US services indicator unexpectedly climbed, Fed may keep tighten policy to manage high inflation

December 6, 2022

The equities market kicked off the week with losses and bond yields climbed as a US services gauge unexpectedly rose, fueling speculation the Federal Reserve will keep its policy tight to tame stubborn inflation. In the meantime, treasuries slumped across the curve, driving 10-year yields to 3.6%. Swaps showed higher expectations on where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023.

A majority of 291 respondents to the latest MLIV Pulse survey said leveraged loans would be the canary in the coal mine to indicate that corporate credit quality is getting worse. About 28% of survey respondents expect defaults to jump significantly if US rates peak at or below 5%. Now, market participants are also anxiously awaiting Friday’s report on US producer prices – one of the final pieces of data Fed officials will see before their Dec.13-14 policy meeting. Inflation numbers over the past month have indicated pressures are slowly cooling, but remain very elevated.

The benchmark, the sell spread throughout all major S&P 500 sectors, with about 95% of the gauge’s companies in the red. The S&P 500 tumbled by 1.79% daily, as all eleven sectors stayed in the negative territory. Especially since the Consumer Discretion sector was performing the worst among all groups, falling 2.95% for the day. Meanwhile, the Nasdaq 100 fell by 1.7%, Dow Jones Industrial Average declined by 1.4%, and the MSCI World index dropped by 1.2% on Monday.

Main Pairs Movement

The US dollar bounced back on Monday after the release of the ISM Services PMI, rising to 56.5 in November from 54.4 in October, which is higher than the market expectation of 53.1, also with the robust Nonfarm Payrolls report, the US Dollar gathered strength against its rivals with the initial reaction and the US Dollar Index rised 0.71% on the day at 105.292 .

US Dollar dropped to over a five-month low at $104.113, the higher-than-expected index may lose the pressure of aggressive policy tightening by the US central bank and release the downward pressure on the greenback. Besides, China’s easing Covid restrictions slow the buying pressure, the EURUSD has dropped lower than 1.05084, and the EUR/USD path of least resistance is downward biased. Therefore, the EUR/USD first support would be the November 22 daily low of 1.022.

The gold price break fell below the cushion of $1,770.0 after surrendering the $1,780.0 support on Monday, the market mood goes soured after the release of the stronger-than-projected US ISM Services PMI data, which triggered a sell-off in the risk-perceived currencies, besides, the upbeat US Nonfarm Payrolls (NFP) data released last week cleared that labour demand is stellar led by strong demand from households. However, the market ignored the surprise rise in employment data and supported Gold prices further.

Technical Analysis

EURUSD (4-Hour Chart)

The Euro Dollar pair witnessed a turbulent trading session on December 2nd. The U.S. nonfarm payrolls for November came in at 263K, above market expectations of 200K. The rather hot payrolls print induced a sell-off in U.S. equity markets and raised interest rate expectations, despite Fed Chair Jerome Powell’s dovish tone on December 1st. On the other hand, Euro bulls have continued to take advantage of the recent Dollar pullback. The surprising dovish signal released by Fed Chair Jerome Powell has continued to put downward pressure on the Dollar. The ECB is expected to hike rates by 50 basis points for December. On the economic docket, ECB president Lagarde is scheduled to speak on the 8^th and the 9^th.

On the technical side, EURUSD has hit its short-term resistance of 1.06. Short-term support for the pair rests at around 1.035. The 76.4% Fibonacci retracement level of 1.0391 sets another short-term support for EURUSD. RSI for the pair sits at 54.22, as of writing. On the four-hour chart, EURUSD currently trades above its 50, 100, and 200-day SMA.

Resistance: 1.06

Support: 1.0391, 1.035

GBPUSD (4-Hour Chart)

GBPUSD snapped its three-day winning streak on the first trading day of the week. The Dollar index’s drop below 105 induced dip buying, which buoyed the U.S. Dollar on the first trading day of the week. U.K. PMI data, released during the European trading session, came in at 48.2, lower than market expectations of 48.3. The lower-than-expected U.K. PMI data has deterred any momentum for Pound bulls. On the economic docket, there are no impactful economic data releases from the U.K. this week. The U.S. will release initial jobless claims and PPI figures on Thursday and Friday, respectively.

On the technical side, GBPUSD has hit its short-term resistance at 1.225. Near-term support for Cable sits at 1.15 and 1.091. The 23.6% Fibonacci retracement also indicates short-term support for Cable. RSI for the pair sits at 49.69, as of writing. On the four-hour chart, GBPUSD currently trades below its 50-day SMA, but above its 100 and 200-day SMA.

Resistance: 1.2400, 1.2600

Support: 1.2154, 1.1927, 1.1765

XAUUSD (4-Hour Chart)

Gold extends its losses from last Friday after the U.S. nonfarm payroll data was released. The higher-than-expected nonfarm payrolls figure immediately sparked a rise in the Dollar index and a drop in the Dollar-denominated Gold. Despite market participants expecting a pivot from the Fed, Fed Chair Jerome Powell continues to reiterate that inflation continues to pose a threat to price stability and it is ultimately the central bank’s goal to bring inflation back down to the 2% mark. However, Fed Chair Jerome Powell’s statement regarding a possible “soft landing” of the economy, still instilled optimism across markets. Gold’s drop throughout today’s trading is mainly due to the higher-than-expected PMI data and the resulting stronger Dollar.

On the technical side, XAUUSD has reversed course from its short-term resistance level of around $1800 per ounce. Short-term support for the yellow metal sits at around the $1740 per ounce price region. RSI for Gold sits at 59.63, as of writing. On the four-hour chart, XAUUSD currently trades above its 50, 100, and 200-day SMA.

Resistance: 1814

Support: 1740, 1706, 1671

Economic Data