What we are looking for

  • USD moves have become more cautious: With a mixed set of FOMC minutes and the important US CPI today, there is a sense of consolidation. The moves coming into the European session reflect caution but the US dollar (USD) positive bias across major forex continues, even if it is only mild this morning. 
  • GBP remains the volatile play: Once more, we see GBP moving the most amongst major forex. It is the main underperformer this morning. 
  • Indices edge lower: There have been marginal moves lower on equities forming. US futures are only a shade lower, but European indices look negative (although the DAX is holding up OK).
  • Commodities look mixed: Precious metals are lower (as the USD sees mild gains), but the oil price is consolidating.
  • Data traders: US CPI will be the primary risk event. Hotter-than-expected inflation caused a big risk sell-off and a surge into the USD last month.

Overview

There has been a gradual sense of consolidation that has taken over major markets in the past few days. As Treasury yields have consolidated the recent rise, the USD has lost some of its upside momentum, even if there is still a mild USD positive bias that is hinting this morning. Last night’s FOMC minutes did little to shed any new light on rate moves. It is probably understandable, with the minutes being three weeks old. In the meantime, markets have been digesting an avalanche of Fed speakers that have been arguing for further aggressive rate hikes and maintaining elevated rates well into 2023. It was though interesting to see “several” FOMC members mindful of the impact of tight rates on the economy.

The eyes now look forward to the big risk event of the week. The US CPI caused significant volatility and a rushing flood towards the USD last month. Any upside surprises today could see a similar move. Ahead of the data, despite the recent consolidation, the USD is still slightly positive and risk appetite retains a negative bias. This is weighing on precious metals and European indices this morning. 

US inflation is the key risk event on the economic calendar today. The US CPI is expected to show a headline decline, but the core inflation to increase. This was also the trend of expectation last month, but the headline stayed flat whilst core inflation increased more than expected. Any repeat of this upside surprise would likely cause already volatile markets to have a risk appetite tailspin once more. Weekly jobless claims jumped considerably higher than expected last week. With another rise expected, markets will be subsequently keeping a close eye on whether last week was merely a one-off. 

Today’s news

Market sentiment is slightly negative amidst the recent consolidation: There is an edge of USD positive and risk negative bias today.

Treasury yields rebound: Yields dropped slightly in the wake of the FOMC minutes, but have rebounded this morning. This is all still within the confines of this week’s consolidation.

FOMC minutes show continued tightening bias, but a bit mixed too: The minutes for the September meeting showed that many participants focused on the cost of not doing enough to lower inflation. Member “reaffirmed their strong commitment” to getting inflation down to the 2% target. Several members did stress that it was “important to calibrate” the pace of tightening so as not to damage the economy. These minutes do little to shape the path of future policy. Expectations on Fed Funds futures remain at 75bps for the November decision but then slightly slower at 50bps in December.

UK Prime Minister Truss advised to ditch the “mini-budget”: According to the Times, Truss has been told by her top advisors that she should “rip up” the mini-budget that has caused so much volatility and selling pressure on UK Gilts and GBP.

ECB’s Holzmann backs a 75bps hike in October: Holzmann (Austria) is one of the most hawkish Governing Council members. He is backing a 75bps hike in October and a 50bps hike in December. That would bring ECB rates to neutral. 

Chilean Central Bank hikes to the max: A unanimous decision to hike by 50bps to 11.25% was expected. However, the bank has also said that this is the maximum level in the current cycle. It will maintain the current level for as long as needed to reduce inflation back towards its target.

Cryptocurrencies tracking lower again: Yesterday’s rebound has proved to be short-lived. Bitcoin has fallen back by -1% to just below $19000, with Ethereum down almost -2% at $1274.

Economic Data:

  • US CPI (at 12:30 GMT) Headline CPI is expected to fall slightly to 8.1% in September (from 8.3% in August). However, Core CPI is expected to increase to 6.5% (from 6.3%)
  • US Weekly Jobless Claims (at 12:30 GMT) Claims are expected to increase slightly to 225,000 (from 219,000 in the previous week

Major markets outlook

Broad outlook: Market sentiment is slightly negatively biased, but essentially remains in consolidation ahead of the US CPI. 

Forex: USD and JPY are outperforming this morning (although JPY is rebounding from record lows versus USD). 

  • EUR/USD has posted two very small bided candlesticks in the past two sessions as the support around 0.9670 has held. This reflects a consolidation, but this is likely to find direction again in the wake of today’s US CPI. Initial resistance is at 0.9775. We continue to see near-term rallies as a chance to sell. We favour a move back under 0.9670 and a retest of the September low at 0.9535.
  • GBP/USD remains volatile and is the most active of the forex major pairs. Yesterday’s positive candle has brought the pair back into the resistance between 1.1085/1.1225, which is a near-term basis of overhead supply. A bull failure around here today (if US CPI is higher than expected) then we expect an extension of the move lower. Below 1.0923 would open 1.0715 initially. Momentum indicators remain negatively configured and rallies are seen as a chance to sell. 
  • AUD/USD paused the drive lower yesterday at a low of 0.6235 and is now in consolidation ahead of US CPI. We favour a continuation of the one-month downtrend channel and would look to use any rebound into resistance as a chance to sell. The previous support at 0.6363 is now a basis of initial resistance. The next important support is not until 0.5980.

Commodities: The recent sell-offs on precious metals are still consolidating with a minor tick higher in oil.

  • Gold continues to consolidate above support around $1660. However, this consolidation is failing to pull the market back above the resistance band at $1680/$1690. We, therefore, continue to favour using near-term rallies as a chance to sell. A break below the $1659/$1660 support opens $1641. The old pivot band is now initial resistance between $1680/$1690. 
  • Silver has fallen sharply in recent sessions, but the momentum of the selling pressure began to ease yesterday. The market is subsequently consolidating this morning. This could still just be a function of the broader consolidation ahead of the US CPI and the risk remains with the continuation of the near-term correction. There is more of a mixed near to medium-term outlook on silver, but there is a pivot at $19.90/$20.00 which is resistance. Below support at $18.50/opens $17.95.
  • Brent Crude oil posted three decisive negative candles in the past three sessions. Having also broken a new two-week uptrend this brings into question the prospect of continued recovery. A minor breach of the old pivot band between $93.25/$96.60 also reflects this. However, as the market has ticked higher this morning the RSI is still above 50 and this lends a mild positive bias still to the near to medium-term outlook. Yesterday’s low at $92.25 needs to hold otherwise a deeper correction will develop. Initial resistance at $95.90/$97.25.

Indices: Selling momentum may have eased, but a negative bias remains on US futures. This is also a weight on European indices.

  • S&P 500 futures may have eased some of the sharp downside momentum of the latest run of selling, but there is still a downside drift towards the support at 3571 from the early October low. Momentum remains negatively configured and we continue to favour using rallies as a chance to sell. Below 3571 the next important support is at 3225.

  • German DAX has been in more of a consolidation in the past 48 hours, holding in a mini-range between 12083/12290. The market may have ticked slightly higher this morning but there is still a negative bias to trading and there is more considerable resistance around 12400 to restrict an attempted rally. We continue to favour selling into near-term strength for a test of the recent low at 11796.
  • FTSE 100 continues to track lower and is testing the October low of 6781. The market is therefore also close to the big March low at 6755. Momentum is negatively configured but is again around a level where the big sell-off of March, June and September found a bottom. Initial resistance is at 6929 and then more considerably around 6970/7025.


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.