Currency and Stock Markets. Daily Insights

[stoch]

EURUSD at Crossroads Amid Economic Signals and Central Bank Developments


The EURUSD is approaching the 1.10 level, but a decisive upward breakthrough requires a change in the yield spread of short-term bonds between U.S. Treasuries and Eurozone securities. Despite the Euro strengthening against the dollar, the spread between 2-year Treasuries and German Bunds continues to consolidate within a range:

For the spread to start decreasing, incoming U.S. data must unequivocally indicate that the American economy is on a downward trajectory. So far, this hasn't happened; economic activity data has been mixed, despite signs of easing price pressures in the U.S.

Since the start of the week, the dollar has remained under pressure due to increased demand for U.S. bonds, increasing the supply of cash. Federal Reserve interest rate derivatives suggest the possibility of a rate cut in June 2024. Yesterday's U.S. home sales data allowed dollar sellers to focus their efforts, as the indicator fell short of forecasts, fueling concerns that high rates are starting to have a more noticeable restraining effect on economic activity in the U.S.

The dollar is likely to be sensitive to today's release of the Consumer Confidence Index from the Conference Board and the industrial index from the Richmond Fed. Several Fed officials, including Goolsbee, Waller, Bowman, and Barr, will also provide comments today. While the market has generally ruled out a rate hike in December, it's essential to note that the recent softening of the Fed's stance was aimed at dampening the rise in Treasury bond yields, which the Fed deemed excessive and tightening on the economy. As yields eventually pulled back (the 10-year bond yield dropped about 0.5% from its peak of 5% to 4.5%), the Fed's position must also "normalize" - officials will seek to maintain flexibility, resisting premature market expectations that the central bank will start tapering. This, in turn, could be a bullish factor for the dollar.

ECB President Christine Lagarde fueled expectations that the central bank would soon reconsider its bond reinvestment strategy during her speech to the European Parliament yesterday. Current hints from the ECB suggest that its pandemic bond-buying program (PEPP) will remain in the reinvestment phase until the end of 2024. However, there is a growing desire within the Governing Council to begin quantitative tightening, i.e., selling bonds from the balance sheet.

Tighter financial conditions usually have a positive impact on the currency, but this specific discussion about PEPP reinvestment may have an undesirable impact on the yield differential of Eurozone peripheral countries. The yield spread between Italian BTPs and 10-year German bonds is more than 25 basis points below the threshold of 200 basis points, but there are risks for Italian bonds in 2024 as fiscal austerity policies are reintroduced in the EU, slowing down the economy. The widening spread between "safe" German bonds and Italian bonds represents a key risk for the euro next year.

The Eurozone calendar is calm today, but there are several speeches by ECB representatives. Lagarde will present a pre-recorded message, and speeches by Pablo Hernandez de Cos, Joachim Nagel, and Philip Lane are also scheduled. The impact of ECB members' comments on the euro has been relatively weak, and the EURUSD exchange rate should remain almost exclusively dependent on the movements of the dollar and expectations of Federal Reserve interest rates. There aren't many catalysts for a break above the 1.10 level this week, and instead, the pair may dip to 1.09 before resuming its upward movement.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US Dollar Under Pressure: Analyzing the Impact of the Fed Statements



The statements made by the Fed officials on Tuesday prompted a mild sell-off of the dollar. At the beginning of Wednesday, the US Dollar Index (DXY) tested the 102.50 area, but during the day, it managed to recover from the decline, ending slightly positive. From a technical analysis standpoint, after breaking through the bearish channel, there could have been a speculative bearish momentum that is expected to dissipate near the 102 level:

Several Federal Reserve officials stated yesterday that there are signs of an economic slowdown, particularly in the deceleration of consumer spending growth. Indicators of activity in the US services and manufacturing sectors are also declining. Additionally, inflation is decreasing, but it's not enough to assert that the Fed has reached the peak of tightening. Clearly, past incidents of a resurgence in inflation after periods of slowdown compel officials to be more cautious in their statements and actions. However, these comments seem to have been sufficient to trigger another reassessment of inflation expectations and Fed rate expectations. From the second half of yesterday, the yield on the 2-year bond fell by about 20 basis points, and the 10-year bond by 15 basis points:

Powell's speech on Friday poses another bearish risk for the dollar and bond yields. Based on the tone of comments from other Fed representatives, it can be expected that Powell will also emphasize the need for a rate hike pause in December.

Against the backdrop of falling bond yields, gold gained further, aiming to test the next round level of $2050 per troy ounce. The S&P 500 futures also rose on Wednesday, approaching the 4600 level, the highest since August. Lower bond rates force investors to accept a lower expected return on stocks, leading to an increase in market capitalization.

The economic calendar on Thursday will be quite interesting: data on US inflation (Core PCE), Eurozone inflation for November, and Chinese PMI in the manufacturing sector will be released. The market will also pay attention to US unemployment claims data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Eurozone Inflation Plummets: Euro and Pound Drop Amid Elevated ECB Rate Cut Expectations



The Dollar Index rose at the beginning of the European session, gaining about 0.3% in a short period, attempting to consolidate above the 103 level. The primary surge was driven by a decline in the Euro – EURUSD depreciated by approximately 0.5%. The pair is approaching the 1.09 level, having tested the 1.10 level yesterday but failed to hold. In the short term, the downward momentum is likely nearing exhaustion, as the price approached the lower boundary of a recently formed channel. Additionally, the RSI momentum indicator dipped into oversold territory:

However, upcoming reports from the U.S., particularly Core PCE and initial unemployment claims, could bring surprises given the recent increased volatility. It's advisable to await their release before relying solely on the technical picture.

On Thursday, data on China's manufacturing sector activity was released. The PMI indicator fell, contrary to expectations, with a slight worsening in industrial conditions – the corresponding indicator dropped from 49.5 to 49.4 points against a forecast of 49.7 points.

Data from the Eurozone on Thursday was mixed. Preliminary estimates for November showed a slowdown in inflation in France to 3.8%, below the forecast of 4.1%. However, October consumption dropped by 0.9%, contrary to the expected -0.2%. Unemployment in Germany increased by 0.1% to 5.9%, against an expected 5.8%. Headline inflation in the Eurozone slowed from 4.2% to 3.6%, and the core price growth decelerated from 2.9% to 2.4%, surprising the market with a lower-than-expected figure than 2.7% forecast. These inflation figures prompted a reassessment of expectations for the timing of the ECB's interest rate cuts, with the possibility of an earlier policy easing cycle. This, in turn, increased the attractiveness of the Euro against the Dollar, as expectations on Fed policy are a little bit less dovish. Some U.S. central bank officials even hinted yesterday at the possibility of another rate hike if incoming data necessitates it.

The weakened Euro also affected the British pound, as expectations for the British economy shifted towards a faster slowdown in inflation. The pound fell against the dollar by approximately 0.5%.

Later today, the Core PCE indicator will be released, and it could influence the position of European currencies if it indicates a faster-than-expected decline in inflation. The expected baseline is 3.5%, which is 0.2% lower than the previous value.

The market should also pay attention to initial unemployment claims, a key U.S. labor market indicator at the moment. An increase from 209K to 220K is expected. Last week, this indicator sharply declined against expectations of further growth, supporting the dollar as markets factored in inflationary consequences and a slower shift in the hawkish stance of the Fed towards a more dovish one. This week's figure will show whether the surprise of the previous week was significant or if the trend of rising unemployment in the U.S. is gradually gaining momentum.

During the New York session, Federal Reserve official Williams will attempt to influence the market, and increased volatility may be observed during the release of U.S. Pending Home Sales data, with an expected 2% decline in monthly terms.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Currency Shifts, Oil Decline, and Speculative Assets: Analyzing Market Trends and Powell's Impact in the Week Ahead


European currencies experienced a continued decline on Monday, with EURUSD finding support around 1.0850, and GBPUSD sliding from its recent peak of 1.27 to 1.2650. Both currency pairs have been consolidating near their local highs since the beginning of last week as the wave of selling the dollar started to taper off. This shift was prompted by changing expectations regarding the actions of the European Central Bank, following the recent EU inflation figures that indicated a significant decrease in price pressures across the bloc. Markets reacted by anticipating similar developments in the UK, putting a halt to the rise of the Pound. Additionally, relatively dovish comments from ECB officials on Friday suggested that, barring inflation shocks, the ECB's tightening cycle may be over, and the central bank could consider policy easing in 2024. The slowdown in EU inflation prevented interest rate differentials from narrowing, which would have favored the European currency. Over the past week, this spread increased by 10 basis points, rising from 1.8% to 1.9%. Interestingly, this spread has largely stayed within a corridor since September, despite the rise in the Euro, raising questions about the sustainability of the European currency rally.

The change in market expectations for short-term real yields in a country, all else being equal, impacts demand for its currency. When it declines, demand drops, and vice versa. However, it's crucial to assess the relative change in yield compared to the real interest rate in a country with similar investment opportunities. This is why the differential between EU and US expected real yields is crucial in evaluating the performance of EURUSD.

On another note, oil prices extended their decline on Monday, partly due to a disappointing OPEC agreement to extend production quotas released last week, indicating potential disagreements among OPEC members on production levels. Additionally, markets may be pricing in a European economic slowdown following unexpectedly dovish inflation figures, which could affect the energy market. From a technical perspective, prices are nearing the mid-November low, and the next support level will be the yearly minimums, particularly for WTI in the range of $68-70 per barrel.

Expectations that interest rates will soon fall have fueled bets on speculative assets like Bitcoin and safe-heaven Gold, which has an inverse relationship with rate expectations. Bitcoin surpassed the $40K resistance without significant resistance from sellers, while gold prices spiked and broke through the $2100 level, reaching an all-time high. Although gold prices later erased intraday gains, they continue to trade near all-time highs around the 2070 level. Remarks from Powell on Friday further supported gold, as he signaled the Fed's increasing confidence that no more rate hikes are needed to combat inflation, but they won't hesitate to act if inflation pressures rise again.

There's a growing consensus in the market that an inflation comeback is unlikely, and global central banks' monetary policies and credit conditions are expected to become softer in 2024. This environment is fertile ground for the rise of assets benefiting from declining investment opportunities and lower bond yields.

Looking ahead, this week is packed with fundamental data from the US. The market will be closely watching the ADP jobs report, services PMI from ISM, and the official unemployment report from BLS on Friday. The consensus estimate is 180K jobs, and a print near this forecast is expected to have a mildly negative impact on the dollar. A weaker-than-expected report could prompt a resumption of the upside trend in European currencies, with last week's decline seen as a pullback within the overall trend.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

NFP preview: US employment resilience persists amid mixed labor market signals


In the latter half of the week, bearish pressure on European currencies has somewhat eased, with EURUSD consolidating in the range of 1.0750-1.08 and GBPUSD at 1.25-1.26. This hints that the upcoming direction may be influenced, to some extent, by the Non-Farm Payrolls, and the upcoming Federal Reserve meeting next week. Recent economic activity indicators in the EU have convinced the European Central Bank to signal that the tightening cycle is nearing its end.

Several officials from the Governing Council made unequivocal comments this week, stating that "further rate hikes are unlikely." However, market expectations for the ECB to shift towards rate cuts in March are deemed somewhat fantastical by one official. The market anticipates a 125 basis point reduction in the ECB interest rate by the end of next year, suggesting a relatively aggressive pace of rate cuts. From this perspective, the potential for further weakening of the European currency is limited, as incorporating anything more aggressive seems challenging.

The third GDP estimate for the Eurozone in the third quarter was revised downward again to 0%, contrary to the forecast of 0.1%. Weak growth was corroborated by EU retail sales for October, showing a year-on-year decrease of 1.2%, below the projected -1.1%. A surprising figure was Germany's factory orders, contracting by 3.7% on a monthly basis against the expected 0.2% increase. German economic exports also decreased by -0.2% in October, while a growth of 1.1% was anticipated for the month.

Shifting focus to the U.S. economy, all eyes are currently on the labor market as employment indicators are the only ones preventing markets to forget completely about the threat of inflation comeback. Alongside signs of weakening, some indicators are surprising on the upward side. One such indicator is initial claims for unemployment benefits, which, despite a gradual increase since mid-October, showed improvement in the latest report:

The extended claims for unemployment benefits, indicating the average duration of unemployment, sharply declined after a significant increase in the preceding week, from 1925 to 1861K against a forecast of 1910K. Earlier this week, market reactions were notable due to JOLTS job openings and ISM's services PMI data. While JOLTS indicated labor market weakness with a sharp decline in job openings (well below expectations), the services PMI surprised on the upside, with respondents noting an increase in hiring compared to the previous month.

Wednesday's ADP report showed modest job growth of only 103K, below the slightly higher forecast of 130K. Wage growth slowed, and weak job growth was observed in both manufacturing and services. Although the connection between ADP surprises and deviations from the unemployment forecast is weak, considering other indicators, risks for today's report lean towards a negative surprise.

What will happen to the dollar and risk assets if NFP job growth disappoints? A moderately lower-than-expected outcome will reduce divergence in the short-term policy stance between the ECB and the Fed, lessening the expected gap in the pace of monetary policy easing, providing clear support to European currencies. On the other hand, very weak or strong job figures may lead to dollar strengthening – the former due to risk aversion, where the dollar's role as a safe haven increases, and the latter due to an expected divergence in the pace of monetary policy easing between the ECB and the Fed.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Central Bank Meetings Overview: Igniting the Chase for Yield


This week saw a series of central bank meetings that delivered a plethora of surprises. In particular, the communication from both the Federal Reserve and the European Central Bank diverged from market consensus expectations. Strong data on the U.S. economy, including service activity indices (PMI), employment and wage growth in November, and changes in unemployment benefit claims in recent weeks, shaped expectations that the Fed would maintain a pause at its Wednesday meeting and initiate a discussion on monetary policy easing only in the first quarter of 2024. Additionally, there were hypotheses that the sharp decline in bond yields (risk-free rates, benchmarks for all other rates in the economy) in October-November would have a "heating" effect on the economy, delaying the onset of central bank rate cuts. However, the Fed didn't hold back; Powell, during the press conference, clearly stated that FOMC members had already begun contemplating and discussing how the rate would decrease in 2024. This became the first major surprise for the market. The updated central bank economic forecasts also worked against the dollar: Core PCE for 2023 and 2024 were revised downward compared to September, while real output increased for 2024. This provided an additional stimulus for market participants to increase demand for risk assets.

The second surprise was the signal of resistance from the ECB to market expectations of aggressive easing of credit conditions in 2024. Although the European Central Bank left the main policy parameters unchanged yesterday, Lagarde's statement at the press conference that the members of the Governing Council had not discussed rate cuts at all was a surprise. The element of surprise here was that incoming data on the European economy for October-November seemed to indicate a much more significant slowing impulse than in the U.S. For example, core inflation sharply slowed from 4.2% in October to 3.6% in November (forecast 3.9%), and GDP contracted by 0.1% in the third quarter. Considering that the ECB's sole mandate is to maintain price stability (inflation targeting), the fact that the sharp decline in inflation in November did not prompt a change in rhetoric became an additional argument in favor of the strengthening of the Euro yesterday.

One tangible result of the sharp shift in market expectations after the meetings of the two leading central banks was the decline in the spread in short-term bond yields between the U.S. and the EU, by more than 20 basis points over the last two days:

The pound sterling strengthened on Wednesday and Thursday by more than two percent after the Fed signaled a softer stance on rates ahead, while the Bank of England, at Thursday's meeting, emphasized that inflation risks persisted, so ruling out further rate hikes was not possible. Three officials out of nine advocated for a rate hike on Thursday, which was also a rather hawkish signal for the market (especially against the backdrop of the Fed decision). Both the bond market and interest rate derivatives revised their expectations for central bank policy easing in 2024 by approximately 7-10 basis points. This was enough to attract investors to British fixed-income assets, triggering an upward movement in GBP:

A highly successful combination for risk assets, particularly the U.S. stock market, was the combination of the Fed’s dovish signal and strong U.S. reports on Thursday. Retail sales in October grew by 0.3% for the month, beating the forecast of -0.1%, and initial jobless claims sharply fell again – to 202K against a forecast of 220K. The data unequivocally increase risk appetite in the market, and the prospect that this will be compounded by a chase for yield (i.e., speculative momentum) shifts short-term risks for the U.S. market towards further growth, at least until the end of the year.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Weak US GDP data points to dovish surprise in Core PCE report


The US dollar found itself on the back foot Thursday after a mixed bag of economic releases, including a downward revision to the third-quarter GDP growth estimate from 5.2% to 4.9%. The GDP Price Index also saw a downward adjustment, from 3.5% to 3.3%, indicating a smaller inflationary impact on growth than initially anticipated. While Initial Jobless Claims came in slightly below expectations at 205,000, the overall data failed to impress, contributing to a broad-based USD selloff in the afternoon.

EURUSD seized the opportunity to extend its recent rally, soaring above 1.1000 for the first time since early November. The softer dollar, coupled with growing expectations for a dovish surprise in the upcoming PCE data, fuelled the euro's ascent. Markets anticipate a smaller-than-forecast rise in the core PCE Price Index, potentially paving the way for a slower pace of Fed tightening and further euro gains. Should the data confirm these expectations, parity could be within reach for the EUR/USD pair.

GBPUSD fluctuated around 1.2700 after UK retail sales defied expectations with a 1.3% jump in November. This seemingly positive development was offset by a downward revision to Q3 GDP growth, which tempered sterling's enthusiasm. The pair's near-term direction likely hinges on the PCE data and broader risk sentiment. A dovish surprise from the data could lift the pound alongside global equities, while a hawkish tilt could trigger a pullback for GBPUSD.

The Japanese yen weakened after minutes from the Bank of Japan's October meeting reiterated its commitment to ultra-loose monetary policy. This stance, coupled with a modest dollar uptick, pushed USDJPY higher despite speculation about a potential policy shift in early 2024. The divergence in Fed and BoJ policy paths could cap further gains for the USDJPY pair, with yen bulls awaiting any hawkish signals from the BoJ in the coming months.

Gold prices climbed to a near three-week high above $2,055 before retreating slightly on a firmer dollar. However, the precious metal's appeal remains underpinned by the prospect of a global rate-cutting cycle in 2024, with the Fed potentially softening its hawkish stance after the PCE data release. Any dovish surprise could trigger a further rally for gold, while a hawkish tilt could lead to a temporary dip, presenting a buying opportunity for investors.

The Personal Consumption Expenditures Price Index takes center stage later today, with investors dissecting every detail for clues about the Fed's future rate trajectory. A dovish surprise could send the dollar tumbling and propel risk assets higher, while a hawkish tilt could trigger a reversal of recent trends. With central bank policies and economic data taking center stage across major economies, buckle up for a potentially volatile ride in global markets.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Mixed Signals in the Markets: US Employment and PMI Reports Shake Things Up


The job report and Services PMI in the US gave the market a bit of a rollercoaster ride last Friday. The dollar flexed its muscles after the employment stats revealed the US added 216K jobs in December, beating the expected 170K. However, the November job figure got a downgrade to 173K. Unemployment held steady at 3.7%, defying expectations of a slight increase to 3.8%. The real surprise came with wage growth, shooting up by 0.4% for the month, outpacing the expected 0.3%. As we know, wage growth is a leading indicator for inflation, making the future outlook and the possibility of a Fed rate cut in March less clear-cut. Over the year, average wages in the US grew by 4.1%, beating the expected 3.9%.

But the dollar rally on the report was short-lived. EURUSD briefly dipped to 1.0880, but within an hour not only recovered but also trended upward. The US Services PMI report played a part in this turnaround. Service sector activity is a key leading indicator for economic expansion, responsible for about 70% of the US GDP and employing around 70% of the workforce. The overall Services PMI dropped from 52.7 to 50.6 points, but the hiring sub-index plummeted from 50.7 to 43.3. In other words, a significant number of respondents reported sharp hiring cuts in December compared to the previous month.

The component of new orders in the report also declined in December compared to November but remained in the expansion zone, i.e., above 50 points.

Analyzing the overall market reaction to Friday's stats, it seems the market put more weight on the PMI report. This isn't surprising, considering labor market indicators are lagging indicators – they reflect peaks and troughs later than business cycle indicators. On the contrary, survey indicators like PMI can preemptively signal a shift in a business cycle.

The mixed US stats were offset by Eurozone data. European inflation in December accelerated but less than expected – 2.9% against a forecast of 3.0%. Signs of slowing inflation increased the likelihood of the ECB adopting a softer policy earlier than anticipated, weakening the upward momentum of the euro. As a result, EURUSD continues to stabilize in the 1.09-1.10 range it occupied before the release of fundamental data.

An important event this week will be the release of the US inflation report on Thursday. The consensus forecast anticipates a slowdown in core inflation from 4 to 3.8% and an acceleration in overall inflation from 3.1% to 3.2%. Also, on this day, we'll get a batch of labor market data – initial claims for unemployment benefits. In recent weeks, their behavior has become ambiguous again – the weekly increase has started to decline and is nearing the minimum of the current business cycle:

As seen, US statistics remain quite contradictory, possibly because the disparity is evident when comparing leading indicators (survey data) and lagging indicators (such as labor market data). Therefore, markets are not rushing to reassess the chances of a Fed policy easing, which remains the main driver for all asset classes.

The dynamics of the dollar this week will likely hinge on the inflation report. Until Thursday, we can expect stabilization in current ranges. The EURUSD retest of the 1.10 level and the subsequent pullback vividly show that the market is not ready to determine the trend for the main currency pair just yet.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

AUDUSD: Potential U-Turn at the Start of the New Year Fueled by Continued CPI Slowdown


The EURUSD's mid-term uptrend has hit the pause button, chilling in a tight range of 1.09-1.10 for the sixth day straight, hugging the lower edge of the trend channel:

Last Friday's dollar-buying signal, triggered by a robust NFP report that outperformed expectations in job growth, unemployment, and wage increase, got dampened by a pretty weak US Services PMI, especially the hiring component. It plummeted below 50 to 43.7 points, raising concerns that official labor market stats in the early months of the new year might take a hit (as PMI indicators are forward-looking). This, in turn, cranks up the pressure on the Fed to ease policy in March. So, last Friday, EURUSD reacted with a 'sawtooth' pattern, dropping to 1.0880 and later bouncing back to 1.10. This week's consolidation likely stems from uncertainty ahead of Thursday's US inflation report (CPI), which could set the forex trend for several days or even a week.

Technically speaking, the current EURUSD pattern – consolidation near the lower edge of a fairly lengthy uptrend (over two months) – often precedes a breakthrough below the lower boundary.

A slightly wider range is still forming for GBPUSD – the price has been waltzing between 1.26 and 1.28 for almost a month. The preceding trend to this range, like with EURUSD, popped up in mid-November when the market started to factor in a change in the Fed's QE stance in Q1 2024:

Today, the head of the Bank of England, Bailey, will speak, and the market will be watching to see if he leans towards taming inflation or preventing further economic slowdown. Recent economic output data showed that the UK teetered on the edge of a recession in Q3 2023 – GDP shrank by 0.1%. The BoE's latest communication expressed uncertainty about growth prospects in Q4, indicating rising pressure to shift the tone towards a more market-friendly monetary policy that boosts credit growth. However, compared to the EU and the US, inflation in the UK is higher, making the dilemma sharper for the BoE than for counterparts in other leading countries. Friday's data on monthly GDP changes, construction volumes, and trade balances in the UK should shed light on which alternative the BoE will ultimately lean towards.

A more intriguing situation is unfolding on the AUDUSD chart – since the new year kicked in, the price has switched to a downtrend, bouncing off a long-term resistance line:

Today, Australia's monthly CPI indicator was released – inflation continued to slow down in November, beating expectations at 4.3% on an annual basis against the forecasted 4.4%. In the recent RBA meeting, rate hikes were put on hold, citing the need to assess the effectiveness of the previous series of increases. The new price data increases the likelihood that the tightening pause will be extended, which should negatively impact the attractiveness of the AUD. Considering the technical aspect of the AUDUSD chart, the risks of further decline are growing.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US CPI: analysis of preliminary data points to potential upside surprise


The currency market and the US bond market are in a bit of a pickle, prices moving in tight ranges or resembling fading oscillations. It seems like all the hot info that came out recently is already baked into the prices:

Hopes for figuring out the next trend are pinned on today's US inflation report. Overall inflation is expected to pick up slightly, going from 3.1% in November to 3.2% in December. At the same time, core inflation (excluding food, fuel, and other volatile components), according to the consensus forecast, will continue to slow down, hitting 3.8% versus 4% last month. Markets are more sensitive to surprises in core inflation, as its changes have a stronger impact on the Fed's policy - central bank folks, including Powell, have pointed this out multiple times. The deal is, if you base monetary policy on highly volatile data, it's clear that the volatility of interest rates and other Fed policy parameters will increase. Clearly, this volatility will spill over into the economy and financial markets, which is definitely not in the interest of the central bank, whose task is to smooth out fluctuations. Check out the graph below showing overall and core inflation: the first one resembles swings around the trend, which is represented by core inflation.

To understand what to expect from today's report, consider the following points:

- The NFP report showed that wage growth exceeded expectations in December, coming in at 0.4% MoM compared to the forecast of 0.3%. Wage growth correlates with changes in consumer inflation.
- The New York Fed, which weekly forecasts the quarterly GDP growth of the US based on incoming stats, raised the forecast for the fourth quarter from 2.26% in early December 2023 to 2.54% at the beginning of January 2024.

Overall improvements in December data may indirectly suggest that inflationary pressure in the economy may have increased in December.

- Initial claims for unemployment benefits in December (an employment indicator) again fell in December.
- Consumer credit sharply increased in November - $23.75 billion (forecast $5.13 billion). This can be seen as a leading indicator of increased consumer spending in December.
- The University of Michigan Consumer Confidence Index jumped to 69.7 points in December - the second-highest reading for 2023.

Among the reports that could indicate a negative surprise in December inflation, only the US Services PMI stands out. The overall index dropped to 50.6 points, but a significant contribution to the decline came from the employment component, which plummeted to 43.7 points.

In general, preliminary data and the seasonal surge in consumer spending at the end of November and in December tilt the risks for the CPI report towards a positive surprise. However, in my view, this won't significantly and for long change the market expectations for the March easing of the Fed's policy: the market will prefer to wait for data for January and February. If the report disappoints, an asymmetric reaction is likely: the market will be much more willing to factor in a Fed rate cut in March. In this case, the dollar could start to decline intensively along with bond yields, and the search for yield will sharply intensify, allowing the US stock market to refresh recent highs: the S&P could head towards 5000 points.


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