 50.
Support and resistance levels for FTSE 100 Index, GBP/USD, and more
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