What we are looking for
- USD sitting cautiously ahead of the Fed: Sharp selling but also trading volatility in the wake of the US CPI yesterday has given way to consolidation this morning across major forex. The FOMC announcement will be key.
- Indices look cautious: Initial gains following the US CPI have unwound and now markets are consolidating again. US futures are a shade higher but European indices are cautious.
- Commodities consolidate: A positive reaction to US CPI but consolidation this morning.
- Data traders: EUR traders will watch the Eurozone Industrial Production. USD traders (but essentially all major markets will react) will need to be ready for the FOMC decision. After yesterday’s soft US CPI, just how far will the Fed retreat from its hawkish positioning?
The surprisingly soft US CPI inflation print yesterday drive a spike of volatility across major markets. With Treasury yields moving decisively lower, the USD also fell. However, a subsequent retracement leaves the USD intriguingly poised ahead of the Fed. The retracement on equity markets was even greater, with significant profit-taking, bordering on a bull failure. How markets respond to the Fed meeting tonight could be crucial.
The Fed looms large on the economic calendar. However, first of all, Eurozone Industrial Production is expected to show a decisive month-on-month decline which would weigh on the 12-month growth. Traders will then look towards the FOMC meeting announcement. A 50bps hike has been priced for a while, and after yesterday’s soft CPI, there will not be any upside surprise to this. Incredibly, some believe that just 25bps could now be on the table. However, the key risk will be in the dot plots (interest rate projections) and inflation projections. There is a growing sense of a split in the rhetoric from FOMC members. This is likely to be reflected in the dots and the median levels could be pulled lower as a result. Also, will inflation projections be pulled lower too, as they were in September?
Market sentiment is cautious: The soft US CPI and subsequent market reaction have left markets very cautious this morning ahead of the Fed. We expect further volatility later today.
Treasury yields holding the declines: Yields fell sharply across the US yield curve yesterday and are lower once more this morning. For now, these moves lower are not translating through forex or commodities.
UK inflation falls back: Is this finally the top? Headline UK CPI inflation has dropped back to 10.7% in November (from 11.1%) and below the 10.9% forecast. The core CPI has also dropped to 6.3% (from 6.5%), again lower than the 6.5% forecast. This will be good news for the Bank of England, but it sets up for an interesting MPC vote on interest rates tomorrow.
Cryptocurrencies holding on to gains: Cryptos jumped yesterday in the wake of the US CPI (Bitcoin was +3.5%). These gains are being sustained this morning. Bitcoin is +0.2% at $17800, with Ethereum +0.2% at $1322. We anticipate further sharp moves on the Fed announcement later.
- Eurozone Industrial Production (at 10:00 GMT) Consensus is expecting production to fall by -1.5% MoM in October pulling YoY growth down to 3.4% (from 4.9% in September).
- FOMC monetary policy (at 19:00 GMT) Consensus expects the Fed to hike by +50bps to 4.50% (from 4.00% previously).
Major markets outlook
Broad outlook: Risk appetite is cautious ahead of the crucial FOMC decision later.
Forex: USD fell yesterday and is slightly lower again today. NZD is the main underperformer.
- EUR/USD has broken out above the resistance at 1.0595 with a closing break above 1.0615 (the late June highs). This now opens the way towards a test of the important May highs of 1.0785. Momentum is strongly configured with the RSI around 70. Previously this has tended to be restrictive, but a move decisively above 70 would reflect the strength of the breakout. With the Fed meeting, we can expect volatility but weakness is a chance to buy with initial support at 1.0500/1.0595.
- GBP/USD has also broken out above resistance at 1.2345 but now needs to close above 1.2400 to confirm the next bull move towards 1.2600. Momentum has moved strongly towards 70 on the RSI and this continues to favour buying into weakness. With the Fed meeting today there is initial support between 1.2200/1.2300 with the key reaction low at 1.2105 as the first important support.
- AUD/USD has moved through resistance at 0.6850 but just needs to take this move on a closing basis for it to be confirmed. Above 0.6915 would be the next bullish breakout. Momentum is positively configured but without being decisively bullish. Weakness is still a chance to buy with the rising 21-day moving average (c. 0.6735) being a basis of support. The initial support is at 0.6729. Above 0.6915 opens 0.7009 as the next resistance.
Commodities: Precious metals continue to find buyers into weakness. Oil is on a technical rally with resistance overhead.
- Gold has broken once more to a new multi-month high, but the move above $1810 will be a strong positive signal if it can be confirmed on a closing basis. The implied target from the base pattern is $1844 but closing above $1810 means the next important resistance is not until $1860/$1875. The support of a five-week uptrend comes in around $1785 with $1777 being an initial higher low support.
- Silver has once more pushed higher and is putting pressure on the resistance around $23.90/$24.10. There is a slight pause in the move this morning ahead of the Fed but momentum is strong and weakness is seen as a chance to buy. There is good support between $23.10/$23.50. Above $24.10 the next key resistance band is $25.50/$26.20.
- Brent Crude oil has continued in its technical rally with another strong positive candle, The rally has now unwound the RSI towards 40 but there is still room for further recovery. The key will be the reaction around the resistance of the old support band of $81.40/$83.55. This is now an area of overhead supply. The five-week downtrend and the falling 21-day moving average are also a basis of resistance around $84/$85. Initial support is now $78.60/$79.50.
Indices: There are question marks over the bull rally following yesterday’s failures.
- S&P 500 futures pulled sharply higher in the wake of the US CPI but decisively retraced the move. There is a mild positive bias coming into the Fed but the bull failure on a breakout above 4106 is a worry. This also failed to confirm a break of the primary downtrend too. The key resistance at 4106 needs to be broken on a closing basis. Initial support at 3985/3990 needs to be watched, with 3912 a critical support now.
- German DAX failed to hang on to strong gains yesterday but more importantly, once more backed away from the crucial resistance band between 14700/14800. This leaves the market still ranging above 14125 with resistance at 14605/14680. Reaction to the Fed tonight and the ECB tomorrow could be a trend-defining moment. Initial support is at 14300.
- FTSE 100 tried to rally again yesterday but pulled back sharply into the close. Further caution is coming today ahead of the Fed meeting. Technically the importance of support around 7440 is huge for the medium-term outlook. The market is threatening a head and shoulders top. A decisive close below 7440 would complete a reversal pattern. Resistance is clear at yesterday’s high of 7565 as the market once more falls away early this morning.
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