What we are looking for
- USD remains under pressure: There has been a significant unwinding of long USD positions on major forex pairs. This move continues today and with US bond markets shut, could continue into the weekend.
- Indices remain positive: Markets were risk positive from the US CPI data yesterday. US futures have sustained the move overnight with the China COVID news. European indices have continued higher early today.
- Commodities continue higher: Precious metals and oil have been significantly boosted by risk positive aspects of US CPI and China COVID.
- Data traders: Despite the US public holiday, USD traders will be looking out for the Michigan Sentiment data. Any downside surprises will add further fuel to USD selling.
US headline CPI has been tracking lower for several months, but with the core CPI surprising to the downside and tracking lower, there are real signs that inflation is now falling. There is much to be done to get back to the 2% target, but these are encouraging signs. It leaves room now to build for a less hawkish Federal Reserve, with perhaps an earlier end to the hikes and a lower terminal rate. We now watch for how Fed members respond in the coming days.
In the near term, there has been a massive shock to the long USD trade that has dominated major markets throughout 2022. Sharp selling pressure yesterday continues this morning. A significant risk-positive bias has also taken hold. This has been extended too by news from China of an easing of COVID restrictions. With US bond markets shut today for Veterans Day public holiday in the States, the momentum of these moves can be sustained.
With the US on public holiday today the economic calendar is a little quiet. However, despite the holiday, there is prelim Michigan Sentiment to look out for. Consensus has fluctuated in recent days but is settling on an expected slight deterioration in November. Traders will also be watching the inflation expectations component, especially in the wake of lower CPI readings.
Market sentiment has turned sharply positive: USD selling continues, with commodities and indices higher. Volatile swings on crypto continue have seen prices turning lower again. This is not weighing on sentiment for now.
Treasury yields fall sharply: After the US CPI fell more than expected yesterday, Treasury yields have fallen sharply (the largest fall in more than 10 years). The 10-year yield fell -33bps yesterday and the 2-year yield by -30bps. US bond markets are shut for Veterans Day today.
China relaxes some COVID protocols: The National Health Commission in China has cut quarantine protocol from 7 days to 5 days. It has also cut travel quarantine conditions for inbound travellers from 10 days to 8 days. This has acted as another boost for risk appetite.
UK Q3 GDP turns negative: Q3 GDP fell by -0.2% (from +0.2% in Q2), but this was better than the -0.5% forecast by consensus. In other data, September Industrial Production grew by +0.2% on the month (slightly better than the -0.2% decline forecast), meaning YoY production was -3.1% (better than the -4.3% in August).
Cryptocurrencies volatility continues: After some enormous rebounds yesterday the sharp moves are still not done yet. Crypto recovered all of Wednesday’s huge decline but remain significantly lower on the week. Prices have turned back lower again today with Bitcoin -3% at $17250 and Ethereum -4% at $1263.
US Veterans Day today: It is the Veterans Day public holiday for the US today. US bond markets are shut. We can expect lower liquidity on forex and potentially erratic volatility.
- Michigan Sentiment (at 15:00 GMT). Sentiment is expected to drop slightly to 59.5 in November (from 59.9 in October).
Major markets outlook
Broad outlook: The massive turn to a positive risk appetite is holding this morning.
Forex: Massive USD selling yesterday and continued underperformance this morning against major forex. AUD and EUR are leaving the outperformance.
- EUR/USD an enormous bull candle has broken not only resistance at 1.0095 but also 1.0197 (the September high). Initial early weakness has once more been bought into this morning and the move higher continues. The next resistance is 1.035/1.0370 from the August highs.RSI momentum confirms the breakout but also in the mid-60s has upside potential. Reaction to weakness will be key now, with the breakouts between 1.0095/1.0197 a basis of support.
- GBP/USD a huge bull candle has broken through resistance at 1.1645 but has also this morning moved above the resistance of the September high at 1.1738. Reaction to any unwinding move will be key now, but already there has been a positive development with an early pullback this morning finding support at the 1.1645 breakouts. Cable needs to build support between 1.1500/1.1645 to sustain the recovery momentum.
- AUD/USD is one of the strongest upside movers on major forex. A huge bull candle yesterday and decisive further gains this morning. The market has moved decisively clear of 0.6520/0.6545 resistance and is already testing 0.6670/0.6680 which is the next basis of resistance. Momentum is strong on the RSI but the reaction to an unwinding move will now be key. The old resistance band 0.6520/0.6545 needs to become a basis of support now.
Commodities: Precious metals have resumed the momentum of huge recent gains. Oil is also swinging decisively higher.
- Gold continues the huge rally of the past six days. Resistances are being smashed through and the market continues higher. Yesterday’s huge breakout above the $1735 resistance has completed a medium-term base pattern that implies recovery towards $1855. The breakout at $1735 now becomes an important initial basis of support for an unwind. Momentum is strong with the RSI towards 70 but is so decisive that this reflects strength in the uptrend. As $1765 is being tested, the next resistance is $1786/$1807.
- Silver is consolidating the breakout following the move through the top of the medium-term trading range at $21.23. The next resistance to test is at $22.51 (the June high). Momentum is strong but approaching 70 (where previous bull runs have faltered), so needs some caution. Reaction to a pullback will be key. Forming support between $20.85/$21.25 would be positive. Under $20.85 the support is $20.37.
- Brent Crude oil has had a wild week, with initial selling followed by a sharp recovery again. The integrity of the recovery trend has been compromised so we need to be a little cautious, but the sharp move back higher suggests the bulls are back in control. The price is back into the long-term pivot area between $96/$100. There is a slight positive bias on RSI momentum which favours a move to test the resistance between $99.50/$101.20. Support at $93.00 is now key.
Indices: Wall Street has made enormous gains, it now needs to hold on to them. The DAX remains the big outperformer, with FTSE positive but slightly lagging.
- S&P 500 futures have broken sharply higher following the US CPI. Breaking through resistance at 3935 has opened the next leg higher of the recovery since mid-October. Breaking a three-month downtrend, the bulls can now focus on the primary 10-month downtrend (c. 4133). Positive RSI momentum also confirms the breakout. The old resistance at 3883/3935 is now the basis of new support.
- German DAX has accelerated decisively higher and has broken another key resistance at 13971. This breakout is important from a medium to longer-term perspective and confirms the end of a long bear phase. There is now good initial support at 13650/13970. We look to use weakness as a chance to buy. The June high of 14708 is the next big upside test.
- FTSE 100 broke out yesterday to an eight-week high but has just stalled slightly this morning. Momentum is still positively configured and near-term weakness is still being used as a chance to buy. Subsequently, the reaction to any unwind within the recovery uptrend will be key. There is initial support between 7327/7383 with the main support at 7228/7250. Resistance is initially at 7442 and then 7516.
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