US inflation causes cautious market sentiment

December 13, 2022

After the DXY snaps a two-day recovery, US Dollar fails to break the resistance of 105.00 and bounced back. DXY portrays the market’s cautious mood ahead of the United States’ key inflation numbers for November, the Consumer Price Index which is going to be released on Tuesday, since the inaction of DXY could be linked to the mixed prints of the early signals for it, as well as the mixed reaction to the headlines surrounding China and Russia.

Besides, while investors broadly expect the Fed to raise rates by 50 basis points, the market will be focused on the central bank’s projections for how high rates will ultimately rise and to what degree the U.S. economy can withstand monetary tightening and the CPI data has sparked explosive market gyrations, as surging inflation forced the Fed to embark on its most aggressive monetary policy.

The Dow Jones Industrial Average has raised 1.58% to close at 34005.04. The S&P 500 raised 1.43% to close at 3990.56. The tech-heavy Nasdaq Composite raised 1.26% to close at 11143.74. The surge in the stock market was the reaction to the coming of CPI, the estimated softer inflation was also seen from the PPI and the UoM Consumer Sentiment Index, moreover, the survey of consumer inflation expectations from the Fed also stated that the 1-year ahead inflation expectations slumped to their lowest level since 2021. Treasury yields drop,  U.S. 10-year treasury yield sits at around 3.6%. The policy-sensitive 2-year treasury yield sits at 4.381%.

US inflation expectations as per the 10-year and 5-year breakeven inflation rate, challenge the recently dovish bias over the Fed, as well as downbeat forecasts for the US Consumer Price Index, and the latest prints of the 5-year and 10-year inflation expectations portray a rebound to 2.28% and 2.35% respectively. The downbeat prints of the United States PPI also hinted at softer US inflation.

Main Pairs Movement

The US Dollar Index extends the previous weekly gains, the first time in three weeks, as it picks up bids to refresh its intraday high around 105.10 during early Monday. The DXY index fell sharply during the UK trading period to a daily low of 104.67 level ahead of the American session. The latest market inaction could be linked to the investors’ cautious mood ahead of the United States’ key inflation numbers for November, namely the Consumer Price Index (CPI).

The GBPUSD has little changed on Monday, as Gross Domestic Product (GDP) grew by 0.5% on a monthly basis in October following September’s 0.6% contraction. This reading came in much better than the market expectation for a contraction of 0.1% but the positive impact of the upbeat GDP data on the Pound Sterling remained short-lived. However, data failed to act as a tailwind for the pair, the pair erased most daily gains in the American session as market participants turned cautious. Meanwhile, EURUSD dropped dramatically in the early American trading session and the pair slid by 0.03% on a daily basis.

Gold dropped by 0.88% on a daily basis, the most in a week, as the US Dollar began the crucial week on a positive note despite downbeat inflation expectations and upbeat performance of the equities, as well as the Treasury bond yields.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR recorded solid gains against the greenback during the trading course of North America due to the overall weakness of the US dollar. The US inflation report may confirm that rate hikes are curbing inflation, which could pave the way at a faster pace. Last week’s US Department of Labor showed that US PPI rose for the third consecutive month, over 0.3% of expectations and increasing 7.4% YoY versus 7.2% expected. Meanwhile, the US CPI will be disclosed on Tuesday, expected to fall to a consensus of 7.3% YoY from 7.7% last month. If the figure shows that inflation is cooling off, this could trigger Euro buying and put pressure on the dollar.

In the Eurozone, ECB expected to raise interest rates by at least 50 basis points. The federal reserve may be responsible for the unexpected decline in the greenback, as the turning point in inflation has been proven. Conversely, it is too early to assert that the same is true for the ECB; thus, inflation in the EU remains high and there is little respite. These very different scenarios mean that this week’s central bank meeting could support EUR/USD.

The EURUSD has rebounded from a 20-year low of 0.9536 set in October and is trading at 1.0595 currently, but it has failed to rise above previous highs of 1.0615 and 1.0638, these levels may continue to act as resistance levels. The 260-day SMA is also in this area as a resistance level which is at 1.0596 currently. On the downside, support can be considered as 1.0443, 1.0290 and 1.0198 which are previous low and inflexion points.

Resistance: 1.06

Support: 1.0443, 1.0290, 1.0223 

GBPUSD (4-Hour Chart)

The GBP firmed on Monday in a bullish cycle that is targeting the 1.2400 area, which could be a measure up from the recent lows around 1.2100. On the fundamental side, the world is focusing on the Fed and BoE interesting rate announcements this week. Generally speaking, BoE is expected to raise by 50 points to 3.50%. As for the Fed, same as BoE, they are expected to rise by 50 points to 4.25%-4.50%. Meanwhile, world interest rate probabilities suggest that a 50 bp hike on December 14 by the FOMC is fully priced in, with only around 10% odds of a larger 75 points move. When we take a look at UK, uncertain growth outlook in the future growing domestically. Concerns about a prolonged recession in the U.K. are still weighing on sentiment. Analysts at Rabobank believe the U.K. recession is likely to have started since last quarter and is widely expected to continue throughout the next whole year. Another potential risk for the GBP lies in the vulnerability of the housing market. Some hawkish favoured upside in EURGBP, as the ECB has the wiggle room to deliver 75 points, based on the market’s expectations for 50 points raise.

GBPUSD managed to stay above its 200-day moving average after the decline in the first half of the week. On the daily chart, the RSI stays above 60 and the pair continues to trade within the rising regressing channel that has been in place since the end of September. 1.1200, the key support of 200-day SMA. If the pair falls below this level and becomes resistant, the pair would go south to 1.2000 or 1.1900.

Resistance: 1.2400, 1.2600

Support: 1.2100, 1.1900, 1.1760

XAUUSD (4-Hour Chart)

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The US Department of Labor will release November inflation figures on Tuesday. The annual rate of core CPI, which excludes volatile food and energy prices, is expected to rise to 6.4% from 6.3% in October.

Market reaction to the inflation report is likely to be immediate, with a weaker core CPI reading suppressing the dollar and providing a boost to XAUUSD and vice versa. A rise in 50 point rate should not be surprising based on FOMC chairman Powell admitting in his last public statement that it would make sense to moderate the pace of interest rate hikes. However, if Fed chooses to raise by 75 points, which is very unlikely at this point, gold could come under heavy bearish pressure and fall sharply.

The New York Fed released its Survey of Consumer Expectations, which showed that inflation expectations for the year ahead have declined, although they remain high. Meanwhile, the survey showed that expected inflation marked a record MoM decline in November, while the median inflation uncertainty fell in the short and medium term.

The charts for gold still show a bullish bias, but the upside shows the difficulty in holding on above $1,800.

A clear sign is a daily close above $1,805 last week, which could open the door to the next strong resistance at $1,810. In the very short term, the bias is to the downside, with the next support level at

$1,775. The price has been down to $1,780 at this moment.

Resistance: 1800, 1810, 1830

Support: 1775, 1765, 1748, 1726

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