The early part of this week has seen a settling of volatility and a more calm sense of risk recovery forming across major markets. However, the cat could be thrown amongst the pigeons today with US CPI inflation data. This is the key risk event of the week and could be the driver of the next near-term trending move. Stronger than expected inflation would send yields higher, likely strengthen the USD and scupper the recent risk recovery.
Risk appetite cautiously positive: European indices are playing catch up on a positive close on Wall Street last night, but US futures are easing back slightly. An edge of positive risk appetite has crept into forex majors today, with commodities mixed.
Treasury yields mixed: Shorter dated yields (2yr) are higher, longer-dated (10yr) are consolidating, so the yield curve is slightly bear flattening. This is still considered to be an early warning signal as the spreads tighten. [Risk mixed to slightly negative]
Russia/Ukraine: Dialogue continues but the two sides seem to be making preparations for conflict. The UK has 1000 troops on standby. The US notes that Russian military forces are increasing at the border.
FOMC’s Mester as expected: Mester (2022 voter, leans slightly hawkish) went with her historic views. She does not see a compelling case for 50 basis points of hikes in March. Also, she expects inflation will moderate this year. [USD neutral]
Crypto rally still on pause: Bitcoin spent the past few sessions fluctuating between $43,000/$45,000.
Central bank speakers: Watch out for ECB’s De Guindos and Lane (at 1200GMT and 1315GMT), in addition to the Bank of England Governor Bailey (at 2015GMT). [EUR and GBP reactive]
- US CPI (at 1330GMT). Headline CPI is expected to increase slightly to 7.3% in January (from 7.0% in December), with core CPI expected to increase to 5.9% (from 5.5%)
- US Weekly Jobless Claims (at 1330GMT). Claims are expected to improve slightly to 230,000 (from 238,000 last week.
MAJOR MARKETS OUTLOOK
Broad outlook: Once more there is a hint of positive risk appetite developing.
Forex: JPY and USD are mild underperformers with little real conviction across majors this morning.
- EUR/USD has consolidated ahead of US inflation. The next key move will either be above 1.1480 for an upside break, or below 1.1360 for a downside break. We wait for the next move.
- GBP/USD has ticked higher but is essentially in wait and see mode. Three small-bodied daily candles in a row reflect the lack of conviction. Despite this, the support around 1.3490/1.3500 is strengthening. Momentum on daily and 4-hour charts is neutral. Initial resistance is around 1.3590 and is a barrier ahead of 1.3627.
- AUD/USD is edging tentatively above 0.7180 but needs a decisive close above to be considered a bullish near-term move. Momentum is beginning to improve now and the bulls will look to hold above 0.7105/0.7145 initial support. A break above 0.7180 opens upside towards 0.7275/0.7315.
Commodities: Gold and silver are edging higher. Oil is consolidating around its 8-week uptrend.
- Gold has edged above the historic resistance band around $1828/$1832 but with the daily RSI approaching 60, this is a point where historically the market has struggled. Previous moves have frequently faltered around here, so we are cautious of chasing the market higher. Key resistance is at $1854. Initial support is at $1815.
- Silver a small base pattern above $23.10 implies a recovery towards $24.00 near term. The move is tentatively higher for now, but a test of initial resistance at $23.55 could be seen. There is good near-term support now between $23.75/$24.10.
- Brent Crude oil has unwound and is consolidating around the 8-week uptrend and the initial support of the previous breakout levels at $90.50/$91.20. This seems to be a near-term crossroads, but the bulls are not giving up yet. Below $90 would suggest a growing corrective threat. Initial resistance is at $92.65, with the high of $94.55 is now key resistance.
Indices: Indices are consolidating and look cautious ahead of US inflation.
- S&P 500 futures have rallied strongly to test the resistance at 4585 but just backed away this morning. Momentum looks strong for a breakout which would open the next resistance at 4638 and then 4695. Support at 4438/4454 is increasingly important. Initial support is at 4532.
- DAX has continued higher with a strong bull candle yesterday, but the run higher has just been pegged back this morning. This comes with a resistance band 15,623/15,742. Above 15,742 would be a key breakout. Initial support is at 15,470.
- FTSE 100 closed decisively above the 7644 key resistance to take the market to multi-year highs and open the next resistance at 7729. An early consolidation this morning, but we continue to look for a weakness as a chance to buy. Initial support is at 7596/7644.