What we are looking for
- USD cautious for now, expect volatility on the CPI: The USD is slipping back once more on major forex pairs. There is a shade of positive risk bias too. However, this could all change later with the US CPI.
- Indices build on support: A positive close on Wall Street and US futures are marginally higher today. This is supporting European indices early today. However, consolidation may take hold until the US CPI later.
- Commodities rebound: Oil has started to recover (albeit via an oversold technical rally). Precious metals fell over yesterday but have recovered this morning.
- Data traders: EUR traders will watch the German ZEW, whilst USD traders will be entirely focused on any surprises in the US CPI.
Overview
There has been a gradual consolidation that has taken hold on major markets. However, that mood has been building up to what could be an incredibly volatile period over the coming days. We start with the US CPI inflation today. The USD sold off sharply last month as the CPI surprisingly dropped. However, US data has been consistently surprising to the upside in recent weeks (including Friday’s US PPI). If US CPI joins this growing list, then we could be in for a sharp USD rebound (at least for 24 hours or so before the FOMC meeting).
Treasury yields have been picking up in recent days, but strangely this has not also benefitted the USD (perhaps due to a very weak auction of US Treasuries yesterday). The USD is slipping lower this morning, with risk appetite tentatively positive. However, in truth, any early moves this morning will be small fry compared to what we could see later this afternoon.
There will be a huge focus on US inflation today on the economic calendar. However, traders will be initially watching the German ZEW Economic Sentiment which is expected to improve in December, helped by improving current conditions. The US CPI inflation could have a defining impact on the FOMC meeting this week. The headline and core CPI are expected to grow by +0.3% on the month but helped by benign comparatives, the YoY readings will show declining inflation. The PPI had an upside surprise last week, so the risk is that this is repeated today. If so, it would drive a USD-positive and risk-negative market reaction.
Today’s news
Market sentiment is marginally positive: AUD and NZD are outperforming major forex and the USD is slipping, whilst equity markets are edging higher.
Treasury yields consolidating after yesterday’s increase: After a strong move higher yesterday yields are steady this morning. US CPI will be crucial.
UK Unemployment headline rate increases: The jobless rate increased to 3.7% in October (from 3.6% in September). This was in line with expectations. The Average Weekly Earnings (ex-bonus) increased from 5.8% to 6.1%, which was more than the 5.9% forecast.
Cryptocurrencies settle again: After a choppy session yesterday closed all but flat, cryptos are again showing little direction early today. However, we would expect some action on the US CPI later. Bitcoin is +0.1% at $17190, with Ethereum -% at $1268.
Economic Data:
- German ZEW Economic Sentiment (at 10:00 GMT) The ZEW is expected to improve in December to -26.4 (from -36.7 in November).
- US CPI (at 13:30 GMT) Inflation is forecast to be +0.3% on the month which would pull YoY CPI down to 7.3% in November (from 7.7% in October). Core CPI is expected to also grow by +0.3% but again would reduce YoY CPI to 6.1% (from 6.3%).
Major markets outlook
Broad outlook: Mild risk positive and USD negative bias ahead of US CPI. But this could all be drastically different later.
Forex: USD is underperforming, especially against AUD and NZD.
- EUR/USD has held above the initial support band at 1.0430/1.0495 but for now, is consolidating under the recovery high of 1.0595. Momentum remains positively configured with the RSI around the mid to high 60s. We remain cautious as the huge risk events begin with US CPI today. However, all things remaining equal, we favour using supported weakness as a chance to buy. The market has left a low at 1.0442 and this is encouraging, but there could be some huge volatility in the coming days. A closing breakout above 1.0595 tests the 1.0615 June high, with 1.0785 as the next key resistance.
- GBP/USD has held on to the one-month uptrend and continues to creep higher. The move is not decisively positive, with a series of small-bodied candles in the move higher. However, there is a positive configuration on the daily RSI and for now, the outlook remains positive. Subsequently, we still back near-term supported weakness as a chance to buy. However, we are mindful of the huge risk events that lie ahead in the next few days and the move higher is tentative. A breakout above resistance at 1.2343 would open the upside for a test of 1.2405. Initial support is 1.2105 with a breakdown below 1.1900 turning the market corrective again.
- AUD/USD has moved higher from support at 0.6668 but has just backed away from a test of the 0.6850 reaction high. The concern is that although the daily RSI is positive above 50, it still shows signs of stuttering and needs to be watched as a move below 50 would be a warning. The run of higher lows means that 0.6642 is an important support now, with initial support at 0.6668. As long as 0.6642 holds, the outlook can still be positive.
Commodities: Precious metals remain positive but have been more cautious this week. Oil is building a technical rally.
- Gold held the support at $1764/$1765 but since Friday has just eased back from the $1810 key resistance again. The move now means that an uptrend for the past four weeks is under significant scrutiny. There is a positive configuration on the daily RSI and we still look to use supported weakness as a chance to buy. With the expected elevated volatility in the coming days, we would still be watching the initial support around $1764 to be a gauge of correction. Furthermore, if the RSI also falls below 50 this would be a decisive reversal signal corrective signal.
- Silver is just pausing for breath following the breakout above the $23.52 reaction high but needs to confirm the break on a closing basis. We still look to buy supported weakness with the breakout band now around $22.00/$22.50 a good gauge of initial support. The next resistance is around $23.90/$24.10. A close below $22.00 would suggest a deeper unwind towards $21.67 initially.
- Brent Crude oil has rebounded since yesterday and is now trying to build a technical rally. The RSI has moved back above 30 (which is a basic buy signal) and there is room now for an unwind towards the mid-40s. With the old support band of $81.40/$83.55 now becoming an area of overhead supply, this is prime rally territory. Initial support is now $77.30/$77.90.
Indices: Wall Street may have rebounded, but moves still look constrained on European indices.
- S&P 500 futures have held on to the support of the important near to medium-term pivot band support at 3912/3935, and futures ticked higher solidly higher yesterday. This is an important move as if there is a close below 3912 it would be a key corrective signal as the recovery would have topped out. The market is now testing the initial resistance around 3987/4015, but we will know more once through the key risk events (at least US CPI and the FOMC). The key resistance is 4106.
- German DAX has settled into a consolidation in recent days broadly between 14190/14390. This comes after having backed away from the crucial resistance band between 14700/14800. However, also, the move settled above important support around 14125. Leaving this support is preventing a topping pattern formation and restricts a deeper correction. The market is essentially ranging between 14125/14605 in a near-term wait-and-see mode.
- FTSE 100 has broken below the support at 7515/7520 and is using this as a basis of resistance now for a drift lower. This move has opened the next important support at 7426/7437 and it also means that initial resistance is now between 7520/7555 for any recovery. The daily RSI is settling around five-week lows and is at least holding above 50. The run of negative candles suggests that intraday rallies are increasingly seen as a chance to sell now to play for a correction. Gauging the reaction to the next reaction low at 7437 will be key.
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