There has been a surge of selling pressure in the wake of the US inflation data yesterday. Inflation went to multi-decade highs of 7% on headline CPI and 5.5% on core CPI. However, these were broadly in line with expectations and were not as high as some had feared. Subsequently, we have seen US Treasury yields falling and USD selling off. This USD sell-off has had a significant impact across major forex pairs, with the EUR/USD chart breaking sharply higher. This move has continued this morning, however, elsewhere markets are looking more cautious. Indices and commodities are fairly mixed early in the European session.
The number of Fed speakers calling for a March hike increases by the day and there are a few more to note today, including Lael Brainard who is due before Congress as part of her promotion to vice-chair of the FOMC. US factory gate inflation is in focus on the calendar today with the US PPI.
Main drivers: Market sentiment slightly cautious; USD weakening continues; Fed’s Brainard testifies; Economic calendar: US PPI inflation in focus
Sentiment slightly cautious: The lack of traction in equities yesterday has turned into a slightly cautious open to European trading today, with mild losses in European markets and US futures a shade lower. Commodities are mixed but quiet, but the decisive moves are coming in forex.
US dollar selling pressure: The dollar is selling off across major pairs today in a continuation of the negative move in the wake of yesterday’s CPI inflation. Despite headline CPI hitting 7% there was relief that it was not higher. Bond yields subsequently fell, hitting the USD. [USD negative]
Pressure mounts on UK PM Johnson: A YouGov poll has put the opposition Labour Party with a 10% lead. Markets seem to be fairly happy about the prospect of a change of Prime Minister with a favourable view of Chancellor Sunak (Finance Minister) would be the likely replacement for Johnson. [GBP positive]
US Fed Beige Book: Notes some signs of easing inflation, whilst Omicron has begun to negatively impact economic activity. [USD negative]
Fed’s Bullard expects four hikes: Bullard is considered the most hawkish of the FOMC members and is a voter in 2022. An increasing number of FOMC speakers are talking about a March rate hike. [USD supportive, but priced in]
Central Bank speak: There are three FOMC speakers scheduled for today
- FOMC’s Patrick Harker (2022 voter, leans hawkish) is speaking at 1300GMT
- FOMC’s Lael Brainard (vice Fed chair, leans dovish) is speaking before Congress at 1500GMT
- FOMC’s Charles Evans (non-voter in 2022, leans dovish) is speaking at 1800GMT
- US Weekly Jobless Claims (1330GMT) are expected to fall slightly to 200,000 (from 207,000 last week)
- US PPI (1330GMT) is expected to show headline PPI increasing to +9.8% in December (from +9.6%) and core PPI to increase to 8.0% (from 7.7% in December
Broad outlook: A continuation of the USD selling pressure is the main market move this morning. Equity markets are mixed to slightly lower, as are commodities.
Forex: USD underperformance continues, with NZD, AUD and GBP outperforming today.
- EUR/USD has broken out! After two months of ranging the market has broken above 1.1385 to complete a 200 pip base pattern and imply c. 1.1585. Breaking the 7-month downtrend also helps to confirm. The old resistance at 1.1360/1.1385 is now a basis of support for pullbacks. Initial support at 1.1435, next resistance 1.1525.
- GBP/USD has broken clear of 1.3698 to continue the rally towards the October resistance of 1.3835. Momentum is strong and weakness is a chance to buy. Initial support is around 1.3700.
- AUD/USD a decisive break above 0.7275 has opened the recovery again. Momentum confirms the breakout and the bulls will look to buy into weakness. . Initial support at 0.7275.
Commodities: precious metals and oil are just consolidating slightly after recent gains.
- Gold rally has just eased back this morning, just shy of resistance around $1830/$1832. Given the neutral momentum configuration, this leaves us cautious of chasing upside moves. Initial support is now $1815 and then $1802.
- Silver picked up strongly from the pivot band at $22.50/$22.70 and is now closing in to test the resistance at $23.25/$23.45. We remain cautious of chasing gains whilst this resistance remains in place.
- Brent Crude oil closing above $83.45 has opened the $86/$87 key resistance. The uptrend is strong and momentum is also strongly positive leaving intraday weakness as a chance to buy. There is good near term support of $82.80/$83.45.
Indices: recoveries on Wall Street are just spluttering slightly this morning. This is seeping into the European indices too.
- S&P 500 futures just pulled back from the resistance of a pivot around 4742 yesterday. This leaves a slightly cautious looking recovery. This is reflected in the daily momentum. A close above 4742 would improve again and re-open the 4807 high. Support around 4680/4700 needs to hold for the recovery to continue.
- DAX recovery has tailed off slightly in the past 24 hours, leaving resistance at 16,075. The bulls will be looking to hold above the higher low at 15,883 otherwise the recovery moves into reverse again.
- FTSE 100 has just paused the rally this morning after a move into two-year highs yesterday. Momentum is strong and intraday weakness is still seen as a chance to buy. Another higher low between 7467/7515 would be that opportunity. Initial resistance at 7574.