Espresso Morning Call: Major fx consolidation as AUD jumps

What we are looking for

• USD is holding ground: There is little direction of note for the USD on major forex.
• AUD is outperforming: The Aussie has jumped after Australian inflation came in hotter than expected.
•  Indices consolidate: The Wall Street rebound around the turn of the week has tailed off into consolidation. US futures are slightly lower and this is resulting in consolidation in European indices.
• Commodities are mixed to slightly lower: The tailing off of the positive risk appetite is curbing the moves in commodities. Precious metals are slightly lower, with oil all but flat.
• Data traders: CAD traders will be looking at the BoC rates decision today.

Overview

There is a sense of consolidation taking hold in major markets. The Federal Reserve is in its blackout period ahead of next week’s FOMC meeting, so no cues to drive the USD. Subsequently, the USD is settling sideways. US earnings season is yet to decisively kick into gear, but forward guidance from Microsoft has just taken the wind out of the sails of a Wall Street rally today. The key mover for major markets this morning is the Australian dollar. With inflation coming in hotter than forecast there will be hawkish pressure on the Reserve Bank of Australia. The AUD continues to be the strongest performer amongst major forex in 2023.

The Bank of Canada monetary policy decision will be the main focus of the economic calendar today. The BoC is expected to hike by 25bps, perhaps for the final time to 4.50%. The forward guidance in the language of the statement will be key. It will want to avoid sounding overly dovish.

Today’s news

Market sentiment looks subdued: There is little to drive major markets and consolidation is taking hold. The AUD outperformance is an exception to this.  

US Treasury yields open slightly lower: It was interesting that yields closed lower yesterday despite the better-than-expected US flash PMIs. Yields are slightly lower again this morning.

Microsoft forecasts disappoint: Revenue for Q2 was slightly lower than expected whilst earnings were a slight beat. However, the company added that current quarter revenues would be guided lower. This has hit the shares.

Australian inflation Q4 inflation higher than forecast: QoQ inflation for Q4 increased by +1.9% (versus a forecast of +1.6%) with Q3 inflation at +1.8%. This increases YoY inflation to 7.8% (from 7.3% previously). The AUD has strengthened on this.

UK PPI inflation falls: Input prices fell by -1.1% MoM pulling YoY PPI Input prices down to 16.5% (from 18.0% previously).

German Ifo improves as forecast: The German Ifo Business Climate has picked up to 90.2 in January, in line with forecasts (it was expected to improve to 90.2). It was 88.6 in December. The improvement came through the increase in the expectations component, with current conditions slightly weaker.

Cryptocurrencies fall away: Crypto has been consolidating in recent sessions, but coins are starting to fall away again this morning. Bitcoin is -0.9% at $22700, but Ethereum is -2.8% at $1553.

Federal Reserve is in its “blackout period”: There will be no Fed speakers until after the meeting on Wednesday 1st February.

Major Economic Data:

• Bank of Canada (at 15:00 GMT) The BoC is expected to hike by +25bps to 4.50% (from 4.25%)

Major markets outlook

Forex: USD continues to trend lower, whilst AUD looks strong.

• EUR/USD is still straining to break decisively clear of the resistance from last week at 1.0887. Another positive close is encouraging but the move is uncertain again today. There still seems to be an appetite to buy intraday weakness for now, but the daily candles lack conviction. The momentum is strong with the RSI in the high 60s, but the market looks indecisive and could be at risk of another near-term unwind. We still look to buy weakness in the uptrend channel, with the next resistance at 1.0935, before the psychological 1.1000 level. Initial breakout support is 1.0860/1.0887 with 1.0765 a key higher low.

• GBP/USD has tailed off from the resistance at 1.2445. Following Monday’s “spinning top” candlestick warning, a decisive pull lower yesterday. We would see this as a near-term unwind within the uptrend channel, with support between 1.2250/1.2290. Momentum is tailing off with the RSI back towards 60. However, this suggests that weakness is a chance to buy for a retest of the highs again. A close above 1.2445 opens 1.2600/1.2660. Below 1.2170 would be disappointing now.

• USD/JPY continues to trade around the resistance of the three-month downtrend and the falling 21-day moving average (c. 130.77). Throughout the move lower the old levels of support have consistently become new levels of resistance. As the pair has fallen back from 130.90, the prospect of another bull failure is there. However, this looks to be an important medium-term crossroads moment. Reaction to initial support at 129.05 will be telling now. The spike high of 131.57 (on the BoJ decision) is key resistance. The daily RSI remains negatively configured and has failed consistently around 40/45 in recent months. This still suggests selling into strength for a test of the low at 127.22 is still favoured.

Commodities: Gold consolidating the breakout. However, Silver is stuck rangebound whilst oil is tailing off in its recovery

• Gold continues to build the recovery, pushing through resistance at $1937 for the highest level since April. The next resistance is $1957 and then the key resistance at $1998. There has been a slight unwind this morning, but nothing yet that would suggest a deeper correction. Despite this though, momentum remains strong with the daily RSI fluctuating around 70. Any near-term profit-taking has been short-lived. The first higher low is at $1911, with $1896 as key support. We continue to favour buying into near-term weakness within the near three-month uptrend.

• Silver has struggled in recent weeks and has developed a consolidation rectangle between $23.11/$24.55. The price is stuck in a range but there is a growing threat of a downside break after the brief spike down to $22.75. The bottom of the rectangle was supportive once more yesterday but the tests are mounting. Having seen the RSI dropping below 50 we are cautious of the outlook although for now, we are happy to play the range.

• Brent Crude oil broke out of the resistance at $86.75 on Monday but the move has begun to retrace with a strong negative candle yesterday. The reaction to this move today will be key, with initial weakness. However, the decisive move would be a breach of support at $83.70. If this support can hold then the prospect of recovery is still in play. Momentum is still positive, but the RSI is dropping back towards 50. A decisive move below 50 would be a downside warning.

Indices: Wall Street is easing back from the recovery as European indices consolidate.

• S&P 500 futures rebounded strongly from 3901 but have just started to tail off. Yesterday’s session was one of consolidation and futures have dropped back overnight. This is leaving resistance at 4056. The risk is that once more the RSI has hit 60 and has been seen as a chance to take profits. This comes under the November/December highs of 4105/4140 which mark the top of a medium-term trading band. Initial support is 3980/4005.

• German DAX has begun to consolidate again as the rebound from 14910 has tailed off. The faltering RSI momentum is lending a sense of caution, however, we continue to see weakness as a chance to buy. Holding on to the support of the breakouts between 14604/14810 is helping to develop the strength of the outlook. The resistance at 15275 needs to be overcome to drive the next bull run higher.

• FTSE 100 has fallen back to leave 7818 as a potential lower high under the recent rally high of 7884. This comes as the RSI is now decisively unwinding and the move looks to be another retracement within the two-and-a-half-month uptrend. The initial support at 7731 will be watched but the more considerable support comes with the breakout of all the old highs between 7635/7695. We look to use supported weakness as a chance to buy.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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