What we are looking for
- USD weakens once more despite the JPY move: As the European session has taken hold, the USD has weakened across major forex pairs. This move has gathered momentum following the UK CPI reading.
- JPY is sharply weaker following the BoJ: A sharp move lower has just begun to stable into the European session. However, volatility is likely to continue.
- Indices are mixed: There is little direction on indices today, however, the slight positive bias within the consolidations continues. US futures are a shade higher as are European indices.
- Commodities move higher: In what looks to be a risk-positive move, silver is moving solidly higher today, dragging gold to marginal gains. Oil is looking to break out for a six-week high.
- Data traders: EUR traders will be looking for any unexpected revisions with the final Eurozone inflation. USD traders have plenty to consider throughout the day with Retail Sales, then Industrial Production and a variety of Fed speakers throughout.
The build-up to the Bank of Japan meeting has been filled with anticipation of a hawkish move. The BoJ was expected to confirm a move away from its ultra-easy policy stance, likely to have been removing the yield curve control bands. However, the BoJ has defied these expectations and continues to defend the 10-year JGB yield from moving above +0.50%. This has seen the previous strength of the JPY sharply unwinding this morning. The momentum in the move has been strong, but volatility is high and some unwind to the move is already taking hold. For now, the negative trend and technical signals on USD/JPY remain intact (see below), but this could be a key moment.
Interestingly, despite the strength that USD may have gotten from USD/JPY rallying, the USD is weakening once more across major forex. UK inflation has dipped slightly, but on a headline basis, with core inflation remaining stubbornly high. We are seeing GBP supported as the USD has sold off. This USD weakness is also helping commodities higher, with silver rebounding hard. However, the interesting mover is Brent Crude oil which is pushing for a six-week high today. A weaker USD is also helping risk appetite and a mild positive bias for equities today. Although the move may find some limitations in overbought markets.
There is a US data focus on the economic calendar today. However, first up is the final reading of Eurozone inflation for December. The headline and core HICP are expected to be unrevised. US Retail Sales will grab the headlines, with reductions for headline sales of -0.8% in December and -0.4% for core sales. US Industrial Production is expected to show a marginal month-on-month decline. There will also be a focus on the Fed, with the Beige Book later in the session and a smattering of FOMC speakers.
Market sentiment is positive: A weaker JPY and also USD underperformance is playing into a positive bias for commodities and to a lesser extent equities.
US Treasury yields have dropped back: The 10-year yield is c. -5bps with the 2-year yield -21bps in early moves today.
Bank of Japan defies expectations and maintains policy: The BoJ has kept its ultra-low interest rate policy (at -0.10%) and held its yield curve control cap. This comes despite market expectations that it would bring its enormous monetary stimulus to an end. The JPY has fallen sharply following the decision.
UK inflation falls slightly, as expected: Headline CPI dropped to 10.5% in December (from 10.7% in November). This was in line with the 10.5% expected. Core CPI has remained at 6.3%, with the consensus looking for a slight drop to 6.2%. GBP has initially strengthened on this.
Cryptocurrencies initially weaker: Cryptos have been choppy intraday in recent sessions but have been grinding out gains into the close. Prices are slightly weaker early today but the trend remains positive. Bitcoin is -0.4% at $21240 with Ethereum -0.4% at $1575.
Four Fed speakers today:
- Raphael Bostic (2024 voter, centrist) speaks at 14:00 GMT.
- James Bullard (2025 voter, very hawkish) speaks at 14:30 GMT
- Patrick Harker (2023 voter, centrist) speaks at 19:00 GMT
- Lorie Logan (2023 voter, slightly hawkish) speaks at 22:00 GMT
- Eurozone HICP inflation - final (at 10:00 GMT) No revisions are expected from the flash inflation for December, with headline HICP at 9.2% (down from 10.1% in November) and core HICP at 5.2% (up from 5.0%)
- US Retail Sales (at 13:30 GMT) Core sales (ex-autos) are expected to decline by -0.4% MoM in December (-0.2% MoM in November).
- US Industrial Production (at 14:15 GMT) Production is forecast to have fallen by -0.1% MoM in December. However, YoY production is expected to have increased to 2.0% (up from 1.2%).
- Fed Beige Book (at 19:00 GMT)
Major markets outlook
Forex: Major pairs have been consolidating but continue to show a USD negative bias.
- EUR/USD has been consolidating around the breakout of the old 1.0785 May 2022 high but the pair has picked up well this morning. We continue to favour buying into weakness and the breakout support between 1.0712/1.0785 is a good basis for the next leg higher. We look for a breakout above the 1.0865/1.0875 resistance area which would continue the recovery to test 1.0935 (the next resistance) and potentially 1.11/1.12. Technically, the outlook remains very strong with RSI momentum in the 60s.
- GBP/USD has continued to tick higher in recent sessions. The momentum generated from a solidly positive candle yesterday has taken the daily RSI into the 60s and with gains today the market is positioning now for a move towards the December high at 1.2445. There is support growing between 1.2150/1.2250. Support at 1.2080 is a higher low above key support at 1.1840.
- USD/JPY has been trending lower since mid-October, using the falling 21-day moving average (today at 131.50) as a consistent basis of resistance. The rebound following the BoJ decision has tested the 21 dma once more but it remains intact and the pair has fallen back from 131.57. With negative configuration on the daily RSI, we continue to prefer selling into strength but the volatility from the BoJ decision could continue throughout today. A close back under 129.50 (an old breakdown) would reflect a bull failure. The low at 127.22 is key support but is still likely to be retested.
Commodities: Metals and oil are rallying again.
- Gold has eased back from $1929 in recent sessions, but we see this as a near-term unwinding move. The intraday rebound from $1896 this morning is encouraging buyers and a move back above $1919 resistance would be bullish again. However, the daily RSI is still in the 70s (recently the highest since March 2022) and there is still the risk of a near-term unwind. There is an old pivot band of $1880/$1890 to contain a near-term pullback within the 10-week uptrend. We still look to use near-term weakness as a chance to buy.
- Silver has eased back from the key $24.54 resistance to leave a one-month consolidation rectangle between $23.11/$24.55. However, there is a positive bias to momentum which favours testing the resistance, and today’s reaction higher is positive. Given the RSI configuration, we favour buying into weakness to test $24.55, but for now, are cautious of positioning for a breakout. Initial support is at $23.79 and is protecting the support at $23.50.
- Brent Crude oil has been recovering well and is now putting pressure on for a potential breakout to a six-week high. Yesterday’s strong bull candle means the market is seriously testing resistance at $86.75. A marginal upside break this morning was quickly pulled back, however, a close above $86.75 would be an important move. RSI momentum is confirming the move higher. Initial support is at $83.10/$83.75.
Indices: The strong rallies are losing some momentum amid consolidation.
- S&P 500 futures have continued to test the primary downtrend from 2022 (which comes in around 4005 today) but this also comes with consolidation in recent sessions. There is a mild tick higher this morning but after yesterday’s doji, the consolidation is a warning. There is a mild positive bias to momentum still, however, the daily RSI is also around a level where the rallies faltered (in the low 60s) in recent months. The big resistance from the November/December highs comes in at 4050/4140. The pivot area between 3912/3945 is supportive.
- German DAX has been moving decisively higher in the past three weeks, but the move is just beginning to lose some of its upside momentum. This comes with the RSI above 70. A similar move came in early November and the index continued to grind higher and RSI in the mid-70s for a few weeks before tailing off sharply. There is good support at the breakouts between 14604/14810. We would still look to buy into supported weakness. The next key resistance is in the 15550/15740 area.
- FTSE 100 continues to consolidate the bull run higher with the move on pause just shy of a test of the all-time high of 7903. This stalling comes with the RSI into overbought territory above 70. The last time the RSI was around 75 was late November when a three-week correction then set in. There is good support from the breakout of all the old highs between 7635/7695 with initial support at 7747/7780.
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